Summary The subordinate insurance hypothesis suggests that highly diverse communities contain greater numbers of subordinate species than less diverse communities. It has previously been reported that subordinate species can improve grassland productivity during drought, but the underlying mechanisms remain undetermined. Using a combination of subordinate species removal and summer drought, we show that soil processes play a critical role in community resistance to drought. Interestingly, subordinate species drive soil microbial community structure and largely mitigate the effect of drought on grassland soil functioning. Our results highlight subordinate species in shifting the balance within the phospholipid fatty acid (PLFA) microbial community towards more fungal dominance. Fungal communities promoted by subordinate species were more resistant to drought and maintained higher rates of litter decomposition and soil respiration. These results emphasize the important role of subordinate species in mitigating drought effects on soil ecosystem functions. Reciprocal effects between fungi and subordinate species explain also how subordinate species better resisted to drought conditions. Our results point to a delayed plant–soil feedback following environmental perturbation. Additionally, they extend the diversity insurance hypothesis by showing that more diverse communities not only contain species well adapted to perturbations, but also species with higher impacts on soil microbial communities and related ecosystem functions.