How can companies build and retain trust within the organization?

Article used with permission from Emerald Group Publishing

Most corporate annual reports boldly state that the firm's people are its most important assets. However, when organizations require cost cutting they look first to reduce investments in people in the form of training, wages and headcounts, for example.

The inevitable outcome of such downsizing and cost-cutting is mistrust and a trust gap between managers and employees, and in the whole organization. This is of critical importance, because without the support of employees, managers are likely to experience lower productivity and weakened organizational performance. Trust is especially important in knowledge-based organizations because it is known to support knowledge-creation processes and related interactions.

Efficiency in organizations is possible only when interdependent actors work together effectively in a climate of positive trust. In addition, trust increases the efficiency and effectiveness of communication and of organizational collaboration. It has also been identified as a critical factor in leadership, job satisfaction, commitment and performance.

How, then, can companies build and retain trust within the organization? One way is to use human resource management (HRM) practices to build a positive cycle of trust. Given the influence of trust in almost every area of human resources, including training and development, compensation practices, promotion, task assignment, job security and placement, and performance evaluation and feedback, organizations can enhance trustworthiness in the eyes of employees by creating structures and processes that make trusting successful.

Organizational trust

There are different types of trust and distinctions may be made based on the nature of the trustee. One can have trust in particular people (i.e. interpersonal trust) or in organized systems (i.e. impersonal trust). Impersonal trust is based on roles, systems and reputation, whereas interpersonal trust is based on interpersonal interaction between individuals within a particular relationship.

The operational environment of companies is complex, rapidly changing and dispersed, which makes impersonal trust a potential source of competitive advantage. Even if interpersonal trust (e.g. a close supervisory role) is critical, organizations could benefit from fostering complementary impersonal forms of trust.

An employee who is able to trust the organization she/he works for can trust her/his future in it even if other employees and supervisors cannot provide sufficient support for the evolution of strong interpersonal trust. If employees could trust the organization without having personalized knowledge of each decision maker and key actor it should be more efficient. The impersonal dimension of organizational trust is usually called institutional trust. Trust in the organization is the evaluation of an organization's trustworthiness as perceived by the employee, i.e. confidence that it will perform an action that is beneficial or at least not detrimental to him or her. Employees may draw inferences about institutional trust from the behaviour of highly visible role models in top management, for example.

Most employees base their trust in top management more on the outcomes of the decisions and less on direct personal experience of the character or actions of the individuals. Trust between employees and management is not interpersonal in nature, but is based on roles, rules and structured relations within the organization. Employees also monitor the organizational environment in order to evaluate whether or not they will trust management. If the environment encourages a high level of management trust in employees, the employees will reciprocate by exhibiting high levels of trust in management. Moreover, trusting a person and trusting an organization are two different things. Trust in an organization is based on the way it acts, on a particular trustworthy way of behaving. This may stem from the manager's personality or from a strongly centralized decision-making structure and organizational culture.

HRM practices

Different kinds of organizations (e.g. companies, the public sector) increasingly recognize the potential of their personnel as a source of competitive advantage. The creation of competitive advantage through employees requires close attention to the practices that best leverage these assets. Consequently, there has been an increase in research focusing on the company-level impact of HRM practices in the past ten years.

Organizations use various HRM practices in order to enhance the skills of their employees, focusing their efforts on improving the quality of the current workforce through training and development, for example. Employees should be motivated to perform their jobs effectively, and may be affected by merit awards or incentive compensation systems.

"Organizations that take the views of their employees into consideration will find a positive impact on employee perceptions of fairness and behaviour output."

They should also have the opportunity to participate in the decision making, i.e. be involved in determining how the work is accomplished. Employee-participation systems and internal labour markets give employees the chance to advance within the organization. They should also have the opportunity to express their views, i.e. to communicate. Organizations that take the views of their employees into consideration will find a positive impact on employee perceptions of fairness and behaviour output.

Learning and development

Training activities and employee development can have a positive impact on organizational trust. Employee development creates a sense of certainty and enhances employability and faith in management; consequently, investments in training and development could be considered a trust-creation mechanism. Employee development was found to be indirectly and positively related to employees' trust in their managers.

Employees evaluate trust in the organization based on their perception of its potential (i.e. if it has the necessary capabilities and knowledge) in terms of offering learning and development opportunities and the possibility to benefit from them.

