Retaining Employees in Small and Medium-Sized Firms: Examining the Link with Human Resource Management

Executive Summary While the 1990s were a decade characterized by downsizing and restructuring, there has been a recent focus on attracting and retaining quality employees. Very little research has addressed employee retention within small and medium-sized firms. This paper uses data from a national study of manufacturing organizations in Canada to investigate the relationship between employee quit behavior and human resource management issues. The results suggest that employee retention is affected by a host of factors that includes the system of human resource management practices, human resource strategy, and decision-making ideology. Introduction While researchers are now placing considerable attention on the links between human resource management (HRM) practices and the performance of the firm, most of this research has been conducted in large organizations (Wood, 1999; Wright, Gardner, Moynihan & Allen, 2005). Many of these studies have examined the impact of human resource systems on the financial performance of the organization. However, there is a paucity of research investigating whether the adoption of certain human resource management practices has the potential to affect employee retention rates (Stovel & Bontis, 2002; Batt, Colvin & Keefe. 2002). The current study uses data from small and medium-size manufacturing workplaces to investigate the factors associated with the ability of an establishment to retain employees. Why should small firms be concerned about retaining employees? There is a strong body of research indicating that employee turnover can be very costly (Griffith & Horn, 2001). Potential costs (Dess & Shaw, 2001) can include both "direct" costs (such as separation, replacement, training and general administration costs) and "indirect" costs (such as lower productivity and reduced customer loyalty). While the loss of quality employees can be devastating for both big and small firms, retaining key individuals may be particularly important for small and medium-size businesses - if a high-quality employee leaves the organization, a smaller firm may be less likely to have a suitable internal candidate or lack the resources to selectively recruit on the external market. Background Although most of the research addressing human resource management and firm performance has been conducted in large firm settings, small and medium-size businesses are now adopting human resource management practices with an expectation that these practices have the potential to positively impact firm performance (Way, 2002). Following from Heneman, Tansky and Camp's (2000) observation that there is a shortage of information on human resource management practices in smaller organizations, it is not surprising that there is very little research addressing the link between employee retention and human resource management. While there is an extensive body of research on employee turnover, almost all of the work by social scientists has been done at the individual (employee) level of analysis (Griffith & Horn, 2001). For instance, Kickul (2001) found that employer breach of factors addressing autonomy and growth (such as providing meaningful work, the opportunity to develop new skills, and recognition of accomplishments) and rewards and opportunities (for instance, providing opportunities for advancement and compensation tied to performance) were associated with a greater intention to quit among small business employees. However, the importance of studying employee turnover at the workplace or organizational level has been noted (Delery, Gupta, Shaw, Jenkins & Gangster, 2000; Batt, 2002). Shaw, Gupta and Delery (2005) recently investigated the relationship between voluntary turnover and organizational performance using data from employers in the trucking industry and organizations involved in the manufacturing of concrete pipe. They found that there was a negative relationship between voluntary turnover and organizational performance but that the relationship was attenuated as the level of voluntary turnover increased. …