Giving Nonselective Downsizing a Performance Review

Performance Management and Trust

In order for PM systems to succeed, employees must trust in the organization and its use of such systems. Research has found trust to be related to acceptance and effective use of all stages of the PM process including the setting of performance goals, the collection of performance feedback, the ongoing feedback process, and the performance review (De Cremer et al., 2010; Murphy & Cleveland, 1995). In fact, relationships based on trust may be more important than the formal aspects of the system, including formatting and measurement scale type, in determining the success of PM efforts (Pettijohn, Pettijohn, & D’Amico, 2001; Pulakos & O’Leary, 2011).

Some behaviors that can help to foster manager–employee trust include setting goals and providing timely feedback on those goals, following through on commitments and promises, reinforcing development efforts, communicating openly, and making the effort to connect with employees on a personal level (Pulakos, 2004, Pulakos & O’Leary, 2011; Rosen, Levy, & Hall, 2006). More than ever, experts are urging organizations to solicit employee input into the process. This suggestion is based on recognition that trust and acceptance are critical factors to a system’s ultimate success (Pulakos & O’Leary, 2011).

Performance Management and Goal Setting

A major component in most PM systems is establishing and working to achieve performance goals. Goal-setting theory states that goals serve to direct and motivate desired behavior (Locke & Latham, 1990; Latham, Almost, Mann, & Moore, 2005, Latham & Mann, 2006). Specific goals focus and direct behavior toward organizationally relevant performance, and difficult goals ensure that the employee is challenged to perform at an optimal level. Furthermore, when employees are committed to their goals and when feedback is provided against those goals, employees are more likely to achieve (Gravina & Siers, 2011; Latham & Mann, 2006; Renn, 2003). Goal setting theory also suggests that employee involvement in setting goals fosters acceptance of goals and commitment to achieving goals.

Goal strategy, and in translating those goals to every level of the organization. Research, case studies, and anecdotal evidence suggest that leaders’ establishment of strategic enterprise-level goals that are then cascaded down through the organizational structure, such that all employees are contributing toward the objectives of the organization, is an important determinant of employee and customer satisfaction as well as organizational performance (Aguinis, 2009b; Bouskila-Yam & Kluger, 2011; Kantabutra, 2007; Schiemann, 2009). In fact, the popular Management By Objective [MBO] system, commonly used in PM systems, is based on goal setting theory (Rodgers & Hunter, 1991).

A great deal of evidence—including practical accounts from companies such as General Electric, WD-40, and Smith Bucklin (Schiemann, 2009), and meta-analytic support from Klein, Wesson, Hollenbeck, & Alge (1999)—emphasizes the criticality of goal commitment in the goal–performance relationship. Research on organizational strategy has found that congruence among the stated, official strategic goals of organizations, actual executive behavior and decisions, and the treatment of employees, is necessary for employees to accept the official organizational strategy as their own (Hoogervorst, Flier, & Koopman, 2004; Pelletier & Bligh, 2006; Sims, 1998). Research also demonstrates the providing accurate and timely feedback on the progress toward goal attainment is necessary for goal attainment (Nordstrom, Hall, Lorenzi, & Delquadri, 1988; Pampino, MacDonald, Mullin, & Wilder, 2003).

Performance Management and Manager–Employee Communication

While most organizations conduct the formal performance review only once or twice a year, it is suggested that for PM systems to be accepted by and to be motivating to employees, employees and managers should engage in continuous two-way communication. Managers should be providing feedback about employees’ performance and development, and how the performance aligns with department and organizational strategies. Employees should be providing feedback about obstacles to performance goals, and ways that the manager and organization can support the employee in reaching those goals (Aguinis & Pierce, 2008). There is growing consensus that strong feedback cultures, where managers provide frequent constructive feedback about performance and where employees are open to communicating possible barriers to achievement, are related to successful PM (London & Smither, 2002; London, 2003; Sessa, Pingor, & Bragger, 2009).