Communication

Open communication is among the most important factors that breed trust within the organization. If the level of organizational communication is high, i.e. if employees can easily communicate and feel that they are listened to, it leads to an open and confident atmosphere, which in turn generates trust. The sharing of information on matters such as financial performance and company strategy conveys to the employees, and other members of the organization for that matter, that they are trusted. Moreover, open, honest and accurate feedback and communication from the employer (through supervisors or managers) affect employee trust in management and the whole organization, and the exchange of thoughts and ideas enhances perceptions of trust.

Performance evaluation and rewards

The perceived fairness of an organization's performance-appraisal system is related to high levels of trust. In one study, trust in top management increased significantly in response to a new appraisal system: the old system, which was not perceived as accurate and did not provide performance-based recognition and rewards, was replaced with a more fair and objective system. Trust in co-workers has also been found to increase in organizations in which general and transparent rules were applied uniformly to all employees. ransparent explanation and communication of compensation decisions from supervisors increase employees' trust in them.

Career opportunities

An internal labour market conveys the message that the organization values its people and provides opportunities for advancement. It may also strengthen the psychological contract between employer and employee. Job rotation could result in an increased feeling of job security, which is positively related to trust. It could also be perceived as an indication of the organization's commitment to its employees, which in turn leads to increased trust.

Career opportunities influence impersonal trust. Trust in the whole organization is affected by how such practices – like promotion and job rotation – function. For example, are promotions based on fair and transparent decisions? Are career-advancement and job-rotation opportunities offered to all employees? Furthermore, employees base their trust not only on how fairly the internal labour market functions but also on the employment outlook, in other words whether there will be any jobs in the future.

Participation

If employees have the opportunity to express their opinions and thus feel that they are being listened to and that their opinions are being taken into consideration, this is likely to play a critical role in mutual trust development. Giving workers a greater share in decision making is one of the key factors that breed trust in organizations. Consequently, trust is assumed to be higher when decisions are made jointly. Empowerment moves the decision-making power to the lower levels, thus breaking through the internal boundaries between management and employees. In consequence, the level of trust in the organization is increased.

Consequently, participation influences impersonal trust. Employees trust the whole organization if they feel that their opinions are listened to and taken into consideration. Trust is therefore based on the opportunity to participate in the decision making.

Job design

High levels of organizational trust are related to adaptive organizational forms and structures. Trust may be perceived to be low in situations in which the roles are unclear or there are role conflicts: poorly structured job classifications cause competition between employees and, as a result, the employees do not trust each other. On the other hand, highly structured work might result in increased bureaucracy and thus lead to reduced trust. If employees know what is expected of them, however, uncertainty and competitiveness decrease. Therefore, trust could be enhanced through the clear definition of roles and tasks. In an environment in which work classification is clearly defined employees will be willing to accept policies and decisions if they are based on fair processes and they are given adequate information.

Enhancing organizational trust

There is widespread recognition that organizational trust could be crucial in achieving competitive advantage over other organizations. If a company is able to set itself apart from its competitors and to build up a higher level of trust, it could exploit the benefits related to organizational trust in order to increase its efficiency and effectiveness, and also to attract and retain its most competent employees. Achieving trust-based competitive advantage is possible only if there is a comprehensive understanding of trust within organizations, incorporating both the interpersonal and impersonal dimensions.

It should be emphasized that the role of HRM practices in trust building is not limited to impersonal trust and also applies to interpersonal trust. For example, aspects such as learning and development and job design could have an effect on trust in other employees: if an employee knows that there are learning-and-development and job-design systems in place (i.e. that other employees are competent in their jobs) she/he will also trust other employees. It could be also argued that HRM practices influence trust in supervisors and managers in terms of how they implement these organization-wide practices. Employees do not perceive HRM practices per se: supervisors and managers implement them and employee trust is based on how they behave and act.

In order to enhance organizational trust firms should pay attention to their HRM practices, which have a particular influence on trust in supervisors and managers, as well as in the whole organization. It is therefore important to develop not only the practices but also the organization-wide system. This is not confined to a particular HRM function (such as the personnel department), it is a management or even a strategic matter. Strategic and managerial actions that support organization-wide policies (e.g. communication, job rotation and performance evaluation) could enhance employee trust in the organization on all levels.

December 2011.

This is a shortened version of "The effect of HRM practices on impersonal organizational trust", which originally appeared in Management Research Review, Volume 34 Number 8, 2011.

The authors are Mika Vanhala and Riikka Ahteela.

© Emerald Group Publishing Limited