Investing for keeps: Firms’ prepandemic investments in human capital decreased workforce reductions associated with COVID-19 financial pressures.

Abstract

We examine how firms' prepandemic investments in human capital influence their use of workforce reductions and layoffs (hereafter, workforce reductions) as a response to financial pressures during the coronavirus disease (COVID-19) pandemic. We contend that workforce reductions must be examined in the context of firms' broader financial and resource orchestration environments. First, we suggest that firms' relative exposure to pandemic financial pressures (PFPs) will determine their need to cut costs during the pandemic. Second, we argue that a firm's prior investments in employees' human capital will reduce the attractiveness of workforce reductions as a cost-cutting response to PFPs, as human capital investment (HCI) increases the value of employees' knowledge, skills, and abilities and motivation, thus inducing firms to seek alternative measures to reduce costs. We then argue that the attenuating influence of HCI on the effect of PFPs on workforce reductions will be stronger when HCI is matched with greater investments in physical capital, as employees' human capital will create more value-and will translate to a bigger loss following employee departures-in such circumstances. We demonstrate support for our hypotheses in a sample of 1,364 U.S. banks using data from quarterly Federal Deposit Insurance Corporation (FDIC) reports, news articles, and Worker Adjustment and Retraining Notifications (WARN) Act filings through the fourth quarter of 2020. We discuss implications for our understanding of the impact of the COVID-19 pandemic on organizations and employees and for research on resource orchestration and human capital.

Management Implications of the COVID-19 Pandemic: A Scoping Review

“…Interestingly, the control group (i.e., no management training) also saw an increase in psychosocial safety climate after the pandemic began; however, the levels of this climate remained lower than those in the group that had the initial intervention and training. Like Bentley et al (2021), Dollard and Bailey (2021) reinforce the idea that established policies and proactive measures should be in place before an unforeseen shock occurs (e.g., a pandemic).…”

“…It was not only organizational decisions made during the pandemic that influenced key organizational outcomes but also decisions made before the pandemic. Using a sample of 1,364 US banks, Bentley, Kehoe, and Chung (2021) found a positive relationship between the financial pressures of the pandemic and a firm's decision to engage in workforce reductions. Importantly, prepandemic investment in human capital weakened this positive relationship.…”

Building organisational resilience capability in small and medium‐sized enterprises: The role of high‐performance work systems

“…Our findings can be context‐specific and may not apply to unprecedented disruptions such as the Covid‐19 pandemic (Gregg et al., 2022). However, in a recent study of the banking industry in the United States, Bentley and colleagues (Bentley et al., 2021) found that organisations were better at coping with the Covid‐19 pandemic crisis (by making fewer people redundant) if their pre‐pandemic investment in human capital was high. They argue that this is because investment in human capital leads to valuable resources that organisations endeavour to protect in times of crisis.…”

Performance measurement and evaluation: applying return on investment (ROI) to human capital investments

“…Riley et al (2016) also showed Performance measurement and evaluation that both investments can potentially yield sustainable competitive advantage. Interestingly, Bentley et al (2021) provide evidence that investments in HC can offer employees some increased job security as organizations that have invested in their HC are less likely to make workforce reductions when responding to financial pressures in a crisis.…”