As you read this, at work, are you also Twittering, about to check your Gmail account and just minutes away from your latest Facebook update? If so you could be a prime example of an unmotivated employee. The good news is that this isn’t all your fault: Your firm’s chief executive needs to make your motivation their concern. Why? Because the evidence is coming in fast that the more intrinsically motivated employees are the better returns there are for shareholders.
Yes, that’s right, the more motivated employees are, the better such firm’s shareholders did. The flip side of this is that investors need to find those firms that motivate employees. The academic muscle backing this idea comes to us via a study jointly released by the Workplace Research Foundation in cooperation with the University of Michigan titled: “The National Benchmark Study: Employee Motivation Affects Subsequent Stock Price.” The study took place over seven years, from 2001 through 2007, and examined survey data from 3,490 employees at 841 corporations that were listed in the Wall Street Journal 1000–an index of firms that encompasses 98% of U.S. gross domestic product. The project was spearheaded by Palmer Morrel-Samuels, Ph.D., a research psychologist at the Workplace Research Foundation, and lecturer at Michigan’s School of Public Health.
The study found that as employee motivation improved, the firm’s stock enjoyed higher subsequent returns the following year, spanning times both good and bad. As an example in 2002 the Standard & Poor’s 500 returned negative 22%. Yet the study found that for every five points added onto a firm’s Employee Motivation Index–how the study kept score–it returned an additional 2% in stock price the following year.
Right about now, if you’re not texting on your iPhone, you’re probably wondering how provable any of this stuff is. One reason the study is reliable is because it was thorough and ran for multiple years, using what the study givers refer to as longitudinal methods typically associated with clinical research in medicine and public health. The study was peer-reviewed and presented in early August at the American Psychological Association’s Annual Conference. Morrel-Samuels adds that for any such hypothesis to be trusted it has to be provable on multiple fronts. First there must be an association between your theory and reality, in this instance employee motivation and higher stock price. Second, there must be an element of predictability, where if your theory holds you can use it for forecasting. Third, you have to rule out alternative hypothesis. In this case one such idea could be that higher stock price leads to better pay, which in turn leads to higher motivation.
Morrel-Samuels rules this last idea out, because he says higher pay tracks not with employee motivation, but job satisfaction; i.e., the better your pay the better your job satisfaction will be, regardless of whether or not you actually do anything productive. “People high in job satisfaction are often self-satisfied, but not particularly productive,” he says. By contrast employee motivation “cannot be purchased” he says. It has to do with intellectual challenge, pride in developing a sense of mastery and the need to make a contribution to both your job and society. The fourth proof is called dose dependence, and it means that if a little dose of the hypothesis is true a larger dose should trigger a larger response. He says his employee motivation proof passes all four criteria.
Are you motivated yet? Maybe you will become so when you apply the lessons of the study to your portfolio. But how to find motivated employees? Start at the top, with motivated CEOs, he says. An environment that fosters employee motivation is opposite the classic “command and control” style of business organization, that you can still see once a week on Mad Men: one where top dogs bark, underlings cower and secretaries get coffee and are still called “secretaries.”
By contrast, in an environment that fosters employee motivation, employees feel communicated with more, respected more and given more control of their work. One example of this is
Over the past five years Dollar Thrifty is down 5.5%, vs.
Another winner is
How to find such firms? One way is to listen in to conference calls with CEOs. Are they talking about motivating employees, or cost cutting? If it’s the latter be wary, such movements can produce a short term boost, but usually don’t result in long-term shareholder value. Are firm leaders giving clear examples of ways they plan to motivate employees? Do they seem to get why this is important?
Our industry observers seem to all get why this is important, though. Bernie McSherry, the senior vice president of strategic initiatives at Cuttone & Co., points to
Margaret Starner, a senior vice president at Raymond James, likes
Michael Ervolini, the head of behavioral finance firm Cabot Research, says the difference between someone connected to their work and just passing time is akin to that of “a lightening bug and lightening.”
Forbes: A study conducted by the Workplace Research Foundation with the University of Michigan found that among the publicly traded firms the higher the level of employee motivation, the higher the subsequent return on investments for shareholders in good and bad times. And it ran for seven years, examined 3,490 employees at 841 firms, and the results are clear. And every year of the study, the better the employee motivation, the higher the subsequent return on investment for stockholders during the following year, during years good and bad.
So, the research suggests that stock prices rise when corporations focus on the long-term goals that are consistent with building strong employee motivation meaning structure jobs so they enhance intellectual challenge, maintain good communications, build mutual respect in the workplace, delegating tasks wisely so employees can make a genuine contribution.
So, clearly, this is meaningful for investors as go the CEO’s priorities regarding employee motivation, so goes the firm’s priorities and returns. Now, you know, what do you guys make of this, and taking it a step further–which firms do you think cultivate this motivation. How can you tell? And what do you look for if you want to find firms that motivate their employees?
