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Journal of Small Business &

Entrepreneurship
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Finding Employees and Keeping

Them: Predicting Loyalty in the Small
Business
a

Barbara Reda & Linda Dyer

Department of Management , John Molson School of Business,

Concordia University
Published online: 19 Dec 2012.

To cite this article: Barbara Reda & Linda Dyer (2010) Finding Employees and Keeping Them:
Predicting Loyalty in the Small Business, Journal of Small Business & Entrepreneurship, 23:3,
445-460, DOI: 10.1080/08276331.2010.10593495
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Finding Employees and Keeping Them: Predicting Loyalty

in the Small Business

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Barbara Reda and Linda Dyer, Department of Management, John Molson

School of Business, Concordia University
Abstract. The research examined the link between the recruitment and selection practices of owner-managers
of small businesses and employees perceptions and attachment to the firm. We also predicted that owners
conscientiousness and openness to experience would affect their choice of hiring practices. Participants were
127 employees and owner-managers in 31 small, independent bakeries, and survey data were collected from both
the owners and the employees. Responses revealed that use of formal recruitment techniques predicted positive
employee perceptions and employees perceptions of owners commitment predicted their loyalty to the firm.
Further, the owners openness to experience was linked to a less formal approach to hiring practices.
Rsum. Cette tude examine le lien entre les pratiques de recrutement et de slection de propritaires-dirigeants
de petites entreprises et les perceptions des employs et leur sentiment dattachement envers lentreprise. Les
auteurs mettent lhypothse que le professionnalisme et lattention au dtail ainsi que le degr douverture des
propritaires de nouvelles expriences et de nouvelles ides ont une influence sur leur mthode dembauche. Aux
fins de cette tude, 127 employs et propritaires-dirigeants provenant de 31 petites boulangeries indpendantes
ont rpondu un sondage. Les rponses obtenues indiquent quun processus de recrutement formel tait li une
perception favorable des employs envers lentreprise. De plus, les rsultats rvlent que la perception quont
les employs au sujet de lengagement des propritaires est lie leur loyaut envers lentreprise. Finalement,
les rsultats indiquent que louverture de nouvelles expriences chez les propritaires est lie des mthodes
dembauche moins formelles.

Finding and retaining good employees is an important challenge for small firms. In
2007, 57% of Canadian small business owners mentioned hiring as one of their most
significant problems (Canadian Federation for Independent Business, 2008). In a small
firm, each employee represents a relatively larger proportion of the total workforce and
so has a relatively larger impact on the firms outcomes than an employee in a large firm
(Gatewood and Field, 1987). It seems logical, then, that owners of small firms, defined here
as businesses with 50 or fewer employees, would be particularly attentive to hiring the best
possible employees.
The small business literature suggests that this is not the case, however. Traditional
human resource (HR) practices that might be expected to improve the chances of attracting
competent and motivated employees are noticeably underused in small firms (Cardon and
Stevens, 2004; Cetinel, Yolal and Emeksiz, 2009; Deshpande and Golhar, 1994; Hornsby
and Kuratko, 2003; Rauch, Frese and Utsch, 2005). The research on this topic is mainly
descriptive, and aims at showing the deficiencies in small-firm approaches to hiring when
compared to large firms (Carroll et al., 1999; De Kok and Uhlaner, 2001; Hornsby and
Kuratko, 2003). Research that proposes and empirically tests explanations for small firms
hiring strategies is sparse (Cardon and Stevens, 2004; Kerr, Way and Thacker, 2007;
Williamson, Cable and Aldrich, 2002). Equally sparse is empirical investigation of how the
typical small-firm hiring strategy affects firm outcomes (Barrett, Neeson and Billington,
2007; Ponzo and Scoppa, 2010). The present study is meant to contribute to these under-

Journal of Small Business and Entrepreneurship 23, no. 3 (2010): pp. 445-460

445

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reda and dyer

researched areas, increasing our understanding of: 1) why formal hiring practices may be
used or avoided by the small business, and 2) the impact of these HR choices on outcomes,
specifically, the employees loyalty to the firm.
In the next section of this paper, we will explain how the small-firm context may affect
hiring procedures and outcomes. Following this, we develop explanations of how the
formality of these practices might predict performance as well as employee perceptions.
Finally, we consider whether characteristics of the owner-manager may help us to
understand the nature of hiring practices in small businesses.

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Why Effective Hiring may be Difficult for Small Firms

