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The Influence of Hierarchy in Organizations on Employee Turnover Intentions The Influence of Hierarchy in Organizations on Employee Turnover Intentions Bas Lensen (10018972) Master Thesis Business Economics Specialization: Organization Economics Date: January 8, 2016 Supervisor: Thomas Buser Contents 1. Introduction ........................................................................................................................... 2 2. Related Literature .................................................................................................................. 5 2.1 Organizational Structure .................................................................................................. 5 2.2 Organizational Formality .................................................................................................. 9 2.3 Voluntary Employee Turnover ........................................................................................ 10 2.4 Empirical Work ................................................................................................................ 12 2.5 Hypotheses ...................................................................................................................... 15 3. Methodology........................................................................................................................ 17 3.1 Method ........................................................................................................................... 17 3.2 Sample ............................................................................................................................ 21 4. Results .................................................................................................................................. 23 5. Discussion............................................................................................................................. 29 6. Conclusion, Limitations and Future Research .................................................................... 31 7. References............................................................................................................................ 33 A1. The Five Versions of the Vignettes ................................................................................... 37 A2. Survey Questions ............................................................................................................... 39 A3. OLS Regressions with Age/Treatment 1 Interaction Term .............................................. 41 1 Abstract I used a vignette study to examine the effect of hierarchy on one’s turnover intentions. Among 178 respondents I found that employees’ turnover intentions are lower when senior colleagues do not act as if they are above others in the hierarchy and when the general workplace atmosphere is informal. I call this informal hierarchy. The deployment of a flat/non-hierarchical organization, characterized by few organizational layers and lines of command, leads to higher expectations about job satisfaction and is perceived to be more attractive. However, this does not lead to lower turnover intentions. Two job aspects following from having a flat structure, higher job complexity and more empowerment do not show a significant effect. These results suggest that people are less likely to quit firms that are not hierarchical. 1. Introduction One of the major challenges for a firm is retaining their talented employees. According to research by the Economist, the war for talent is getting harder. Businesses have increasing difficulties in recruiting and retaining skilled employees. Many executives indicated that employee recruitment and retention would become tougher (66%) or even ‘significantly harder’ (20%) (Murray, 2008). In 2012, four years and an economic crisis later, the war for talent was predicted to remain intense even though unemployment increased significantly (Bishop, 2011). The term “war for talent” was first used by researchers at McKinsey (Chambers et al, 1998). They argue that it is important to shape an environment that is attractive for talented employees to work in. According to them: ‘’You can win the war for talent, but first you must elevate talent management to a burning corporate priority. Then, to attract and retain the people you need, you must create and perpetually refine an employee value proposition: senior management's answer to why a smart, energetic, ambitious individual would want to come and work with you rather than with the team next door. That done, you must turn your attention to how you are going to recruit great talent, and finally develop, develop, develop!’’ (p. 44) There are loads of angles for firms in creating the value proposition as mentioned by the McKinsey research. For instance a firm could look at the (financial) incentives, on-the-job training, and growth opportunities they offer their talented employees. These are just examples of many factors in the value proposition that can be offered to employees to attract them, and to make sure that they want to keep working for your organization. Therefore, 2 research that tries to get insights in what elements people are attracted by in a job and what influences people’s decision to quit their job is of crucial importance for organizations. Since merely attracting the right people does not mean much if you are not able to retain them, this thesis will focus on employees’ decision to quit working for a given firm. One of the factors that might be a predictor of employees’ quit behavior, is whether their organization is a hierarchical one. Since hierarchy can exist formally, characterized by the amount of layers in the organizational chart, or informally, by recognizing that some people are above you and respecting them and their decisions, the following research question will be answered: To what extent does an organization’s level of hierarchy, both formal and informal, influence an employee’s intention to quit? A lot of research on quit behavior of employees has already been done. In an early paper on the matter, Weiss (1984) finds that tenure, education, gender, race, and job complexity influence the likelihood that an individual will quit his job. Other authors found evidence that general training, work group cohesion, pay, alternative pay, and bonus structure influence quit behavior (Mueller & Price, 1990; Brewer, 1996; Blakemore et al, 1987). One of the issues that is discussed quite often is what kind of organizational structure firms should employ. According to an article on the Forbes Magazine website, although still relatively rare, flat organizations are gaining in popularity (Wirtham, 2014). Some potential benefits of a flat organizational structure have been discussed. In fact, there is a growing amount of evidence that flat organizations outperform hierarchical organizations (Kastelle, 2013). Quinn (1985) argues, among others, that motivated employees are crucial to the success of a project, and that large bureaucratic organizations often suffer from motivation problems. Bureaucracy is more likely to occur when an organization consists of many layers and lines to top-management are long. Therefore, to the extent that the motivational issues lead to employees leaving the firm, there may be an effect of organizational hierarchy on employee turnover. Some job aspects associated with flatter structures and their effect on voluntary quits have been examined: for instance, empowerment, responsibility and job complexity (Weiss, 1984; Dow Scott et al, 2003). 3 Formal hierarchy is likely a factor in employees’ work-related decisions. However, an organization’s structure might not be the only way in which an organization can be hierarchical. An organization can be quite flat on paper, but still require employees to recognize their superiors as people well above them in hierarchy or treat people with higher seniority as if they stand above them in hierarchy. In other words, hierarchy can exist not only on paper, but it can also be present in the general atmosphere at the workplace. This is only partially recognized by the current literature. Perhaps it is not merely the presence of hierarchy by organizational design that is relevant for an employee’s quit intentions, but also his perception of the presence or absence of superiority of certain individuals. A research that examines the overall effect of hierarchy, both through organizational structure and organizational formality, on quit behavior is lacking. Since data on quit behavior is scarcely available and organizational structure is hard to measure, I will focus on the intention to quit and I will use a vignette study to measure this. Researchers already argued that intention to quit is a good predictor of actual quit behavior (Firth et al, 2004) and some empirical support for this has been offered (Mobley et al, 1978; Miller et al, 1979). This study shows that individuals are less likely to quit if their boss or other senior employees treat them as equals and the general workplace atmosphere is informal. Suggesting that subjects care more about whether they are treated as if they are lower in the hierarchy than whether or not they actually are. Furthermore, there is a weakly significant effect of the presence of hierarchy by design on how attractive individuals perceive their job to be, and on how satisfied they expect to be from the job. Finally, two job aspects associated with organizational hierarchy were examined: centralization/lack of authority and the job complexity that stems from the fact that the individual performs
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