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The study investigates the relationship between employee involvement (EI) and small firms’ financial performance using statistical analyses of establishment-level data from the 1990 Workplace Industrial Relations Survey.
It shows:
- The EI practices and EI combinations which ‘work’ for small-firm establishments are very different from those that work for large-firm establishments.
- The least bureaucratic and least costly EI methods have the potential to benefit small firms most.
- Whether they actually do so depends on the array of other EI and non-EI practices in operation: an inappropriate configuration can have a negative effect on performance.
- These findings take account of factors associated with being an ‘EI firm’.
Small firms benefit from systematic use of the management chain (MANCHAIN) and regular use of direct communication methods (DIRCOM3), like team briefings. These are the least bureaucratic EI practices, and are the least costly to maintain. The findings challenge the conventional wisdom that, as fairly ‘low intensity’ forms of EI, they are liable to have little effect on performance. In small firms, regular communication with decision-takers who are in close proximity may form the basis for meaningful participation in decision-making and trust-based employee relations.
The positive impact of direct communication methods is significantly enhanced when combined with upward problem-solving techniques (UPS), such as quality circles. Managers can use regular direct communications to explain their plans for problem-solving, while workers can use them to convey concerns and alternative approaches. This may foster the mutual trust which, through organisational commitment and job satisfaction, can have positive effects on firm performance. Small-firm workers may feel (and actually be) more involved in decision-making because there is two-way communication. Upward problem-solving alone is associated with poorer performance, suggesting that attempts to tap into worker knowledge, and to elicit greater worker effort through problem-solving EI, can prove counterproductive if they are not combined with regular two-way communication between management and workers.
Whereas ‘the management chain’ has a positive effect on small firm performance, it has a negative effect in combination with upward problem-solving. So, although one-way downward communication of management instructions can bring financial rewards for small firms, this ‘authoritarian’ approach conflicts with the more collaborative approach required to make upward problem-solving work.
Although financial participation (FINPART1) enhances large firm performance, profit-related payments and share ownership schemes have no effect on small firms’ performance, suggesting that the costs in implementing and maintaining such schemes counter any incentive effects they may have. Individual performance-related payments do improve small firms’ performance, while having no effect on large firms’ performance. They may be more suited to the small firm environment, where monitoring individual effort is less costly and wages are more responsive to individual productivity. However, they do not combine with EI practices to improve performance, suggesting that they are not used as a financial pay-off to workers to participate constructively in EI schemes.
Practical implications for small firms
EI practices have different, and sometimes opposing, effects on small firm performance in isolation and in combination with other practices. There is no one EI practice which, if combined with others, can guarantee improved financial performance for small firms. So what sort of ‘EI package’ would most benefit small firms?We estimate the statistical impact of six different EI regimes on the performance of establishments with few EI practices; those with medium levels of EI; and those with a high number of EI practices (Table 2).
The estimated effects are calculated by multiplying the coefficients from our preferred statistical model by the mean scores on each independent variable for that firm type. In this way it is possible to simulate the effect of shifts in the EI regime holding other characteristics constant.
So, for example, in panel 1 of the table, the bottom line in the ‘No EI’ row relates to ‘High EI’ establishments. The figures in that row show the change in the probabilities that a ‘High EI’ small-firm establishment would have of being in each of the four performance categories if it switched to being a ‘No EI’ establishment, other things remaining constant.
The ‘No EI’ row shows the negative impact that removing existing EI practices would have on small firm performance. Even among those with ‘Low EI’, a shift to ‘No EI’ would reduce the probability of performance ‘a lot above average’ by 13 percentage points to 8 per cent.
The best EI package for small-firm establishments is a combination of direct communication and systematic use of the management chain (panel 2) - regardless of current levels of EI activity at the establishment. ‘Low EI’ small firms would increase the probability of recording performance ‘a lot above average’ by 34 percentage points to 55 per cent if they adopted this package. ‘Medium EI’ small firms would see a 28 percentage point increase to 56 per cent, and ‘High EI’ firms a 32 percentage point rise to 53 per cent.
The addition of individual performance-related pay (panel 4) is of no net benefit compared to the direct communication/management chain combination because the positive effect of individual performance-related payments in isolation is offset by the negative effect it has in combination with direct communication.
Adding upward problem-solving to the direct communication/management chain combination (panel 3) would bring substantial performance improvements to small firms, but they do not compare to the benefits of the direct communication/management chain package. This is because the negative effect of upward problem-solving in isolation, and in conjunction with the management chain, outweighs its positive effect in combination with direct communication.
The most EI-intensive regime (panel 6) would have a negative effect on performance akin to switching to a ‘No EI’ regime, emphasising the need for small firms to think carefully before adopting or dropping EI practices.
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