Retaining Employees in Small and Medium-Sized Firms:
|Specific HRM Practice|
Employee Attitude Survey
Employee Career Counseling
Information Sharing Program
Employee Assistance Program
Sexual Harassment Policy
Employee Recognition Program
Internal Promotion Policy
Employee Suggestions System
Total Quality Management Program
Problem Solving Groups
Formal Training Program
Employee Involvement Training
Personal Computer Training
Individual Merit Pay
Employee Pension Plan
Employee Stock Ownership Plan
Formal Performance Appraisal System
Flexible Work Hours
Employment Selection Tests
Written Job Descriptions
As a result of some research addressing decision-making ideology (Goll, 1991) and human resource strategy (Bae & Lawler, 2000), we also developed measures of these two constructs. Decision-making ideology was measured from a three-item scale adapted from Goll (1991) that assesses the level of participative decision-making and open communications. Each item was measured using a six-point scale (one = strongly disagree and six = strongly agree) and the scale's Cronbach's coefficient alpha was 0.81.
A firm's operational human resource management strategy was assessed, based on the work of Huang (1998; 2000). HRM strategy was measured using an eight-item scale that addressed human resources and strategic management decisions, the degree of devolution of human resource functions to line management, human resources and long term planning, and human resources and the future mission of the firm. Again, each of the eight items was measured on a six-point scale (one = strongly disagree and six = strongly agree), with the scale's Cronbach's coefficient alpha at 0.87.
Although one may question the use of a scale which was used in research on Taiwanese firms, Huang's (1998; 2000) articles were written in English and the questions making up the scale were grounded in literature from mainstream Western human resource management literature. Respondents to the survey had no problems understanding the questions and the scale reliability was very good. As Huang (1998: 60) states, "The purpose of this research will, it is hoped, not only promote a deeper understanding of HRM practices in Taiwan, but also help determine the extent to which western HRM theories are applicable to oriental social and cultural contexts."
There has been some research on the role of the human resource management department in achieving organizational objectives (Ng & Maki, 1993). One may expect professional human resource managers to be more aware of current issues in the field. Consequently, we examined whether the quit rate was associated with the presence of a HRM professional or HRM department. In the study, the presence of an HRM professional or department was coded as one and absence as zero.
A number of variables were entered into each of the regression equations to control for other factors that were hypothesized to influence quit rates. The control variables included the demand for the establishment's primary product or service (one = substantial increase; six = substantial decline), whether the business had experienced a merger over the past five years (one = yes; zero = no), whether the business had permanently reduced its workforce over the past two years (one = yes; zero = no), the union status of the business (one = union; zero = nonunion), the age of the business (natural logarithm of the number of years the business has been operating), and size of the business (natural logarithm of the number of employees). Previous research (Shaw et al., 1998; Delery et al., 2000; Batt et al., 2002) has demonstrated the need to control for such variables.
As a check on non-response bias, we grouped the survey responses depending on whether the questionnaire was received on the first or second mail out. We then ran a logit model in which we compared early and late respondents with reference to the control variables (product demand, merger, permanent workforce reduction, union status, age of the business, and size of the business) and each of the independent variables (HRM practices, decision-making ideology, human resource strategy, and presence of a human resources department). This approach is based on the notion that late respondents are more likely to be like non-respondents (Armstrong and Overton, 1977). The logit results showed no difference between the early and late respondents.
While respondent firms varied in size, the average number of employees was 189. The mean number of years a business had been operating was 38 years. About 23 percent of firms reported engaging in a permanent workforce reduction of the workforce over the past two years and respondents reported an increase in demand for their primary product (mean score of 2.57 on the six-point scale). Although there was considerable variation in the composition of the HRM practices index, the average number of practices per workplace was about 16. The mean score for the decision-making ideology scale was 4.43 (out of a maximum of 6), suggesting a somewhat positive approach by the firms. However, the average score for the human resource management strategy scale was somewhat lower (mean of 3.94 out of 6); while some organizations are heavily involved in HRM strategy, other firms have not placed much focus on this approach.