Performance Management and Reinforcement Contingencies

The term Performance Management was originally coined by Aubrey Daniels in the late 1970s to refer to the application of Skinner’s Theory of Reinforcement (1965) and the scientific method in managing behavior and results in the workplace (Daniels, 1985). One of the most basic principles of behavior is that people will continue to engage in desired behaviors when they receive positive rewards for that behavior, and will discontinue poor performance when they experience negative consequences (Skinner, 1965). According to Daniels & Daniels (2004), performance is an outcome of management’s effective administration of antecedents and consequences of behavior. The term “contingent” refers to the fact that rewards (e.g., raises, bonuses, vacation time) are given if and only if the desired behavior occurs; if the relationship between behavior and reinforcement is not formally established and consistently applied, the desired performance will not occur. Over time, the label and some of the principles of PM were coopted to refer to the use of performance appraisal systems that integrated Management by Objective principals, but in most organizations PM systems are often not based on the guiding principle of Daniels’s (and Skinner’s) original theories, or are watered down, and the contingent reinforcement of behavior is often overlooked or inconsistently applied (Gravina & Siers, 2011).

Organizations create a culture of accountability when they make goals and expectations explicit and then follow through by measuring performance against these goals, and, as is often the case by assigning extrinsic rewards such as bonuses, promotions, or merit increases according to degree of goal attainment. This series of relationships underlies the developmental and motivational aspects of PM. According to Expectancy Theory, motivation is determined by (a) how much an individual believes he or she can perform at some desired level, (b) how much an individual believes that performing at this level will result in some promised outcome, and (c) how much an individual values or is reinforced by that particular outcome (Vroom, 1964). And as originally suggested by Skinner, providing an antecedent to an employee that will direct and incentivize an employee to perform the desired behavior (goal setting) and then providing contingent reinforcement (praise, pay increases) for the performance, greatly increases the likelihood that the desired performance will continue. When reinforcement theory and expectancy theory are applied correctly in PM, then employees learn to trust their leadership and PM systems and are more highly motivated to succeed (Hantula, 2011; Mager & Pipe, 1970).

In summary, it is our contention that for PM to achieve desired results, there must be trust in leadership and organizational systems, continuous two-way communication between employees and managers, development based on goal setting and learning, and strong contingencies that reinforce desired work performance. In the next section, we present how downsizing, as it is often practiced, directly conflicts with these critical factors, and how damaged PM can interfere with employee development and in turn necessitate downsizing.

Downsizing and Performance Management

Why is downsizing not living up to its goal of saving costs and improving organizational performance? First, it should be noted that any arbitrary large-scale change without a solid strategic rationale is likely to fail because it is not truly addressing the underlying problem(s). It also seems true that employees’ behavioral and attitudinal responses to downsizing directly and indirectly impairs intraorganizational social processes, resulting in damaged PM, which can limit and eliminate employee development and performance and other anticipated benefits (Mishra & Spreitzer, 1998; Sheaffer, Carmeli, Revivo, & Zionit, 2009). It could also be argued that broken PM, due to impaired social processes or lack of proper development and implementation, can increase need for downsizing, but that this downsizing cannot be properly or fairly conducted without valid performance feedback.

As discussed earlier, factors such as (a) the development of trust, (b) how organizational goals are cascaded to employees, (c) management–employee communication and feedback culture, and (d) accountability within the organization have been found to influence the success of the various processes of PM. It also seems that nonselective downsizing interferes with the development of these factors, and that damage to these factors can interfere with downsizing, thereby impairing employee engagement and organizational performance.

Downsizing and Trust

Trust is often a casualty of nonselective corporate downsizing (Brockner et al., 1997; De Cremer et al., 2010; Parker, Chmiel, & Wall, 1997). When downsizing continues to occur in unfair and noncontingent ways, employees may come to believe that PM is just a pretext that provides legal justification for downsizing. Pugh, Skarlicki, and Passell (2003) also found that people who were downsized were likely to carry these negative feelings to new employers, and perhaps enter into new psychological contracts already expecting to be mistreated; this, of course, sets the stage for a troubled employer/employee relationship, and for biased or ineffective PM, which can simultaneously increase the need to downsize and interfere with the ability to effectively do so.