Bernie McSherry: Well, you know, this is a topic that people have been talking about an awful lot lately, and it’s very difficult. It’s the agency problem. It’s how do you get people their own personal goals, their own personal motivations aligned with that of a firm.
And we saw throughout this recent crisis that lots of folks were basically playing with house money. They were playing with money that belonged to the firm with very little personal risk. And it’s because the bonus system was structured in a way that they were getting short-term rewards. They were able to ignore many of the risk factors that put their firms ultimately at risk. So, you’ve got to find a way to delay some of those rewards so they reflect long-term goals and long-term health for the companies so the idea of making people wait five years for cashing out bonuses and things like that, I think you’re going to see a lot more of that, and it’s probably helpful.
Forbes: OK. Michael, I feel like this might be a little up your alley. I was wondering about your thoughts of the motivated employee.
Michael Ervolini: Well having been a business owner for over 15 years, and I’m sure everybody’s seen it in their own work, the difference between someone who’s really connected to their work and feeling fulfilled and someone who’s just showing up is sort of the difference between a lightning bug and lightning.
And so, I think if you can find ways to hire the right people for your environment, it can add to extraordinary productivity. It’s not magical, but it can happen. And if you can get extraordinary productivity, you can do better than other people. And that, you know, top line, bottom line, you know, separate is a question that I’m not capable of addressing, which is how does the market value that and so, there’s clearly, from a human perspective, you know, as Bernie pointed out, if you’re acting as a principal and not as an agent, meaning what you do is in the best interest of both you and company every moment, that is a very powerful way to approach work. It’s very satisfying, and it should help everybody including shareholders.
Margaret Starner: Well, I happen to work at a firm like that. I didn’t want to make this too personal, but I do work at a firm where the principal, where the owners, really have the controlling shares of the company. It’s started by the family. And they walk the walk and they do everything we do. And there isn’t a huge difference in their salary and the rest of everybody else’s. And I do think that they’re more long-term goals because of that. And we have almost no turnover. We have never had a layoff, I don’t think.
McSherry: Well, that speaks to corporate culture and the importance of it. You know, so many organizations talk a great game, and have these impressive mission statements, but they don’t really follow through internally. And that sort of thing does come from the top management on down. And if you have an enlightened management, you can inculcate a culture that’s going to help everybody and coordinate everybody together.
Forbes: Now, if I’m an investor, I want to find these firms that have the better-motivated employee, where they feel like principals, not just agents. And you know, I was wondering how we would find them, and if you guys know of any firms, present company not included that are known for their great corporate cultures and their motivated employees?
Starner: You know, a lot of companies, a lot of media magazines have lists of the best place to work. So I think that’s one way to start. And they’re names that you would recognize like Netflix, Nordstrom’s and Google.
McSherry: Sure, well, Google is probably the best example of a corporate culture that’s seems to be producing great gains. But people within the firm are encouraged to pursue their own ideas and to try them out, to test them. They have a very communal work place. And they seem to be taking a lot of management theory and putting it to work. And it seems to be very effective. I’m sure the folks are going to notice and perhaps try to copy it. It’s questionable whether that can transfer to other industries, though, successfully as it has done there.
Forbes: I’d always heard that among banks, Goldman had a really good culture vs. their peer firms, one that encouraged peer review from above and below, and didn’t encourage, kind of, stepping on deals from those above to those below, kind of cultivating younger talent, have you guys ever heard that?
Starner: Yes, and they’re on this list.
Forbes: And conversely, what are some firms that are known for terrible corporate cultures and, you know, the lack of encouragement that maybe are ones to avoid, maybe not for that alone, but it’s a factor you’d consider? Anything I mean, you guys have ever heard of?
McSherry: Well, I think we have a list of a few companies that have failed spectacularly over the last year. I expect that a few of those might have counted for that list.
Forbes: That’s true.
Starner: Well, you know, if you look at just retail, like, I’m a shopper, so if I look at retailers, I would look at someone like Costco as a model. And interesting, I go to Saks a lot. And that’s a model to me where they have stepped on their workers, they pit them against one another. I wouldn’t buy their stock, I mean, just based on my experience with what the sales people tell me.
And they’ve had a different owner every so many years, because they have some equity owner now.
Ervolini: I think one of the behavioral things that happens–it’s sort of a cognitive concept–is that when looking at these firms, we also have to ask how many firms that have cultures like this aren’t doing well? And how many firms are doing extremely well that don’t have these kinds of cultures? Because what we do is we tend to naturally fit data.
And so, the thesis that firms with extraordinary cultures are going to rise to the top long term, that may or may not be true. And so that I offer that not based on any work that I’ve done but just in general, people don’t often ask, is the counter also true? Is every firm with a weak culture going to do poorly? I know from just general analysis, we tend to say that firms that have these qualities, you know, like–
Starner: You mean, like “From Good To Great“?
Starner: And then, half of those failed.