People Follow Structure: How Less Hierarchy Changes the Workforce

Managers today are attuned to current thinking that how companies are organized matters to their performance, so they frequently adjust the corporate structure in the interest of improving outcomes. But the effect those changes may have on the workforce itself is less well understood.

While research has shown that employees are a heterogeneous group and that attracting and retaining talent involves a mix of incentives, we know less about how various types of organizational structures appeal to different workers, and whether those structures bind them to their employer or make them want to leave.1

The more radical the changes that senior leadership intends to implement, the more critical this question becomes. Among the most dramatic transformations observed in the corporate landscape these days are moves from traditional, hierarchical organizing to working with flatter structures featuring fewer layers of command. These structures offer more autonomy but also impose burdens of self-organization on employees.2

Top management must think seriously about which structural changes to implement and which complementary measures to take to tailor the composition of their workforce to meet their needs. But first, they must have greater insight into how a shift from a hierarchical work structure to a more self-organized one may affect the composition of the workforce. They must understand what types of individuals will be newly drawn to the company, which ones will be likely to leave, and how individual case conditions may affect the outcome.

To develop some initial guidance for implementing a flatter structure, we conducted a large-scale empirical study using data from more than 5,500 companies in the U.S. financial services industry that had significantly de-layered their hierarchies from 2000 to 2022. We found that, on average, workforces feature a higher share of conscientious, agreeable, and open individuals a year after the company has de-layered its structure. We then conducted in-depth case studies with two affected companies to better understand what drives the differences between organizations.

Why ‘Structure Follows Strategy’ Is Too Simplistic

Many senior strategists agree with scholar Alfred Chandler’s influential dictum, dating to 1962, “Unless structure follows strategy, inefficiency results.”3 In practice, this means that a leader must consider their clients, offerings, and value delivery before they split up the work among their people. And only once they have distributed all of the tasks among employees will that leader know how to reintegrate all of the pieces people contribute, channel their communication, give them decision rights, and eventually assign managerial roles — in other words, only then will the leader understand how to structure the company to achieve collaboration.4

It is that kind of contingency thinking that has led to a rather standardized approach for dealing with questions of structure — one that suggests that C-level managers can pick from a menu of stereotypical forms of organizing, depending on the context they are in. Many leaders — with disquieting automatism — still gravitate toward implementing stereotypical organizational forms, depending on the circumstances. When their companies get bigger, they move toward a divisional structure; when they downsize, they prefer a functional one. And when it all becomes complex and dynamic, they might choose to move to the so-called M form, with multiple semiautonomous divisions.

However, this approach is out of step with today’s corporate reality, where objectives other than strategy execution have gained importance. Some leaders may seek to experiment with different structures in order to foster the learning and adaptation needed to identify new opportunities. In the late 1980s at Danish hearing aid manufacturer Oticon, CEO Lars Kolind introduced the term “spaghetti organization” as he sought to turn the company’s fortunes around. The nonhierarchical, nondivisional, non-function-based, project-based form of work in a spaghetti organization was meant to unearth and identify new, viable business ideas.5 Much of what Bill Anderson, the current CEO of Bayer, is now doing at his organization is reminiscent of that approach.6

In any case, we’ve seen that organizations pursuing similar objectives may differ dramatically when it comes to structuring work. A plethora of contemporary management approaches — such as (scaled) agility, scrum of scrums, or Haier’s RenDanHeYi — rely on organizing with fewer layers of managerial authority while giving more autonomy to the workforce. These different structures appear to work for very different people, irrespective of the strategy the companies pursue.7

Exploring Employees’ Reactions to Corporate Structure

The finding that individuals respond differently to different corporate structures is unsurprising: People differ from one another, and employees appreciate and expect different things from their workplaces. Research has shown that employees will thrive in jobs that better match their skills and that they prefer to work in organizations that have values similar to their own. Importantly, the literature clearly shows that creating better fits between individuals, their jobs, and their organizations not only reduces involuntary turnover but also helps employers attract sought-after talent. However, this line of investigation has not yet addressed the question we aim to tackle here regarding which people might gravitate toward which type of organizational structure. This is relevant for strategists currently experimenting with a shift to less-hierarchical structures, who need to understand the implications for talent. Will changing structures from more to less hierarchical result in attracting new individuals to the company or motivating current employees to leave? And if there is such an effect, will workers naturally shift to the management structures they are best suited for?

Our findings are clear. First, controlling for company-specific effects that stay constant over time, as well as controlling for company size and particular year effects (macroeconomic events), we can show that workforces do in fact change as a result of structural de-layering.8 Second, we can demonstrate that, on average, employees become more conscientious, agreeable, and open; that is, they rank higher on three of the big five personality traits that many HR professionals use to assess their employees (the other two being extraversion and neuroticism). To quantify the effects: When a company with a five-layered hierarchy eliminates one managerial level in a given year, in the following year, the average workforce score for conscientiousness will rise by 2.0%; the average score for agreeableness will rise by 3.6%; and the average score for openness will increase by 3.4%.These findings are relevant in absolute terms: Many organizations compete to hire talent with these traits, and that has a direct impact on performance. But they also indicate that de-layering leads to worker self-sorting across different types of structures, which should help increase productivity. Here’s why: When companies reduce the depth of their hierarchies, the remaining managers’ spans of control widen, and as a result they can no longer micromanage their direct subordinates but must delegate more decision-making to workers. Those employees should then be able to — and indeed must — organize their own work to a greater degree. Individuals who particularly enjoy this novel autonomy and thrive in flatter environments typically rank high on conscientiousness, show a high need for achievement, and push new initiatives and projects.