Traditional hiring practices include recruitment, attracting a good pool of job applicants,
and selection, choosing the best person from among the applicants. Regarding recruitment,
researchers have pointed out that size is a liability in attracting applicants to small enterprises.
Small firms are less visible than their larger counterparts, and thus are below the radar of
most job seekers (Williamson, Cable and Aldrich, 2002). Even when potential applicants
are aware of the existence of the small firm, they may not see it as a desirable workplace.
It is commonly believed that small firms are less than ideal places to work because they do
not have the resources to adhere to industry norms (Williamson, Cable and Aldrich, 2002).
Expectations may be that salaries, benefits, working conditions, training opportunities,
career development, and labour relations will be less attractive in small firms than in larger
firms (Cardon and Stevens, 2004). The small firms very survival may be questioned, since
small firms are known to be fragile entities in an unforgiving environment (Storey, 1994).
These and related factors deter potential applicants, who may think it wise to seek careers
in larger, more established and more predictable firms. Thus, recruitment for the small firm
requires extra effort on the part of the small business owner-manager.
Even when the small firm is able to attract multiple applicants for a position, selecting
the best from among them may pose difficulties. Few owner-managers of small companies
have specific expertise in using HR selection tools, and few small firms have formally
trained HR managers (Hornsby and Kuratko, 2003; Kerr, Way and Thacker, 2007). The jobs
for which they hire tend to cover a broader and less well-defined range of responsibilities
than jobs in a large firm, and they have fewer employees in any given job category. Because
the number of positions in the company is relatively small, hiring will be less frequent and
regular than in a larger enterprise, so managers in small companies will be less practised
at using selection tools (Cardon and Stevens, 2004). For these reasons, the activity of
selection may be infrequent and highly variable, and it may not be particularly costeffective to purchase validated selection tests or hire HR professionals for help in selection.
Researchers have documented the increased costs associated with a comprehensive HR
system (Sels et al., 2006). These challenges may decrease the chances of selecting the best
of the available applicants.
In brief, effective hiring activities require resources and skills that may be in short
supply in the microenterprise. The small business literature suggests that, in these difficult
conditions, many owner-managers exploit their personal and social networks to entice people
to work for them. They ask current employees for referrals, use family members and other
personal contacts as employees, or post advertisements at the place of business (Ponzo and
Scoppa, 2010). All these informal recruitment practices are useful, but are likely to attract
a restricted range of job applicants. Owner-managers do buy newspaper advertisements,
but are less likely to recruit using the more structured approaches that would increase

finding employees and keeping them: predicting loyalty in the small business447

the applicant pool, such as attending job fairs, contacting college or university placement
offices, or using professional recruiters. In the selection process, small business ownermanagers also tend to use ad hoc tools such as unstructured interviews or job tryouts,
eschewing prescribed formal HR approaches such as written selection tests (Cardon and
Stevens, 2004; Hornsby and Kuratko, 2003). Leungs (2003:315) research participants,
for example, based their decisions to select new hires on the feel they got at the selection
interview, and a hope that their judgement is correct.

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HR Formality and Firm Performance

The payoff for a formal approach to hiring is assumed to be an improved likelihood of
productivity and successful performance of the company. A few researchers have tested
this assumption empiricallysome of the studies have reported results specific to hiring
practices (e.g. Barrett, Neeson and Billington, 2007); others have examined staffing practices
as part of a broader HR system (e.g. Kerr, Way and Thacker, 2007). The outcomes studied
have included financial performance, firm growth, and owners success perceptions.
Barrett, Neeson and Billington (2007) conducted interviews with 27 business owners.
What emerged from this qualitative study was a proposition that when firms had instituted
formal HR strategies, the owners perceived that they were better able to search for and hire
competent staff. In a large-scale quantitative study, Ponzo and Scoppa (2010) analyzed a
large database of Italian employee information and found that individuals who worked in
small firms were significantly more likely to have been hired through informal networks.
At the same time, the use of informal networks was associated with lower employee
wages and low-productivity jobs, even after controlling for firm size, industry, employee
experience, and related variables. In yet another study, the intensive use of HR practices
(including hiring) was found to be correlated with productivity and financial performance
in small Belgian companies (Sels et al., 2006). Similarly, Nguyen and Bryant (2004)
reported a relationship between the formality of HR procedures and the owners report of
profit growth at Vietnamese firms. These findings all support the notion that formal hiring
practices are associated with improved outcomes for the firm.
When the focus is specifically on staffing practicesas opposed to HR practices in
generalthe impact on firm performance is less clear. Having formal staffing practices
(holding other HR practices constant) was linked with higher perceived productivity in
Ways (2002) study; and Fabi, Raymond and Lacoursire (2007) reported that a cluster
of HR practices that included recruitment, job descriptions and performance appraisals
was related to higher sales growth. However, Kerr, Way and Thacker (2007) found that
recruitment effectiveness (the number of applicants for each job opening) was unrelated
to perceived productivity, and there was just a weak, marginal link between the use of
screening tests and productivity. In another study (Barrett and Mayson, 2007), growthoriented small firms were more likely than non-growing firms to use formal recruitment
and selection practices, but there was no link with the owners satisfaction with recent
hires. We conclude that the study of the relationship between the use of formal hiring
practices and small firm performance has produced equivocal results.
HR Formality and Employee Loyalty
Our contention is that improved understanding of the mixed results described in the
previous section will come from more careful theoretical explanations of the link between
HR practices and small firm performance. This is the source of our specific interest in