Table 1 provides information on the quit rate experienced by the participant organizations. As noted previously, the rate is calculated as a percentage of the total workforce. By way of example, a score of 3 percent on the quit rate index would indicate that for each 100 employees, a total of three quit during the past year.
|Quit Rate||Percentage||Cumulative Percentage|
|0 percent (No Quits)||6.5 percent||6.5 percent|
|0.1 percent to 2.5 percent||33.2 percent||39.7 percent|
|2.6 percent to 5.0 percent||24.8 percent||64.5 percent|
|5.1 percent to 10.0 percent||19.4 percent||83.4 percent|
|More than 10 percent||16.1 percent||100.0 percent|
As observed in Table 1, about 6.5 percent of the respondents reported that no employees quit the organization over the past year. About one-third of participants had a quit rate of between 0.1 percent and 2.5 percent and a little over 16 percent had a quit rate exceeding 10 percent. In times when qualified job candidates are in short supply, there are considerable costs in trying to replace good employees.
We used OLS regression to investigate whether a firm's human resource management activities were associated with quit behavior. These results are provided in Table 2. The first column of results (Model 1) contains the additive scale of 24 HRM practices as well as the control variables. The coefficient on the HRM practices variable was both negative and significant at p < .01. In other words, employers with more HRM practices (as measured by the HRM practices scale) had lower quit rates.
|Variable||Model 1||Model 2||Model 3||Model 4|
|Number of Employees||-0.238***
|Years in Business||-0.073
|*p < .10; **p < .05; ***p < .01|
Models 2 and 3 of Table 2 provide the results for the decision-making ideology and HRM strategy variables. In both models, the coefficient on the relevant variable was negative and significant (p < .05 for decision-making ideology and p < .01 for HRM strategy). In short, firms with a higher decision-making ideology score and a greater focus on HRM strategy had lower quit rates. These findings, in conjunction with the results from Model 1, indicate that human resource management is associated with employee retention (as measured by quit behavior).
Does having an HR department or HR professional result in a lower quit rate? As indicated in Model 4 of Table 2, the coefficient on the HR department variable was negative but not statistically significant. This suggests that the presence of HRM professionals is not significantly associated with employee quit rates.
Although the focus of this paper is on human resource management and quit rates, a few of the results relating to the control variables merit discussion. First, and consistent with past research (Delery et al., 2000; Batt, 2002), quit rates were significantly lower (p < .01 for all four models) in unionized organizations. As Batt, Colvin and Keefe (2002) observe, the presence of a labor union provides employees with a voice in issues relating to their employment (such as the right to appeal management decisions or grieve a disciplinary penalty) and a higher level of compensation relative to similar nonunion jobs. Second, quit rates were also lower when there was a merger and among larger firms. It may be that workers experiencing a merger feel that employment opportunities are limited and are thus unwilling to simply quit their job. Furthermore, larger firms may provide greater benefits and opportunities for promotion and advancement so employees do not have to quit in order to advance their careers.
Earlier, we examined the effect of a "bundle" of HRM practices on quit behavior. While acknowledging the importance of such "bundles" or "systems" in the literature (Wood, 1999; Pfeffer, 2005), we were also interested in examining the effects of individual practices on voluntary turnover. Obviously, caution must be exercised in the interpretation of these findings; as the result on "bundling" shows, it is often the synergistic effect of practices that affect performance outcomes rather than the effect of any one practice (Michie and Sheehan, 2005). Still, for practitioners, it may be useful to have some information on specific factors associated with reduced quit rates.
We ran a set of 24 regressions (one for each of the 24 practices comprising the HRM practices index) with a full set of control variables included in each estimation. We discuss these results using the seven broad headings provided in Figure 1.
Communication with employees (in the form of conducting of employee attitude surveys and the presence of an information sharing program) was associated with lower quit rates (with both variables significant at p < .05). It appears that employees want to know what is happening in the organization and seek a sense that management is listening to them (the notion of "employee voice").
Not surprisingly, both protection-type programs (an employee assistance program and a sexual harassment policy) were strongly associated (p < .01) with lower quit rates. Although merely instituting such programs is not enough, programs such as an EAP or sexual harassment policy send a message to employees that the employer cares about them and the workplace environment. People may be more likely to quit when confronted with intractable personal problems or with a workplace that does not respect their dignity. By contrast, none of the recognition programs was related to the quit rate. It may be that such programs are not as valued among workers.
In recent years, there has been a growing focus on the use of team-based activities. For all three of the team initiatives (Total Quality Management, project teams and problem-solving groups), there was a significant association with lower quit rates (p < .05 for the TQM variable; p < .01 for the variables addressing project teams and problem-solving groups). Employees may feel a greater commitment to a team and a preference for working with others. It may be more difficult for employees to quit a job when peer associations and group responsibilities prevent them from doing so. Similarly, the presence of a formal training program was also related (p < .05) with employee retention. The practitioner literature and popular press reports indicate that employees are seeking more challenging work and an opportunity to further develop their skills. The current study underscores the importance of employee training in retaining workers.