It is clear to see how this mistrust could affect one’s participation in PM system implementation. When an organization uses the increasingly common practice of collecting multisource feedback from the employee’s peers, reduced trust causes employees to be less honest in evaluating their peers. If they rate their peers too positively, it could give those peers an advantage over themselves in terms of retention during layoffs. If they rate their peers too negatively, it could lead to the termination of acquaintances and friends (Spence & Keeping, 2011; Smither, 1998). A lack of trust due to fear of layoff could also interfere with employee input into the PM process, and with the exchange between the manager and employee that occurs during the ongoing feedback process. This lack of two-way communication impedes employee development. Considering the necessity of trust and manager/employee relationships (Pettijohn, Pettijohn, & D’Amico, 2001; Rosen, Levy, & Hall, 2006), and with downsizing research demonstrating the negative effects of layoffs on employee trust, it seems that these two processes are in conflict.

Downsizing and Goal Setting

In terms of cascading goals, employees look to the actions of organizational decision makers to infer the actual goals, as opposed to the official goals that are espoused by the leaders. If executives are continually concerned with making the organization leaner, employees will, over time, learn that this behavior represents the actual goals of the organization (Abate, 2010). Victims and survivors of nonperformance-based downsizing understand a disconnect often exists between actual and official goals, and that there are associated consequences for them and their coworkers (Datta et al., 2010; Guthrie & Datta, 2008).

Social learning theory suggests that people not only learn behavioral contingencies from direct experience, but also from viewing the behavior and consequences of others. Observational learning can occur in relation to watching live models be rewarded or punished for behavior, or through observing (or reading or hearing about) symbolic or fictional models doing so (Bandura, 1977; Harrison & McIntosh, 1992). Individuals are likely to learn from the media or from friends and loved ones about committed and hardworking individuals who are downsized (Abate, 2010; Zyglidopoulos, 2005). Cameron, Freeman, and Mishra (1993) suggest that layoff survivors may perceive that diligence toward reaching goals is no longer valued, since their coworkers, who may have displayed such traits, were themselves victims of downsizing. Social learning regarding nonselective downsizing may make employees resistant to involvement in setting their own performance goals or render low commitment to those that are set (Klein et al., 1999). In general, the cascade of organizational strategy to employees’ goals is less likely to occur, and this can often be made worse when managers are either ignorant of the downsizing plans or do not share them, leaving employees feeling deliberately kept in the dark. These factors reduce chances that organizational goals will be met, resulting in a lack of employee development and in reduced profits and/or increased costs, which can make downsizing more necessary.

Downsizing and Manager–Employee Communication

Armstrong-Stassen (1994), as well as Spreitzer and Mishra (2002), found that supervisor support during downsizing can mitigate decreases in organizational commitment among survivors. Managers are responsible for managing their people and the completion of tasks. Downsizing reduces personnel, but not the overall workload. Post downsizing, focusing on managing the completion of tasks often takes priority over managing people and their performance. Middle management is often helping their direct reports complete tasks in an environment where there are fewer employees and the same, or more, work. Managers do not have the time to complete the formal reviews they are responsible for, or to participate in the informal conversations that provide important performance feedback and support to employees (London, 2003; Pulakos & O’Leary, 2011).