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employee loyalty. A few scholars have cited employee retention (or voluntary turnover) as
one potential mediator that may explain the relationship between the use of formal hiring
practices and firm performance. The argument is that the use of formal practices increases
the knowledge, skills and abilities of new hires, and the extent to which they are a good
fit with job requirements and the organizations values. These attributes all affect the new
employees motivation to stay or leave the firm, and the resulting turnover level works to
increase or reduce firm performance (Carroll et al., 1999; Mayson and Barrett, 2006; Sels
et al., 2006).
Empirical testing of this proposed mediation is rare. Way (2002) reported that using
formal HR practices was correlated with reduced voluntary turnover, but Sels et al.s
(2006) analyses uncovered no relationship between these two factors. Fabi, Raymond
and Lacoursire (2007) also found that the use of formal recruitment, job descriptions
and performance appraisals had no impact on employee retention. In discussing their null
findings, Sels et al. (2006) explained that the lack of relationship might have emanated
from an extreme shortage of qualified staff in the then-current economic situation.
Our study builds on the notion that employee retention is an important factor in
understanding the impact of formal hiring practices. However, unlike earlier research that
simply measured employee turnover, we hope to provide a more detailed look at employees
turnover intentionstheir feelings of loyalty to the firm and their perceptions of their
relationship with the employer. These attitudinal variables are expected to shed more light
on the outcome of hiring practices than would a simple headcount of the employees who
quit the firm. We propose that an informal and variable use of hiring techniques might be
seen by employees as a lack of predictability, and this would engender less confidence in the
owner and less security in building a career in that owners firm. So, for example, reliance
on causal referrals instead of formal recruitment, and unstructured instead of structured
interviews (Ponzo and Scoppa, 2010), might affect employees attitudes negatively.
However, when employees feel that they were hired as a result of a careful and rigorous
process, they will feel like valued members of the company (Mayson and Barrett, 2006).
Moreover, the more stability there is in HR techniques and the more formal attention that is
paid to hiring, the fewer the surprises and misunderstandings for the new recruitas well
as for the owneronce the employee starts the job. Mutual understanding between owner
and employee should result in greater employee retention and attachment to the company.
In brief, we propose that the use of formal HR hiring practices will increase employees
feelings of security and decrease the chance of misunderstandings, and these perceptions
will, in turn, increase employees loyalty to the company. This leads to the following
research hypotheses:
H1: The greater the use of formal hiring practices and the less the use of informal hiring
practices, the greater the employees feelings of security and mutual understanding with
the owner.
H2: Security and mutual understanding are directly linked to employees loyalty to the
firm.
Owners Characteristics and Hiring Practices
A second goal of our research is to explore the reasons why small business owners might
engage in or avoid formal hiring practices. The rationale provided for the small business
owners underuse of formal HR practices has usually been economic. This is undoubtedly

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finding employees and keeping them: predicting loyalty in the small business449

a valid explanation, but several researchers have suggested that there might be additional,
non-financial explanations for the choice of an informal approach. More specifically,
owner-managers of small firms seem to embrace informal techniques, not because they
have to as a result of of economic constraints, but because they want to, as consistent with
their own values and predispositions.
Deshpande and Golhar (1994) studied small manufacturing firms where managers
rated the use of formal HR practices as unimportant to their success. A paper by Jack and
her colleagues (Jack, Hyman and Osborne, 2006) supports the notion that, in small firms,
an individualist ideology on the part of the owner and a preference for informality are
predominant characteristics. Fabi et al. (2007) also surmise that the owner-managers profile
might be a predictor of HR activities. Along the same lines, Leungs (2003) interviews led
him to suggest that future research should examine the personality of business owners, and
how it might influence their recruitment preferences. We respond to these suggestions by
examining the owners personality traits, in a dispositional approach to explaining hiring
practices in small owner-managed organizations.
Personality provides a basis for decision making, but there has been little research
linking personality to human resource practices (Cardon and Stevens, 2004). In the
broader literature, two personality traits in particularconscientiousness and openness to
experiencehave been found to be pivotal in explaining important performance outcomes
(Ciavarella et al., 2004; Meyer, Dalal and Bonaccio, 2009). We have selected these two
traits for initial investigation. Specifically, we propose that managers with these traits are
more likely to decide to use formal hiring practices.
Conscientious people typically are responsible, hardworking, orderly and careful
planners (Judge et al., 1999). In a small business context, we expect that these characteristics
would extend to the use of recruitment and selection methods. Thus, conscientious owners
may be less than comfortable with a casual approach to recruiting; they may use more formal
recruiting practices than their peers who are lower on conscientiousness. Conscientious
owners may be responsible enough to acknowledge that they do not have the time or the
expertise necessary to do a good job hiring employees, and may thus be more likely to
include expert advisors in their workforce planning. They may prefer objective methods of
selection, where there is guidance about exactly how information is to be interpreted and
analyzedsuch as formal written testsrather than relying on intuition, luck or informal
methods.
Individuals high in openness to experience tend to enjoy playing with ideas and
expressing their own creativity. They are curious, broadminded and experimental (Judge
et al., 1999). They are also autonomous, non-conforming and imaginative. We expect that
small business owners who are high in openness to experience will tend to try different
approaches and experiment with different hiring practices in the firm. The resultant wideranging and eclectic approach to recruitment and selection might mean that they would
use a greater variety of hiring techniques than those owners who are lower on openness
to experience. However, the non-conforming nature of the open small business owner
suggests that they would also be unconventional in their hiring practices, unlikely to be a
methodical user of any of the formal, prescribed recruitment or selection techniques. They
might reject standardized approaches, preferring to follow their own creative hunches.
Thus, our hypotheses are:
H3a: The higher the owners level of conscientiousness, the greater the use of formal
hiring practices and the less the use of informal practices.