Obviously, fair compensation is necessary in the retention of employees. Our results suggest that retention is associated (at p < .01) with the presence of a productivity sharing programs, an employee pension plan, and an employee stock ownership plan.
Among the other practices, employee monitoring activities such as performance appraisal systems and written job descriptions were not significantly associated with quit rates. The only variable that was significant (and only at p < .10) was the use of employment selection tests. It may be that rigorous selection of employees should lead to better hiring decisions and fewer quits. Firms that expend more resources and time on matching job applicants to actual jobs might expect less turnover.
The major purpose of this study was to examine whether human resource management practices were associated with employee retention in small and medium-size manufacturing employers. Overall, about 40% of the organizations had an employee quit rate of 2.5% or less per year, while 16% of firms had a quit rate in excess of 10%.
Our results show that retention of employees is related to human resource management activities. A lower employee quit rate was associated with a greater use of HRM practices (as measured by an additive index of 24 practices). While a number of small and medium-size firms may lack the resources to have a highly-sophisticated human resource system, Pfeffer and Veiga (1999) note that even among large organizations, only a small minority have effectively implemented such a system.
Although a number of the individual HRM practices were associated with lower voluntary employee turnover, it is likely that such practices bundle together (at least under related themes) and play a role in reducing employee quits. By way of example, the findings suggest that communication practices, protection programs (such as an EAP and sexual harassment policy), team-based work, investment in employee training, and selected forms of compensation help reduce employee turnover. In managing human resources, firms seek (or should seek) to keep quality workers while removing less productive workers. While poorer performers may quit, in some instances it may be necessary to terminate such individuals. As Griffith and Hom (2001) note, voluntary turnover can be both functional and dysfunctional; firms want to retain quality employees and have poor performers leave the organization.
An important finding with implications for small and medium-size firms was that a lower quit rate was associated with a higher score of the decision-making ideology scale and greater attention to HRM strategy issues. Decision-making ideology addresses the use of participative decision-making and open communication while HRM strategy focuses on the importance of linking human resource needs with the strategic plan of the business - a firm concerned with employee retention could aim at increasing its performance on both of these constructs without having to undergo the costs of implementing a full battery of HRM practices.
Way (2002) has noted that introducing a battery of HRM practices can be very costly. In small and medium-size firms, the presence of formal human resource practices may be less important and the workplace climate can be a major factor in an employee's decision to quit or stay with the employer. In short, organizations with a more developed human resource management system and an environment in which employees feel that the business is "a good place to work" are more attractive to employees and thus fewer workers quit such firms.
Some research (for instance, Guthrie, Spell and Nyamori, 2002; Michie and Sheehan, 2005) has shown that the adoption of HRM practices and the relationship between human resource management systems and performance may be associated with the business strategy of the organization. Depending on the strategic perspective of the firm, some organizations may be more willing than others to accept high employee turnover. Although it has been estimated that the cost of hiring and training a new worker to replace one that has quit is about 50% of the employee's yearly salary (Stovel & Bontis, 2002), this cost varies between firms. Consequently, some organizations may do a cost-benefit analysis of the effect of high turnover and conclude that the benefits may outweigh the costs.
There are several avenues for future research. For instance, while this study used a sample of manufacturing firms, it would be important to see if the results generalize to employers in the service sector. In addition, how does a firm's corporate culture and operative strategy affect the relationship between HRM practices and employee turnover? It would also be advantageous to examine the association between retention and human resource activities using longitudinal data rather than relying on cross-sectional studies. Furthermore, there is need for considerably more work on the measurement of HRM systems; for example, what practices should make up the index and to what extent are subsets of practices associated with employee retention? Simply adopting more practices, without understanding their impact and relation to other existing practices, may not be beneficial. Given the costs of termination and the importance of making appropriate labor force adjustments, it is in the best economic interests of the firm to effectively address employee retention issues.
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Terry H. Wagar is Professor of Human Resource Management and Industrial Relations at Saint Mary's University in Halifax, Nova Scotia. His current research interests include human resource issues affecting small firms, organizational downsizing, and dispute resolution.
Kent V. Rondeau is Associate Professor of Health Policy and Management at the University of Alberta in Edmonton, Alberta. His current research involves the link between human resource management and organizational performance and human resource issues in health care.