In addition, downsizing is often implemented in the form of “delayering.” This method, as defined by Gandolfi (2010), involves removing levels of middle management in order to “flatten” the organization. If conducted in a strategic and performance-based manner, this strategy could result in efficiency and faster communication (Littler, 1998). However if conducted nonselectively, this process can involve the loss of talented individuals who have collected a great deal of organizational knowledge (Fisher & White, 2000; Lei & Hitt, 1995; Sitlington & Marshall, 2011). In addition, delayering also widens the span of control of those management levels left behind (Salemi, 2005). Each manager is responsible for providing appraisal feedback to more individuals. This reduces the chance that managers will dedicate time and energy into providing frequent and thoughtful feedback, which impedes employee development. Thus, while London and Smither (2002) suggest that a strong feedback culture can improve the effectiveness of an organization’s PM system, downsized organizations have obstacles in place preventing a strong feedback culture. They are then less able to use performance goals and feedback to produce work and employee development.

In addition, when effective managers become targets of downsizing themselves, they become fearful and distrusting and either do not communicate at all, or communicate their fear to their subordinates (Armstrong-Stassen, 2005). Research suggests that the effects of downsizing on organizational trust and employee performance are worse when managers do not communicate information about imminent downsizing to their employees (Brockner et al., 1997; Brockner, Spreitzer, Mishra, Pepper, & Hochwarter, 2004; Hoover, 2005; Spreitzer & Mishra, 2002). Finally, downsizing can impede organizational development by reducing a layoff survivor’s ability to correctly process performance feedback and use it to improve performance (Mansour-Cole & Scott, 1998; Sitlington & Marshall, 2011)., which can negatively influence performance and make continued downsizing seem the only viable option.

Downsizing and Performance Contingencies

Cyclical downsizing, especially by means of nonselective layoffs interrupts the reinforcement contingencies of a PM system by rewarding executives for short-term financial gains as opposed to long-term success, and by being seen to punish at least some high performers with layoffs.

First, it makes sense to consider what reinforcement contingencies exist in the C-suite. CEOs and high-level executives may be told that the long-term success of the organization is most important, but other messages are communicated nonverbally through executives’ compensation plans. While downsizing is often presented as a necessity for the long-term well-being of the organization, stock-owners and boards often intentionally or unintentionally reward executives on short-term financial gains (Boselovic, 2010; Lefkowitz, 2003). CEO and executive pay structure focuses heavily on stock ownership and bonuses based on stock price and executives often receive such bonuses for cutting cost structures (Lefkowitz, 2003; Van Buren, 2000). Cutting these costs often results in an immediate, short-term gain in the company’s stock for which CEOs and executives are rewarded with stock ownership at discounted prices (and inflated values) and bonuses (Van Buren, 2000). However, there is evidence that when these bumps do occur, they are short-lived (Cascio & Young, 2003), and declining productivity and financial performance often follow (Cascio, 2002; McElroy, Morrow, & Rude, 2001; Muñoz-Bullon & Sanchez-Bueno, 2010). CEOs then must plan for the next event—either a merger or layoff—to “improve” financial performance, this can result in a regular cycle of downsizing or “streamlining” to revive stock prices and keep bonuses flowing. CEOs communicate the actual, if not the official, strategy of an organization through their reward structures. In this way, nonselective downsizing develops performance contingencies that result in ineffective people management.

Second, it makes sense to question whether the organization is truly rewarding the behavior it desires. While CEOs and other high-level executives may be reinforced with praise and bonuses for layoffs, the rest of the organization’s employees are not. Often, decisions are made to cut the highest paid employees, which results in the layoffs of hardworking employees—many of whom have received merit pay raises and promotions (Cascio, 2010). The practice of nonselective downsizing is potentially punishing organizations’ most loyal and highest performing employees. This disrupts the reinforcement contingencies that underlie effective PM systems. Past victims and survivors of layoffs learn that hard work is not rewarded, and this affects their attitudes, performance and citizenship behavior (Brockner et al., 1997; Gandolfi, 2008; Mager & Pipe, 1970; McElroy, Morrow, & Rude, 2001). Victims are punished for working hard by being laid off, and survivors are punished with more work and less people to accomplish it. In this downsizing culture, even employees in organizations where downsizing has not occurred, may learn through people they know and media portrayal of downsizing that they will not be rewarded for hard work and commitment to their organization. Without this instrumentality, or the perception that good performance will be recognized, employees are left to conclude that the organization does not follow through with promises.