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H3b: The higher the owners openness to experience, the less the use of formal practices,
the greater the use of informal practices, and the greater the variety of practices used.
Method

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Participants
The participants in this study were 127 individuals working at 31 small firms in the bakery/
caterer sector. This is a growing industry; consumers appetite for high-quality baked goods
has increased in the last decade, and small bakeries are perceived as offering fresher and
better quality products than their large, mass-production counterparts. Still, this is a very
competitive environment, especially for new, urban start-ups (Starting a Bakery, 2008).
Small bakeries are usually one-store operations with employees who bake and sell the
goods on site. Medium-sized bakeries may bake at a central location, and distribute their
products through wholesalers and other retail outlets. Some of the employees may have
specialized skillsbakers or pastry chefsthough others may be less-skilled retail clerks.
Skilled bakers may be difficult for owners to recruit and keep. For less-skilled positions,
it is easier to hire workers, but high turnover may lead to a frequent need to recruit. These
HR challenges make this sector an interesting one in which to test our research hypotheses.
Another advantage of focussing on a single industry is that measures of the employees
daily experiences and expectations would be more directly comparable.
The sampling frame of bakery retail outlets was obtained online (Canada 411),
and we selected three large Montreal neighbourhoods. The list of companies in these
neighbourhoods was later expanded through snowball sampling techniques (Sudman and
Kalton, 1986), that is, asking early respondents to suggest colleagues in the industry who
might be willing to participate in the study. Each owner was asked to complete a paperand-pencil survey, and then was asked to distribute questionnaires to his or her employees.
Employees returned their surveys in sealed, unmarked envelopes, as a way of ensuring
their anonymity. Seventy-five firms were approached and the owners of 31 firms agreed to
participate, thus our firm-level response rate was 41%. Approximately 300 employees of
the 31 firms were approached and 96 employees responded, making our response rate for
the employees approximately 32%.
Thus, the final sample comprised 127 respondentsthe 31 owner-managers and one
to five of their employees. Twenty-five owners were men and five were women (one
participant did not indicate his or her gender). Among the employees, 37 were men and 59
were women. The average length of time the firms had been in operation was 19.0 years
and the median size of the firms in terms of full-time employees was six, ranging from
a low of two to a high of 20 employees. Thus, all were microenterprises. About 41% of
the employees had a personal relationship with the owner (family members or friends).
The reported mean from the 24 firms who told us their net annual profits was 3.58, which
corresponded roughly to CAN$60,000.
Measures
We used a survey research design and the data were collected using two paper-and-pencil
questionnaires. The employees rated their own perceptions in three ways: 1) their view of
the owners commitment to them as employees; 2) their beliefs that the owner had kept the

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finding employees and keeping them: predicting loyalty in the small business451

work-related promises that he or she had made to them; and 3) their loyalty. The owners
gave us information about their hiring practices, their personality, and key descriptors of
the business.
Employee survey. In this questionnaire, we measured the three aspects of the employees
perceptions. We drew as much as possible on standard measures that were psychometrically
sound and commonly used in the organizational literature. Another criterion for selecting
measures was that they would be relatively brief, given the challenges of collecting data in
small firms (Storey, 1994). The employees perception of the owners commitment to them
was measured using Rousseaus (2000) Psychological Contract Inventory, a set of scales
that have been widely used and repeatedly found to be reliable. There were nine items on
this scale. Employees rated the extent to which their employer had made commitments
such as Concern for my long-term well-being and Make decisions with my interests in
mind ( = .80). We also measured the employees perception of broken promises on the
part of the owner using Robinson and Morrisons (2000) scale. Slight adaptations were
made to focus the questions on the recruitment process. The five items were found to
be reliable in this sample ( = .81). Examples are Almost all the promises made by my
employer during the recruitment process have been kept so far and My employer has
broken many of its promises to me even though I have upheld my side of the deal (reverse
scored). Both variables were measured on five-point scales in which five represented a high
level of the variable.
The measure of employees loyalty was taken from the standard scale of normative
commitment by Meyer, Allen and Smith (1993), which also has seen frequent and successful
use in the organizational literature. Normative commitment exists when employees feel
loyal to the firm. This measure included six items such as This organization deserves my
loyalty, and I do not feel any obligation to remain with my current employer (reverse
scored). All items were rated on a five-point Likert scale (5 = high loyalty). This variable
was found to be internally consistent ( = .75).
Level of Analysis and Aggregation of Employee Surveys. The formality of hiring practices
was measured at the firm level, so we had to aggregate the individual-level employee
variables to correspond to the firm level of analysis. It was necessary to ensure that there
was homogeneity among the employees responses so that aggregation was justifiable
(James, Demaree and Wolf, 1984). To examine this, we used the James, Demaree and
Wolf (1984) rWG index, which assesses the consistency among responses when several
people rate a single referent, in this case, the owner of the firm. The index has been used by
previous researchers who studied team leaders, each of whom had been rated by multiple
team members (e.g. Eby et al., 1999). Our study was a parallel situation in which the
perceptions of individual employees within a firmloyalty, the perception of owners
commitment, and the perception of broken promiseswere linked to the HR practices of
the owner of that firm.
In 27 of our 31 firms, more than one of the employees had responded to the survey,
so we calculated the rWG values within each of these firms for each of the three employee
variables. The values of this index range between 0 and 1, and a value of .7 is considered
to be good consistency. In our study, values between .6 and .7 were deemed as having
marginally acceptable consistency.
The rWG values for employees loyalty ranged from a low of .27 to a high of .97. The
average rWG was .79, and all but two of the rWG values were in the acceptable range. Thus,
aggregation of loyalty responses was justified in 25 firms; for the other two firms, loyalty

