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Raz Godelnik headshot

Want Better Stock Returns? Invest in Employee Satisfaction


How much is a happy employee really worth? I bet many companies still ask themselves this question, wondering what the real value of employee satisfaction is.

Fortunately, academic researchers are here to help with a new study looking at the relationship between employee satisfaction and stock returns, using lists of the “Best Companies to Work For” in 14 countries as their database. In addition, the researchers investigated how this relationship depends on the country’s level of labor market flexibility.

And the results? The researchers, Alex Edmans of the Wharton School of the University of Pennsylvania and Chendi Zhang and Lucius Li of Warwick Business School in the U.K., found out that “employee satisfaction is associated with positive abnormal returns in countries with high labor market flexibility, such as the U.S. and U.K., but not in countries with low labor market flexibility, such as Germany.”

In other words, greater employee satisfaction contributes to higher stock returns, at least in labor markets that are more flexible. The difference between the two different types of labor markets, the researchers suggest, may be due to several reasons: First, when firing is easier, employees tend to value more satisfactory jobs. Second, in low flexibility labor markets, regulations usually guarantee minimum standards for worker welfare, and hence employees are less likely to value the marginal benefit of whatever additional perks they enjoy at work.

Should we be surprised by these findings?

The answer is probably no. First, one of the researchers, Alex Edmans, already published two prior studies in 2011 and 2012 looking at the question of how job satisfaction and firm value are linked based on the list of “100 Best Companies to Work For in America,” and he found similar results. In his first study, he found that “a value-weighted portfolio of the '100 Best Companies to Work For in America' earned an annual four-factor alpha of 3.5 percent from 1984 to 2009, and 2.1 percent above industry benchmarks.” In his second study, Edmans found that “companies listed in the '100 Best Companies to Work For in America' generated 2.3 percent to 3.8 percent higher stock returns per year than their peers from 1984 through 2011.”

Second, there are also theories making the case that employee satisfaction can be a valuable motivational tool. One example this study mentions is the efficiency wage theory of Akerlof and Yellen, where they argue that "employees view a positive working environment as a 'gift' from the firm and respond with a 'gift' of increased effort.” The study also mentions sociological theories arguing that satisfied employees identify with the firm and internalize its objectives, thus inducing effort.

However, I guess some companies might be surprised, especially those who still operate according to early 20th century management theories, in which employees were considered just another form of input that management needs to extract maximum output from, at minimum cost. As Edmans notes, this approach reflects a zero-sum view, in which “satisfaction arises if employees are overpaid or underworked, both of which reduce firm value."

If this approach looks a bit anachronistic to you, just look around and see how many companies are still built on unskilled or low-skilled, low-paid employees and struggle with recognizing their employees as key organizational assets.

What the study doesn’t tell us

It’s important to note that the study is using “100 Best Companies to Work For" lists, and these lists (at least according to the American list) are based on two elements: Two-thirds of a company’s score is based on a survey sent to employees asking questions related to “their attitudes about management's credibility, job satisfaction and camaraderie,” and the other third is based on the answers to a questionnaire companies answer about pay and benefit programs, hiring practices, training, etc.

This means that while the study looks at employee satisfaction, assuming that it’s higher in companies included in the list, it doesn’t differentiate between different types of motivations. Hence, we don’t know if employee satisfaction is mainly the result of reward motivation (i.e. the company pays well, provides generous benefits and so on) or other motivations, such as autonomy, mastery and purpose, which Dan Pink describes in his book "Drive: The Surprising Truth About What Motivates Us."

Another unknown is: What is the optimal investment companies need to make in ensuring their employees’ satisfaction? We know from the study that the flexibility in the labor market is a factor (more flexibility requires more investment) but not more than that. So the debate about the value of investing in employees will probably continue -- though it would probably be less about the concept itself as much as about the degree required to reach the optimal balance, where both employees and shareholders are happy.

What does this study means in terms of sustainability?

In general I believe the findings definitely reaffirm the arguments of many in the sustainability space about the value of investing in employees in general and employee engagement in particular. However, as I mentioned, it still leaves many questions opened, as we don't know the specifics of this investment: Should companies invest more in their environment ('habitat' as Stanford’s Tina Zeelig calls it) or culture? In training? In perks? In better salary and benefits? In all of the above? I guess we’ll have to wait for the next study to get a better idea on this issue.

Another place where this study can be valuable is in investment firms utilizing SRI strategies. As the researchers show employee satisfaction is beneficial for firm value and the market does not seem to recognize this link (otherwise there wouldn’t be abnormal returns for companies that have higher rates of employee satisfaction). Add these two together and you get an opportunity for SRI firms using positive screenings, at least in labor markets with high flexibility.

And what do you think about the study findings? Do you see this relationship in your workplace? Feel free to add a comment!

Image credit: Tech Cocktail, Flickr Creative Commons

Raz Godelnik is an Assistant Professor of Strategic Design and Management at Parsons The New School of Design. You can follow Raz on Twitter.

Raz Godelnik headshotRaz Godelnik

Raz Godelnik is an Assistant Professor and the Co-Director of the MS in Strategic Design & Management program at Parsons School of Design in New York. Currently, his research projects focus on the impact of the sharing economy on traditional business, the sharing economy and cities’ resilience, the future of design thinking, and the integration of sustainability into Millennials’ lifestyles. Raz is the co-founder of two green startups – Hemper Jeans and Eco-Libris and holds an MBA from Tel Aviv University.

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