At the same time, agreeable individuals help ensure that self-organizing does not result in teams that cherry-pick the tasks that inspire them and avoid work that does not specifically benefit or appeal to them. In other words, a team must include people who are willing to perform supportive tasks on behalf of everyone — say, organizing the holiday party.

Importantly, the overall qualification level of the workforce does not change as a result of the restructuring — it neither rises nor falls. This underlines our earlier point: There is not necessarily one best structure that encourages an organization’s most-skilled workers to stay; among talented staff members, different structures appeal to different individuals.9

These findings raise the question of whether the net effects we have described are the result of new employees arriving or members of the workforce leaving. Given the move to a less-hierarchical structure, what types of individuals will be drawn to the company and which will be prone to leaving?

Our findings are unambiguous on this point, too: The overall changes in the workforce as a consequence of structural change were attributable to the employees who chose to leave their employers, not to those who newly entered them. In other words, structure affects workforce retention or attrition, but it does not appear to attract newcomers. That may be because structure, and the effect it has on an employee’s perceived autonomy, may be better understood as personally experienced than as described by, say, a hiring manager. In this way, it exerts an effect on current employees but not necessarily on prospective job candidates.

Digging Deeper Into Workplace Contexts

Like every large-scale empirical endeavor, our study has both advantages and disadvantages. While our results drew from LinkedIn data relevant to incidents of hierarchical de-layering in the finance industry over a 20-year period, that data set doesn’t provide in-depth insights on individual cases like a small-scale interview study could. So, to complement our findings, carve out potential boundary conditions, and provide further food for thought, we conducted two in-depth case studies with companies that had moved toward establishing less-hierarchical self-organization environments. We listened to their experiences and discussed their interpretations of their companies’ workforce change data. The goal was to shed light on the extent to which individual case conditions may affect the big picture.

Our first case company is a major U.S. bank holding company that underwent a series of restructuring initiatives from 2000 to 2020. The last reorganization during that period moved the entire corporation toward team-based work, following the scaled agile methodology. We interviewed a former master agile coach for the company, who told us the aspiration was to deliver a better product in a more timely fashion — “doing more with less.” The coach was responsible for helping people understand agility and work across businesses, teams, and portfolios of projects. The change meant moving from a very traditional hierarchical command-and-control structure to one where autonomy and self-organization would become the new expectation. As we found in our industrywide analysis, average employee conscientiousness climbed steadily during the transformation, to no surprise of the master agile coach.

The coach saw this shift as reflecting that individuals with a high need for achievement, notably coders, could better showcase their work. For example, more people — and more senior-level people — started attending the coders’ presentations. Similarly, agreeableness and openness among the workforce steadily rose during the transformation, much to our interviewee’s satisfaction. “One of the hardest things to break down is the mentality of ‘my idea is the only idea.’ The agile transformation attracted folks with an open attitude,” they said. Arguably, the dismissal of people with an outdated mindset also accounted for part of the overall effect but was likely less important.

Two further results are interesting, although they differ from our industrywide analysis. First, the average skill level across the case company’s workforce rose. However, that did not happen by itself. Hand-in-hand with the agile transformation, the corporation sought to recruit people with different skills. “Before the transformation, we did not need a person who could span the entire stack. Everybody was a specialist,” our interviewee told us. Because the company wanted to be the first in its industry to fully utilize cloud computing resources, it changed its hiring scheme to emphasize recruiting people with the relevant skills to work with what was then a disruptive technology. The share of extraverted employees also went up — and other research has shown that such people are likely to feel happier and be more productive in nonhierarchical settings than in more rigid environments.

Our second case company is a major payment-processing company that implemented a significant corporatewide work restructuring from 2014 to 2017. Like the bank holding company, this organization also moved toward team-based work and followed the scaled agile methodology. According to our interview partner, the company’s former agile program transformation director, the initiative was meant to counter some of the challenges the company was facing at the time, including employee attrition, low morale, and suboptimal productivity. A total of 3,000 employees — about three-fourths of the workforce at the time — were formed into agile teams and empowered to grow into a productive mode of self-organized work. Preparation took about 18 months and included team formation and role assignments, as well as training on self-coordination. According to our interviewee, the initiative paid off with increased productivity: In 2016 and 2017, the company did the same amount of work as before but with fewer people. However, over time, the patterns in the workforce composition began to look very different from what both our industrywide study and the first case company analysis would have suggested. LinkedIn data covering about half of the company’s workforce indicated a drop in the average qualification level among employees. There was also a drop in average agreeableness, conscientiousness, and openness.