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reda and dyer

was coded as missing data. For the perception of owners commitment to the employees,
the rWG values ranged from .54 to .99, with an average of .90. Aggregation was justified
in all but one firm; in the latter, perception of owners commitment was coded as missing
data. Finally, rWG values for perceptions of broken promises ranged from .60 to 1.00, with
an average of .89; aggregation of responses rated to broken promises was justified in all
firms.
Owner survey. Two personality traits were measured using items from John, Donahue
and Kentles Big Five Inventory (1991). Conscientiousness was measured on a nineitem scale; the owners were asked to indicate to what extent they agreed or disagreed
with statements such as Does a thorough job and Can be somewhat careless (reversescored). The internal consistency reliability in this study was acceptable ( = 0.75).
Openness to experience was measured by the owners extent of agreement with 10 items,
including Has an active imagination and Likes to reflect, play with ideas. The internal
consistency reliability was also 0.75.
Drawing on the HR literature, we generated a list of recruitment practices and selected
six that seemed relevant and feasible in the small bakery context. Owners were asked
whether they used the recruitment practices for every position, most positions, some
positions, few positions, or never (on a five-point Likert scale). These frequency ratings
were factor analyzed and two factors emerged (see Table 1). One factor included: I rely
on word of mouth when it comes to recruiting new employees, I ask existing employees
if they know anyone who would like to work for me, and I put advertisements in the
newspaper when I need to fill a position (reverse-scored item). We labelled this factor use
of word-of-mouth recruitment (Cronbach = 0.80), and judged that a high score indicated
an informal approach to recruitment. The second factor included three items: I use the
services of professional firms to find new people, I put advertisements in schools and
universities to attract new people, and I use government agencies when I need to look for
new people. We labelled this factor use of recruitment professionals, and the calculated
reliability was acceptable ( = 0.71). This was a more formal approach to recruitment.
Table 1. Pattern Matrix for Recruitment Measures
Item

Word-of-mouth
Approach (Less
Formal)

I rely on word of mouth when it comes to recruiting new employees

.779

I ask existing employees if they know anyone who would like to work for me

.846

I put advertisements in the newspaper when I need to fill a position (reversescored)

.910

Use of Recruitment
Professionals (More
Formal)

I put advertisements in schools and universities to attract new people

.702

I use the services of professional firms to find new people

.821

I use government agencies when I need to look for new people

.870

Note: Factor loadings smaller than .40 are not shown

We also generated a list of ten selection methods based on the general HR literature.
Again, owners rated the frequency of use of these selection practices on a five-point
Likert scale (for every, most, some or few positions, or never). Using a factor analysis,
we screened out three items that loaded on multiple factors. After removing these items,
repeating the factor analysis led to the emergence of two factors (see Table 2). The factor

finding employees and keeping them: predicting loyalty in the small business453

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that we named use of selection tests was composed of the following three items ( = .93):
I ask people to do written tests (for example, intelligence tests or personality tests) to
decide whom I will hire, I give people a written test based on the job they will be doing,
and I ask people to undergo medical exams to decide whom I will hire. Finally, the
use of biographical information included four items ( = .78): My hiring decisions are
based on personal background information on the candidates resumes, I use personal
background information given to me by the candidates on the application forms I provide,
I ask references given to us by the candidates before I make any hiring decisions, and
I ask previous employers about the candidate before I decide whom to hire. Both of
these selection tools indicated a relatively formal approach to hiring (compared to simply
selecting walk-in candidates, relatives, or friends of employees).
Table 2. Pattern Matrix for Selection Measures
Use of Biographical
Information
(More Formal)

Item
My hiring decisions are based on personal background information on the
candidates resumes

.606

I use personal background information given to me by the candidates on

applicant forms I provide

.788

I ask the references given to us by the candidates before I make my hiring

decisions

.880

I ask previous employers about the candidates before I decide whom to hire

.850

Use of Selection
Tests
(More Formal)

I ask people to do written tests (e.g. intelligence tests or personality tests) to

decide whom I will hire

.947

I give people a written test based on the job they will be doing

.978

I ask people to undergo medical exams to decide whom I will hire

.882

Note: Factor loadings smaller than .40 are not shown

In summary, the owners responses led to the identification of three clusters of HR

activitieslabelled Use of recruitment professionals, Use of selection tests and
Use of biographical informationwhich we used to measure the frequency of using
formal hiring practices, and one cluster of HR activitieslabelled Use of word-ofmouth recruitmentwhich we used to measure the frequency of using informal hiring
practices. As mentioned before, we tested the relationships between these variables and
the constructs of employee perceptionsperception of owners commitment, perception
of broken promises and loyaltyas well as the owners conscientiousness and openness to
experience.
Results
First, we describe the frequency with which the owners used formal and informal
hiring practices. Word-of-mouth recruitment was popular, used for some or most
positions (mean = 3.17 on the five-point frequency scale). The owners also told us that
they frequently relied on biographical information during the selection process (mean =
3.45), but they rarely used selection tests or recruitment professionals (both averages =
1.77, which fell between few and none of the positions hired). These mean frequencies
are reported in Table 3. In addition to the frequency-of-use ratings, we calculated the
number of hiring tools used (as a yes/no measure). From a maximum of 13 recruitment and

