Companies’ employee-oriented human resources management (HRM) practices play a significant role in mitigating the negative effect of downsizing following mergers and acquisitions (M&A) on labor productivity.

That is the conclusion of a study conducted by Dr. Hyesook Chung, an assistant professor in the Jindal School’s Organizations, Strategy and International Management Area. A worldwide professional association for scholars has recognized her and her co-authors with its Best Convention Paper Award for the article — “It’s Different: Examining the Effect of Firm Employee-oriented HRM on Employee Downsizing Following Mergers & Acquisitions.”

Chung and her co-authors received the award from the Human Resources Division of the Academy of Management. After undergoing a rigorous selection process, the awards committee selected the paper as the best paper of the year. Chung and her fellow researchers were honored at the organization’s annual conference, which began Aug. 9.

One underlying mechanism identified in this study is that M&A serve as a unique context to modify employees’ established perception that downsizing breaches the psychological contract between employees and their employers.

“The psychological contract refers to the unwritten expectations between employees and their employers,” Chung explained. “Unlike a formal contract, it includes beliefs or informal agreements about mutual obligations and promises that are not formally written but assumed by both parties. For instance, employees expect fair treatment, job security and supportive work environments, while employers expect their employees to work diligently, be loyal, and contribute to the organization’s performance.”

Chung said that downsizing is likely to affect employees’ psychological contract negatively, as it breaks these implicit promises of job security. This is especially true unless the downsizing decision is reasonable and the process is fair.

“When the psychological contract is violated during downsizing, it can lead to negative consequences such as decreased morale, motivation and job satisfaction, as well as increased employee turnover,” she said.

However, Chung said, “While downsizing is typically viewed negatively by employees as a threat, the unique context of M&A allows for the possibility that it may be seen as a strategic move to align with the new direction of the merged company and eliminate redundant roles.”

This “sense-making” is only feasible when the firm communicates a clear and convincing message to its employees.

“Employee-oriented HRM can act as a cognitive cue for employees to interpret the intentions behind an organization’s decision to downsize,” Chung said. “It can help employees make sense of these changes, viewing downsizing as a rational part of the broader organizational strategy rather than an opportunistic managerial action.

During a merger, companies with strong employee-oriented HRM policies — i.e., training, internal promotion, career development, flexible working schemes, diversity and equal opportunities, and employee health and safety — are likely to experience fewer negative employee reactions compared to those without such policies. These policies can help them better maintain employee morale and retain valuable staff during downsizing, ultimately leading to higher productivity.

The research team’s findings show that companies can take practical steps to mitigate the negative effects of downsizing after mergers and acquisitions.

“Our findings suggest that when layoffs are unavoidable post-M&A, implementing fair procedures and HR practices that focus on employee well-being is essential,” Chung said. “We recommend firms strategically use these HR practices and continue investing in their workforce. For firms without such practices before an M&A, starting these investments can yield positive outcomes. This approach signals the firm’s commitment to its employees and facilitates integration. By prioritizing employee well-being and creating a supportive work environment, firms can build trust, reduce uncertainty and achieve more successful M&A results.”

Chung said employee-oriented HRM will continue to evolve over the next decade and become even more critical, especially in the context of increasing M&A activities.

“Firms will increasingly recognize the importance of clear and sincere communication during M&As to keep employees informed and engaged,” she said. “There will be a greater emphasis on mental health, work-life balance and overall employee welfare, ensuring that staff feel supported throughout these transitions.”

If there was one key takeaway Chung would want managers and HR professionals to remember from her research, it would be that, from a managerial perspective, employee downsizing may be an inevitable choice during the M&A process to achieve organizational efficiency.

“Even so, it can be a shocking and threatening event for employees, especially those from acquired firms,” she said. “To prevent negative repercussions from downsizing, it is important to have organizational interventions, such as employee-oriented HR practices, already in place.”

However, she also recognizes that, in practice, it can be challenging for firms without prior investment in HRM to suddenly adopt employee-oriented practices around M&A. Ideally, she said, firms would commit to these HR practices.

“But if that’s not feasible, you can still convey an employee-focused message through other means,” she said. “This could include clear and sincere communications from top management, training sessions explaining the downsizing process or Q&A sessions addressing individual concerns. The key is to reassure employees that they are valued and cared for and that the downsizing is a strategic, fair part of the M&A process.”

Chung said she is honored and humbled to receive the award.