Performance Management’s Influence on Downsizing

We posit above that noncontingent downsizing destroys the social context of PM, and that this can cause a downward spiral of performance that will result in the need for more downsizing and limit the ability to conduct strategic, performance-based downsizing. It is also possible, however, that this cycle can begin with broken PM. For example, in a start-up company, enthusiastic owners may have no need or inclination to downsize, but a lack of knowledge of the psychological principles of motivation can result in incorrectly developed and administered PM, which may damage trust, goal setting and performance contingencies, and eventually lead to the need to downsize.

The performance review is another facet of PM with the potential to negatively influence the social context necessary for effective PM and contingent downsizing. Managers often have difficulty in summarizing and presenting performance feedback to underperforming subordinates, either because an honest assessment will involve a difficult conversation about performance deficiencies or because they fear firing employees (Tumlin, 2004). Tumlin found the feedback presented to employees was influenced by how the subordinate reacted to the interview. When underperforming employees are not instructed in how to improve, or not dismissed so higher performers can replace them, eventually the financial burden of underperforming employees can necessitate downsizing, yet hinder the ability to conduct performance-based downsizing.

Cascio (1998, 2002) and others (Freeman, 1999) have suggested that downsizing should only occur after considering other restructuring options and in the context of the overall organizational strategy. However, while some organizations talk of rightsizing (Gandolfi, 2008, 2010) there is still evidence that organizations are continuing to downsize in a nonstrategic, nonselective manner (Abate, 2010, Gandolfi, 2008). We suggest that PM systems broken by prior nonselective downsizing destroy the goal setting and performance contingencies necessary to conduct strategic downsizing. In the next section, we demonstrate how PM and downsizing might productively coexist and present several suggestions for building a cultural context that supports sound PM systems and, when necessary, strategic performance-based downsizing.

Alternative HRD Income-Generating and Cost Reduction Methods

Downsizing should be considered a last resort, but during economic downturns or when organizations have strategic failures, alternative cost-saving measures may be necessary. There are significant costs associated with recruiting and selection, and reviewing the data from performance feedback systems may help identify when employees have or could easily develop competencies that can be put to use elsewhere. HRD staff should train managers and employees in process improvements and analyze the results of such training, to determine if such training can stave off the need for downsizing (Roberts, 2006). Organizations may also consider pay freezes and cuts, furloughs, job sharing, shortened work weeks, suspension of matching retirement contributions, and early retirement as alternatives to downsizing staff.

Leaders may wish to solicit input from employees about additional ways to contain costs and avoid layoffs in crisis situations. As suggested by Wang, Hutchins, and Garavan (2009), the employees themselves, as experts in the work of the organization and stakeholders in its business decisions, are likely to have viable suggestions. Furthermore, if participation breeds commitment, then acting on employee suggestions already increases the likelihood that staff members will have more positive reactions and develop quicker. As an example, Lincoln Electric, the welding machinery company discussed above, is known for successfully implementing many of these options (Koller, 2010). Lincoln Electric’s employee handbook states they will avoid nonperformance-based layoffs. Even in hard economic times, the organization has managed to keep this promise and still thrive by implementing many of the suggestions above. They are particularly efficient in cross training so that departments with fewer work demands at a given time might be redeployed in other areas with higher demand. The organization also has an advisory board where employees at all levels are able to give suggestions and state opinions. Many organizations will not be able to completely eliminate downsizing, but may reduce it substantially by implementing some of these suggestions.