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reda and dyer

selection techniques included in the measure, owners reported a mean of 2.16 hiring tools
used (median = 1.8 tools).
Table 3. Means and Zero-order Correlations for Major Variables
Variable

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Mean

10

1. Word-of-mouth
recruitment

3.17

.80

.075

.130

.109

-.290

-.017

-.365*

.291

-.211

-.445*

2. Professional
recruitment

1.77

.71

.565*

.343*

-.036

.201

.348*

-.314*

-.104

-.435*

3. Biographical
information

3.45

.78

.049

-.088

.165

.129

-.031

-.047

-.421*

4. Use of selection
tests

1.38

.93

-.076

.065

.170

.025

.128

.133

5. Number of
practices used

2.16

--

.085

.043

-.039

-.239

.319*

6. Loyalty

3.32

.75

.718*

-.339*

-.213

-.101

7. Owners
commitment

3.76

.80

-.501*

.112

.295

8. Perception of
broken promises

1.79

.81

.180

-.048

9. Conscientiousness

4.22

.75

.386*

10. Openness to
experience

3.68

.75

p < .05, one-tailed

Reliability coefficients on diagonal

Formality of hiring, employee perceptions and loyalty

Hypothesis 1 addressed the extent to which the four measures of recruitment and selection
practices affected the two measures of employee perceptions. Of the eight possible zeroorder correlations between the hiring practices and employee perceptions, we found that
just three of the relationships were significant. First, the greater the use of professionals in
recruitment, the lower the perception of employees that there were broken promises (r =
-.314; p= .048, one-tailed). Second, the greater the use of professionals in recruitment, the
greater the perception that owners were committed to their employees long-term welfare
(r = .348; p = .032, one-tailed). Third, the greater the use of word-of-mouth recruiting, the
less the perception of owners commitment to employees (r = -.365; p = .026, one-tailed).
All three relationships were in the predicted direction.
The next step was to test these relationships in regression analyses. Because there were
significant correlations between the frequency of use of recruitment professionals and the
selection practices (see Table 3), we examined the recruitment and selection variables
separately in the regression analyses. Regressing word-of-mouth recruitment and use of
recruitment professionals on owner commitment to employees, we found a significant
relationship (F = 5.17; p = .013). Both predictor variables contributed significantly (p =
.022 and p = .027 for word-of-mouth and recruitment professionals, respectively). In other
words, the greater the use of recruitment professionals, and the less the use of word-ofmouth recruiting, the more employees felt that the owner of the firm was committed to their
security and well-being in the long term.

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finding employees and keeping them: predicting loyalty in the small business455

The recruitment practices were also significantly linked to the employees perceptions
of broken promises (F = 3.47; p = .046). We found that perception of broken promises was
related to a less frequent use of recruitment professionals (p = .05) and a somewhat greater
use of word-of-mouth recruiting (marginally significant at p = .062).
The regression analyses confirmed that none of the selection practices were predictors
of employee attachment in terms of employees perceptions of the owners commitment,
or their perceptions of the owners broken promises. Overall, therefore, there was partial
support for Hypothesis 1. The use of formal recruitment practices increased employees
perceptions of attachment and mutual understanding, and informal recruitment practices
decreased these perceptions. Selection practices, however, had no impact on employee
perceptions.
Hypothesis 2 proposed that the employees perceptions of the owners commitment
to them, and the extent to which they felt that owners had broken their promises to them
would be related to the employees own loyalty (normative commitment) towards the
firm. The zero-order correlations resulted in a very strong positive link between perceived
owners commitment and the employees loyalty (r = .718; p < .001), and a negative link
between perceived broken promises and loyalty (r = -.339; p = .039). When both perceived
owners commitment and perceived broken promises were regressed on loyalty, the model
was significant (F = 14.49; p < .001); however, it was clear that owners commitment made
a significant contribution to the variance (p < .001), while the effect of broken promises
ceased to be significant predictor (p = .672). Thus, when employees have a strong sense
that the owners are committed to them, they are inclined to be more loyal. Hypothesis 2 is
partially supported. Parenthetically, we found no direct relationships between any of the
hiring practices and loyalty.
Owners personality and formality of hiring practices
Most of the owners, in describing their own personality traits, reported that they
were moderately high in openness to experience (mean = 3.68) and even higher in
conscientiousness (mean = 4.22). For both these scales, the maximum score was five.
Hypotheses 3a and 3b looked at the effects that conscientiousness and openness to
experience had on the level of formality of the firms hiring practices. We examined
the zero-order correlations and found that conscientiousness was unrelated to the use of
any recruitment or selection activities (see Table 3). Openness to experience, however,
was negatively linked to the use of recruitment professionals and the use of applicants
biographical information (r = -.435 and -.421, respectively; p < .02, one-tailed, for both
relationships). Interestingly, a negative zero-order correlation also emerged between
openness to experience and the use of word-of-mouth recruitment, indicating that owners
who were higher in the openness to experience personality trait were less likely to use this
informal means of recruitment, a relationship that was opposite to our predictions (r =
-.441; p = .016, two-tailed). There was no correlation between openness to experience and
the use of selection tests.
Regression analysis confirmed these results. Conscientiousness and openness to
experience together had a marginally significant impact on the use of recruitment
professionals (R2 = .19; p = .06), but the beta weights showed that only openness to
experience was responsible for the effect (p = .022), with a significant negative link to
this formal recruitment practice. Similarly, conscientiousness and openness together had
an effect on the use of biographical information (R2 = .19; p = .055), but only openness to
experience made a significant (negative) contribution to the selection practice (p = .018).

