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Impact of Company Downsizing on Employee Motivation

Paper Type: Free Essay Subject: Organisations
Wordcount: 3049 words Published: 3rd Aug 2021

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The employee downsizing is a ubiquitous feature of modern economy and is used by businesses to reduce costs, regain competitive advantage, increase operational efficiency, change market focus, etc. The act of downsizing has significant emotional impact on downsized employees as well as survivors. This can potentially impact the employee motivation and reduce engagement and productivity thus diminishing the objectives of downsizing. This article examines the impact of downsizing on employees’ motivation by referring to current research in organizational behavior, human resource planning, and psychology. It discusses the impact on motivation during and after downsizing in the context of the established psychological and organizational behavioral theories. It leverages Justice theories and Motivation theories to explain employee behavior. On the basis of the understanding of employee behavior during downsizing, it makes recommendations on change process to preserve employee motivation during and post downsizing. 

Keywords: employee downsizing, motivation, morale, layoff

Impact of Company Downsizing on Employee Motivation 

Downsizing is a planned set of organizational policies and practices to reduce workforce with the goal of improving firm performance (Datta, Guthrie, Basuil, & Pandey, 2010). Globalization and economic instability have increased both the frequency and magnitude of economic change worldwide. Downsizing, restructuring and relocating domestic jobs to international locations are now ever- present means of improving financial performance and competitiveness (Fugate, Prussia, & Kinicki, 2012). Millions of U.S. jobs have been lost in recent years. We now know that in fact 5.7 million U.S. jobs were lost between December 2007 and April 2009 (U.S. Bureau of Labor Statistics, 2009).

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While companies expect to make financial and performance gains by downsizing, this is not always the case! The empirical evidence provides inconsistent results on the relationship between downsizing and organizational financial performance (Chhinzer & Currie, 2014). Chhinzer and Currie (2014), from the results of a survey, observed “more than half of the 1,468 firms that downsized indicated that productivity deteriorated from downsizing”. In another survey of 1,005 firms that downsized between 1986 and 1991, it was found that only 46 per cent actually reduced expenses, only 32 per cent actually increased profits, and only 22 per cent actually increased productivity (Appelbaum, Delage, Labib, & Gault, 1997).

A major factor that contributes to the failure of most organizations to achieve their corporate objectives after downsizing is that they do not adequately and effectively address the “people factor” throughout the process as it related to surviving employees. Research strongly suggests that survivors in the organization also suffer adverse effects after downsizing has occurred (Appelbaum et al. 1997). While change is a strategic imperative for employers, it also is vital to note that (remaining) employees determine the ultimate success of such changes. Put another way, negative employee reactions are potentially highly consequential as they can severely impede the realization of the intended benefits of change. It therefore is essential for organizations implementing change to better understand employees’ negative reactions to change in order to manage outcomes more effectively (Fugate et al. 2010).

Having established the importance of surviving employee’s motivation for success of the organization, let us examine the factors that influence employee’s motivation in context of various psychological theories that explain the employee’s behavior in stressing time. I will review change management literature that emphasizes the process to manage change to keep employee motivated. I will look into psychological contract theory and justice theories to understand the employee behavior. I will also delve into survivor syndrome to explain employee reactions. Finally, I will review intrinsic motivation. There is some evidence that intrinsic motivation is not significantly impacted by downsizing. Finally, I will make recommendations, based on this review, to keep employees motivated.

Change Management Process

There is a wide body of literature on organizational change that suggests that outcome of the change is critically dependent upon how well the change process is managed (Datta et al. 2010). It has been argued that open and effective communication that provides accurate and timely information, employee participation in change decision making procedures and addressing employee concerns can mitigate the anxiety and stress associated with downsizing.

Positive Change Orientation

Fugate et al. (2012) define the positive change orientation as a constellation of malleable individual characteristics that affect how individuals perceive and respond to change. Those who have a high level of this state are more confident in their abilities to cope with change and even influence it. Although there are individual differences, the positive change orientation is a state like construct and is dependent upon the situation; it can be influenced to make employees supportive of change (Fugate et al.  2012).

The change self-efficacy, positive attitudes toward changes, and perceived control of changes are indicators of positive change orientation.

Change self-efficacy

Employees with high levels of change-related self-efficacy believe they have the ability to deal with change-related demands and that they can function effectively during the change process. Change self-efficacy is critical for coping with organizational changes. Individuals who feel more confident about their ability to handle changes should be less affected by change demands, because change self-efficacy enhances one’s feelings of competency thereby acting as a source of predictability and control (Xu, Payne, Horner, & Alexander, 2016).

Perceived control

Perceived control over the changes reflect employees’ belief that they have the ability to influence the processes and outcomes (Ashford, 1988).  The perception of control alleviates the inherent uncertainty associated with the change and enables employees to be supporter of the change. This helps with coping and adjustment with change (Fugate et al.  2012)

Positive attitudes

Employees with positive attitudes towards change are more likely to support the change and have expectations for positive outcome. Employees with higher positive attitude are more satisfied with jobs and less likely to quit. The positive attitudes are formed by personal experiences and beliefs (Fugate et al.  2012).

Change related fairness

There is great body of literature on fairness as the central factor in management employee relationship. It is the main factor for trust during organizational change. The presence of fairness provides employees trust in management, thus reduces uncertainty in current actions and provides predictability in future actions (Fugate et al.  2012).

Fairness heuristic theory is concerned with how people react to outcomes of their dealings with authorities, and makes predictions concerning the relationship between perceived fairness of procedures, perceived fairness of outcomes and acceptance of outcomes (Árnadóttir, 2002). In times of organizational change, fairness related experiences become important factors in shaping attitudes and behaviors.