Contingent PM and Performance-Based Downsizing

Healthy, or desirable, turnover occurs when lower performers are leaving organizations while higher performers are entering in their place (Gandolfi, 2008). When a reduction in headcount is deemed necessary, both performance records and managers should be consulted to identify histories of low performers. When turnover decisions are linked to performance, it bolsters instrumentality and strengthens the performance reward contingencies. Youngcourt, Leiva, and Jones (2007) found the perceived purpose of performance appraisal systems to be related to job satisfaction and organizational commitment; appraisal systems that are used to identify and develop high performers rather than provide a legal justification for downsizing will foster a satisfied and committed work force. This also emphasizes the critical need for accurately designed performance appraisal tools that involve employee input; otherwise, performance-based downsizing would be no more effective than nonselective downsizing.

Development of HR Personnel and Managers to Be Proactive Rather Than Reactive

In order to successfully integrate PM and downsizing, it is important for HRD personnel to understand how these systems affect each other, and how to create and implement contingent and evidence-based PM systems. Yawson (2013) suggests a gap between HRD theory and practice; many HRD practitioners either lack the know-how or choose not to design and implement systems and policies that mesh with organizational goals (Pfeffer, 1998; Ulrich & Brockbank, 2005). Swanson (1998) provides evidence of how HRD efforts “imbedded in a purposeful performance improvement framework” can demonstrate high-yield returns on organizational investments; HRD personnel must focus on developing skill sets in financial accounting, statistical design and analysis, strategic agility and understanding the “big picture” that can help HRD capitalize on the benefits of performance improvement plans and which can help communicate the bottom-line cost-benefits of well-designed PM systems.

These HRD specialists must then demonstrate to executives and managers how downsizing can affect PM and how noneffective PM can necessitate downsizing. Given the fact that executives are often rewarded for making decisions to downsize (Lefkowitz, 2003), HRD personnel must use theory and research from the field of HRD to convince executives and managers that nonselective downsizing can damage the organizational context and that damaging these factors can affect the organization’s (and their) profitability and long-term survival. Such research should also help to inform managers in how to observe and document performance, how to establish realistic and valid metrics, and how to give ongoing positive and negative feedback to both promising and problem employees (Daniels & Daniels, 20004, Swanson, 1998) We suggest implementing developmental exercises used in the field of HRD (Sofo, Yeo, & Villafañe, 2010), whereby specialists provide role-play and other action learning experiences that allow managers practice in developing metrics of performance, in accurately summarizing feedback, in honestly communicating negative performance feedback, and in dismissing consistently underperforming employees. These role-plays may be used by managers to practice communicating the Company’s necessity of downsizing and conveying to underperforming employees the concrete performance reasons as to why they are being downsized.

HRD personnel and managers may consider implementing measurement and motivational concepts originally developed for PM to conduct equitable and performance-based downsizing. For example, when downsizing is deemed necessary because of environmental shocks or organizational failures, HRD personnel could implement some form of MBO for managers (or RBO; Restructuring by Objective); objectives of restructuring could include things like reducing the number of layoffs for a given cost reduction, using performance as a main criterion for decisions, not losing employees with irreplaceable skills and history, and adjusting outcome expectations so that the existing work objectives are reprioritized to the new workforce. Executives and managers may also be reinforced for properly developing and achieving these objectives.

Postdownsizing Performance Management Evaluation

Postdownsizing, the organization must reevaluate its strategy and goals in light of the changing economic or organizational conditions and because fewer employees are available to complete the proposed work. As Zatrick and Iverson (2006) note, executives must determine how the new organizational strategy will be cascaded down to departments, and managers must work with employees to determine how they fit into the newly changed organization. Employees must be developed in the competencies that align with the organizational strategy of the newly changed organization. Foster (2010) found that organizational justice perceptions are strongly associated with commitment to organizational change. This suggests that if it is clear to employees that the downsizing was unavoidable, that other options were exhausted and that the selection of downsized candidates was based on performance factors, it may maintain some of employees’ trust in the understood psychological employment contract and perceptions of organizational justice (Abraham, 1999; Capelli & Neumark, 2001; Edwards, Rust, McKinley, & Moon, 2003).