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reda and dyer

Conscientiousness and openness together had an effect on the use of informal word-ofmouth recruitment (R2 = .20; p = .055), but again, it was openness to experience that made
a significant negative contribution (p = .033). Regression analysis also indicated the lack of
relationship between the two personality variables and the use of selection tests.
It was expected that openness to experience would be directly related to the number of
hiring methods used, and, indeed, we found a positive correlation between these variables
(r = 0.32, p = 0.04, one-tailed; see Table 3). In brief, we found no support for Hypothesis 3a
and partial support for Hypothesis 3b. Conscientiousness was unrelated to hiring practices.
Openness to experience predicted a lower frequency of using formal and informal hiring
practices, but a greater variety of practices used.

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Discussion
This study attempts to increase our understanding of the hiring practices of small business
owners by looking at the effects on employee loyalty. A second goal is to explain the
owners preference for certain hiring practices in favour of others by looking at the owners
personality traits.
Our results point out that some of the hiring practices used do affect the employees
perceptions, and these perceptions, in turn, affect employees loyalty to the owner and the
firm. The use of professionals for recruitment was found to play a role in the employees
perceptions of broken promises. In other words, the more professionals are used in
recruitment, the lower the incidences of perceived broken promises by the employee. A
possible explanation could be that in having a formalized third-party contact with the
candidate, the owner has less direct interaction with the potential recruit, and so will be less
likely to make rash promises to induce the individual to join the firm. In consequence, the
new employee starts off with fewer unrealistic expectations, and so is less likely to feel that
promises made to him/her have been broken. The owners use of recruitment professionals
is also related to the employees perceptions that the owner is committed to him or her. The
explanation may be twofold: first, it may be that using professionals creates confidence in
the mind of the owner and trust in the quality of the employee; second, using professional
recruiters may signal thoroughness and attentiveness to prospective employees, which they
then perceive as the owners commitment to them.
The use of informal, word-of-mouth recruitment was negatively linked with perceived
owners commitment; perhaps this more casual approach inadvertently communicates
to employees that the owner did not care enough to commit resources to the search for
job applicants, and so might not care enough to commit resources to keeping current
employees either. Alternatively, owners may actually place less value on employees hired
through word-of-mouth processes (perhaps because they did not expend great effort to
find these employees), and the employees can perceive accurately the owners low level of
commitment to them. Word-of-mouth recruitment was also marginally linked to perceived
broken promises, suggesting that there may be unclear expectations or unrealistic job
previews when existing employees or other acquaintances recruit job applicants.
The use of selection practices was unrelated to employees perceptions. Apparently, it is
the first contact, during recruitment, that makes the difference, and the relative formality of
selection practices has no additional impact on employees. In retrospect, this makes some
sense, since activities like analyzing selection test scores or telephoning referees listed on a
resume usually occur in the absence of the job applicant. Thus, activities that were outside
the awareness of employees understandably have no impact on their perceptions of the
owners commitment or promises to them.

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finding employees and keeping them: predicting loyalty in the small business457

We found a strong positive relationship between the perception that the owner was
committed to his or her employees and the employees feeling of loyalty (normative
commitment) to the firm. Seeing the owners high commitment to their secure, long-term
employment might have inspired employees to reciprocate with a demonstration of their own
commitment. When the owners commitment is low, employees might also reciprocate with
low loyalty. Loyalty (or disloyalty) is likely to have a bi-directional flow, creating mutual
feelings of commitment among owners and employees. Thus, owners who want to retain
employees need to find ways to communicate their commitment to these employees.
In reference to the second goal of this study, which was to look at the effect that owners
personality traits had on their preference for avoiding the use of more formal hiring
practices, several interesting issues were brought to light. The hypothesis that recruitment
methods used by small business owners are influenced by the small business owners
personality was supported. Although conscientiousness does not seem to be involved in
these hiring practices, openness to experience is. Those owners who were high in openness
to experience reported that they used a greater number of different recruitment and selection
methods than owners who were low in openness. We attribute this to their curiosity and
inquiring nature. Open owners also were less likely to use two of the three formal hiring
practices we studiedusing recruitment professionals and biographical information. We
surmise that while their curiosity leads them to try new approaches, their unconventionality
makes them reluctant to institutionalize standard practicesthey might be more interested
in moving on to something new. It emerged that owners who were high on openness to
experience were less likely to use word-of-mouth recruiting; we interpret this result to
mean that even this informal technique is of less interest to these owners than their own
idiosyncratic approaches to hiring. It would be useful to see whether this relationship could
be replicated in a new sample.
Apparently, the level of organization/responsibility of the high-conscientious owners
does not extend to their hiring practices. Alternatively, if highly conscientious employers
feel that their HR skills are low, maybe they will carefully avoid getting out of their depth
and so they will reject the formal hiring practices they know they do not fully understand.
Taken together, our results suggest specific implications for small owner-managers in
their quest for finding employees and keeping them. We cannot recommend decreasing
their openness to experience, since personality traits are stable dispositions and not easily
altered (Funder, 2001). We can suggest, however, that if owners know that they have these
creative and experimental tendencies, they could make specific efforts to build consistency
and stability into their recruitment practices. Attendance at job fairs and the use of recruiting
intermediaries may inspire perceptions of stability and commitment among job applicants
and employees. Similarly, designing advertisements, brochures and websites that portray
a clear message about the jobs and the firm could manage applicants expectations and
communicate professionalism; these brochures and websites could be used in tandem with
word-of-mouth recruiting to increase the effectiveness of this less formal technique. These
approaches may create employee awareness that the owner is committed to their security
and well-being, and our results suggest a positive effect on employee loyalty.
It is worth noting that the practices recommended here are not necessarily expensive
or inaccessible to the resource-poor small business. Williamson, Cable and Aldrich (2002)
have noted that making the style of newspaper ad copy look more professional need not be
more costly. Advertising the advantages of the firms non-bureaucratic structure (Cardon
and Stevens, 2004), or outsourcing recruitment and selection to professional employer
organizations that provide temporary employees may actually reduce costs for the small