Employee withdrawal

The employee withdrawal refers to intentions to quit, voluntary turnover, and absenteeism. The first is cognitive withdrawal and last two are behavioral. The employee withdrawal has significant cost to employer.  (Fugate et al.  2012).

The employee withdrawal can be explained with theory of reasoned action wherein behavior is a function of one’s intentions, which are determined by individual differences and contextual factors. The threat appraisal refers to employee’s negative reaction to change which shows up as withdrawal. The employee withdrawal is a mitigation of perceived threats.

Psychological Contract Theory

The impact of downsizing on individuals and groups in an organization has been explained in context of psychological context theory, which emphasizes negative consequences for violating implicit contracts governing relationship between firms and employees (Datta et al. 2010). The employees expect employer to keep its side of bargain of providing fulfilling employment in return of their contributions to workplace. The employees perceive downsizing as a breach of contract by employer and leads to lack of trust between employer and employee. Given that trust is fundamental to employees’ beliefs and experiences, it has negative impact on employee attitude and behavior. Surviving employees may withdraw psychologically (e.g.,   lost trust, reduced effort, reduced engagement, lack of ownership) or physically (increased absenteeism and voluntary turnover), with negative consequences for the firm.

Justice Theories

The justice theories (distributive and procedural) are well studied in literature and can be used to explain employee behavior in downsizing. Procedural justice concerns the fairness and the transparency of the processes by which decisions are made, and the distributive justice concerns with the fairness in the distribution of rights or resources. The employees are likely to view downsizing as less threatening or more favorably if they view the change was done fairly. The distributive justice pertains to how fairly “the pains and gains” of change were shared between management and employees. The procedural justice pertains to how the planning and procedures decisions to downsize were made (Fugate et al.  2012). The survivors are in a good position to judge the fairness of downsizing both procedurally and distributively. The survivors are likely to be more positively inclined to change if they perceive the downsizing was done fairly (Appelbaum, et al., 1997).

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Motivation Theories

The motivation theories can be used to explain employees’ behavior due to downsizing. I briefly discuss Maslow’s hierarchy of needs, Expectancy Theory, and Reinforcement Theory. Downsizing threatens the fulfillment of basic levels of Maslow’s hierarchy of needs. It is expected that in context of downsizing, the employees will be traumatized and are not expected to function at optimal level.

The Expectancy theory predicts that employees will apply the minimum effort required to reach an outcome and the extent of effort depends upon the value and likelihood of obtaining the desired outcome. The significant ramification of this theory in context of downsizing is that if employees perceive that the change process was not fair, they can’t do anything to improve the outcome for themselves. That is, if the performance is not the criterion for surviving or a reward, they will have no incentive to perform (Appelbaum, et al., 1997).

The Reinforcement theory states that an individual’s behavior is a function of its consequences. This implies that when they see terminations, demotions, and salary cuts as negative consequences to high performance, they will not be motivated to perform (Appelbaum, et al., 1997).

Survivor Syndrome

The job loss is a traumatic experience probably right after death of a relative or friend or divorce. There is evidence that employees that survive downsizing experience mixed bag of emotions. They become demoralized, confused, insecure, and cynical (Baruch & Hind, 2000). This psychological condition might be caused by stress and anxiety of fear of diminished prospects and further layoffs or loss of trust between employees and management or a combination of both. The survivors frequently experience feeling of guilt especially if they perceive that change procedure was followed without distributive and procedural justice.

The survivors are identified with one of the following emotions (Makawatsakul & Kleiner, 2003):

  • Fear, insecurity, and uncertainty
  • Frustration, anger, and resentment
  • Sadness, depression, and guilt
  • Injustice, betrayal, and guilt

There is evidence of inverted-U relationship between the job insecurity of survivors and their work efforts, with low levels of downsizing showing positive effect on effort, whereas higher levels of downsizing leading to lower efforts. This employee behavior can be explained by expectancy theory, the employees put greater effort into their job to save their job when they perceive that they can control the outcome but when they perceive that it is out of their control, the effort is reduced.

Intrinsic Motivation

There is research to show that intrinsic job motivation is able to withstand downsizing related effects. Jalajas and Bommer (1999) reported through a study that job motivation dominates the downsizing factors.  This provides a capable tool to counteract the effects of downsizing on morale – the job design that promotes empowerment and intrinsic motivation. This seems to be intuitively true as the employees that are highly satisfied with their jobs are likely to fair better in downsizing.


We examined various factors related to motivation during downsizing and explained employee perception and behavior in context of various behavioral theories. Based on our analysis, I make the following recommendations to mitigate impacts of downsizing on motivation.

Improve Trust in Management

The downsizing must be handled as fairly as possible. The reasons for downsizing must be explained and change management procedures must adhere to justice theories. The senior management must be visible and accessible to answer questions in interactive sessions. Over-communicate to employees about the downsizing process, and its progress frequently and honestly. The vision for organization for post downsizing must be shared (Cameron, 1994).

Support Change

Provide training and cross-training to employees in anticipation of change. Train supervisors on how to motivate survivors and on how to manage change and transition. Train employees on how to handle stress and increased workload (Appelbaum, et al., 1997).

Share Control

Have employees participate in change so they have a sense of control and feel empowered by involving them in identifying changes required for downsizing and in implementing those changes (Cameron, 1994).

Build Intrinsic Motivation

Design jobs that promote intrinsic motivation. Involve employees in job definition thus consider what motivates employees (Jalajas and Bommer, 1999).


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