Our conversations with the transformation director suggest some possible explanations. Our interviewee admitted that, in retrospect, “focusing on leveraging the mass of the people may have come at the neglect of paying enough attention to some of the highly skilled experts” — creating unintentional collateral damage. Some highly skilled experts felt left behind because they no longer felt like they were the “go-to” problem solvers, and so they quit; they were not encouraged to leave. The same held true for some of the potential high performers who had ranked high on conscientiousness.

The two cases, both of which involved companies in the financial industry that were pursuing very similar approaches to reducing hierarchical control, provide useful insights that complement our large-scale analysis. Most importantly, they show that transformations from a hierarchical structure to more self-organized work don’t always lead to more efficient workforce sorting. Considering individual career goals matters: Even if some employees appreciate autonomy more than others, they still want their work to be valued and showcased, and it’s important to provide positive feedback and visibility. Employees working autonomously need more than an orientation about the journey they are supposed to embark on.10 The journey must also hold an appeal for them. The cases also make plain that merely adjusting the organizational structure does not change the average skill level.

Several factors can make a big difference in getting the most out of an organizational transformation. Many of them may be company-specific. Our own case comparison suggests that often, two underlying drivers may be key factors in the process’s result. One is prior learning and experimentation. Whereas Company 1 had been experimenting with agile work environments for quite some time before embarking on its corporatewide transformation, Company 2 took the plunge all at once. The second driver is top-level management coordination and integrated communication. Company 1 had full buy-in from the CEO and the CIO — knowing that “business and delivery” would have to work hand in hand to make the transformation a success. The initiatives in Company 2 had been spearheaded by the CIO alone.

In summary, our large-scale analysis and our case work show that organizational restructurings will likely change workforces as individuals shift to environments they prefer — though not always efficiently. Restructurings will not change workforce abilities, but they can help attract better talent in certain instances.

Implications for the C-Suite

CEOs devise strategies. Chief operating officers (COOs) implement structures. Chief human resources officers (CHROs) bear responsibility for the workforce. Yet only a few HR leaders get a seat at the table when CEOs and COOs rethink their organization’s business model and reorganize work. This is likely a mistake.

As our study shows, people’s preferences for different working environments vary. That is why devising a corporate structure without thinking about its potential effects on the workforce can have unintended consequences.

De-layering hierarchies to become more agile can be expected to increase the share of conscientious, open, and agreeable individuals among the total workforce — precisely the people needed to work in such an environment. While this is good news for companies banking on more self-organization among their teams, our results also show that the effects are only moderate and are mainly driven by attrition.

To fully benefit from the advantages of a flatter structure, CHROs should be involved early on in corporate restructuring initiatives. CHROs can help complement the natural effects of turnover with additional recruiting efforts geared toward attracting workers who are better suited for the new structure. They can create people-strategy road maps that are linked to organizational goals and characterize the skill and experience profiles appropriate for teams working with significant autonomy.11 These road maps may build on performance reviews and psychological assessments of the current workforce to identify who is likely able to work more autonomously and self-coordinate.

But CHROs can and should also coordinate with COOs on role redesign as part of a transformation initiative. De-layering hierarchies involves stripping managers of some decision rights to give their (former) subordinates more autonomy. Redesigning positions to retain those individuals requires leaders to think through nonmonetary compensation mechanisms. Thoroughly understanding these individuals’ motivations and creating new roles for them outside the traditional hierarchy is a task that COOs and CHROs can best master together. For example, is it possible to create a specialist role for the former IT midlevel manager deprived of their hierarchical power as a consequence of a de-layering initiative?

To get a say in such decisions and be seen as trusted partners in devising strategic and organizational decisions, CHROs must look at the organization through a wider lens than just traditional HR considerations. This is because CEOs, CFOs, and COOs think of structure in terms of hierarchical depth, divisional and functional specialization, and spans of control. Understanding how these macro concerns translate into micro decisions at the role and job definition level, and vice versa, will be key to CHROs’ ability to hold useful conversations with the top management team.

Finally, a restructuring requires all senior leaders to adjust their way of coordinating and supervising subordinates. There are a variety of facets to the latter, but a few points stand out: Stifling the impulse to micromanage more autonomous employees does not mean that leaders should not provide guardrails for work. In fact, the more autonomy leaders grant to their subordinates, the more they will need to design workflows and processes in ways that facilitate employee self-coordination.

Here, shaping transparent, modular, project-based structures that allow efficient self-selection of workers into projects, avoid duplication of team efforts, and allow for smooth cooperation across rather independent groups becomes key to retaining corporate productivity. Instead of continuing to direct each and every initiative in person, successful leaders will increasingly morph into designers of workplaces that both cater to the corporate purpose and fit the preferences of their people.

But no matter how well designed these workplaces are, they will produce frictions, too. And then it will be leadership’s responsibly to help resolve them, by providing support structures for peer-to-peer conflict resolution whenever possible and by being available to employees when the going gets (too) tough. Clearly, this is a team effort that requires all of the skills and experience a top management team has to offer. True human-centric leadership must blend strategic considerations, structural contemplations, and employees’ needs from the outset — because not only does structure follow strategy; people also follow structure.