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reda and dyer

firm (Cardon, 2003). Thus cost or convenience may not be an insurmountable barrier to the
use of particular formal HR activities in small firms.

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Limitations
Since we aggregated our responses to the firm level, the sample size was small; it is a
challenge to get small business owners to be research participants, especially when the
design calls for participation from employees as well as owners. Having this multisource
design for data collection (employees and owners) was a major strength of our research
and, we would argue, a worthwhile trade-off for sample size. Although we used a snowball
sample (some of the business owners gave us suggestions for other potential participants),
we do not believe that this created bias in our sample. The main problem with snowball
sampling is the possible social isolation of certain members of the population. This occurs
because the participants tend to ask the people in their networks; therefore, the participants
with the largest networks will dominate the sample population at the exclusion of those
participants with smaller networks. However, this method is still deemed appropriate if
the social isolation, which may be caused by snowball sampling, is not a factor that affects
the variables under study, as it is in this case (Sudman and Kalton, 1986). Furthermore,
the potential bias of the snowball method used here has been further reduced since the
seeds used to start the snowball sampling came from a list of businesses which fit our
target population. From this list, a group of participants was randomly selected; hence,
the sample used in this study did have an element of randomness, which is a required and
preferred element needed in any study. Another sampling problem was that the consent we
got from owners in distributing the questionnaires to employees may have been a source
of bias. It is conceivable that the owners would have guided us towards certain employeeparticipants who would be more positive about their experiences in the firm. This may
have led to an over-reporting of high commitment, which could have restricted the range
of responses and dampened the strength of relationships.
Moreover, as a non-experimental design, our research could not establish the direction
of causality in the links between personality and hiring practices, or between hiring
practices and commitment. That said, it is unlikely that hiring practices could affect an
owner-managers personality traits (reverse causation), since personality is conceptualized
as an enduring quality of the individual. Similarly, employees must be hired first before
they can be committed to an organization, so hiring practices precede commitment in
time, and our suggested direction of causality is supported. However, a feedback loop
could be present because, if owners find that certain hiring practices result in finding more
committed employees, then the owners will tend to use those methods to increase employee
commitment within the firm. In the area of hiring practices, experimental work would be
infeasible in the field, but a longitudinal approach would be one way to determine the
direction of this causal relationship and confirm the internal validity of our conclusions.
The external validity of this study must also be considered; we focussed on bakeries, a
goods-producing industry that demands employees with very particular skills. It would be
interesting to see if our findings would generalize to other types of firms in both goods and
service industries.
Future research is also needed to establish a concrete relationship between employee
loyalty, employee retention and firm performance. Our study has built on earlier assumptions
that hiring practices bolster retention, which, in turn, increases firm performance (Sels
et al., 2006; Way, 2002). We have found some useful links between hiring practices and
commitment perceptions, but the sample of owners who gave us financial data was too

finding employees and keeping them: predicting loyalty in the small business459

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small to explore a statistical relationship between hiring practices, employee loyalty and
firm performance. Data from a larger sample would allow for a test of loyalty and retention
as mediators of a hiring practices-performance relationship.
To conclude, we have learned from our research that a small firms recruitment activities
do have an impact on employees perceptions and, following this, their loyalty. Further, the
openness to experience of owner-managers shapes their choice of hiring activitiesowners
should monitor their own tendencies and take steps to ensure that potential applicants and
current employees develop appropriate expectations of predictability, confidence in the
owners, and motivation to build a career at the firm. Our research suggests the institution of
hiring practices that would not be costly for the small business owner-manager, but which
could be a valuable aid in the challenging task of finding good employees and keeping
them.
Contact
For further information about this article, contact:
Linda Dyer, Department of Management, John Molson School of Business, Concordia University;
1550 de Maisonneuve Blvd West, Montreal, Quebec, H3G 1M8
E-mail: dyer@jmsb.concordia.ca
Telephone: 514-848-2424 x2936

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