Title: The Link Between Job Satisfaction and Firm Value, with Implications for Corporate Social Responsibility (Fee or subscription required)
Authors: Alex Edmans (University of Pennsylvania)
Publisher: Academy of Management Perspectives; vol. 26, no. 4
Date Published: November 2012
Cultivating a happy workforce results in more than just feel-good meetings and upbeat corporate retreats. According to this paper, satisfied employees actually raise the worth of their firms. But Wall Street has yet to catch on.
Analyzing the performance of Fortune’s “100 Best Companies to Work for in America” over a 28-year period, the author found that these firms generated higher yearly stock returns than comparable companies not on the list. They also systematically beat financial analysts’ earnings estimates, an indication that job satisfaction is an important variable that the market does not fully value.
Previous research has suggested that satisfied employees can, in theory, boost their firms’ performance in a number of ways. For example, high-performing employees may be more willing to join and remain at a company that fosters a positive workplace culture, which in turn cuts down on the firm’s recruitment and training costs. (And for companies in knowledge-based fields such as pharmaceuticals and software development, hanging on to key employees can be especially important.) Satisfied employees may also work harder and tie the company’s goals to their own.
But the ability to fully document the organizational benefits of job satisfaction has proven elusive to researchers. Indeed, most studies have examined the link between satisfaction and employee performance, rather than the impact of satisfaction on the firm. However, merely measuring worker output can be misleading, studies have shown, because employees’ most important contributions increasingly include complex intangibles such as mentoring subordinates and nurturing relationships with clients.
What’s more, recent research has failed to determine whether employee satisfaction drives firm performance, or whether it’s the other way around. Are employees just happier because they are working at a high-flying company? Or do managers at successful firms perhaps have more leeway to dole out raises or bonuses, in turn boosting satisfaction?
Given the vagaries in play, the author of this study chose to look at corporate value through a wide lens, eschewing standard measures (such as earnings reports) in favor of long-term stock market returns. This allowed the author to examine “all potential channels (both benefits and costs) through which satisfaction can affect firm value.” These channels include the impact on stock prices following the launch of a new product, good customer satisfaction ratings reported in the media, positive reports from Wall Street analysts, the finalizing of a new contract, or the filing of a patent.
Using the list of best companies also had several advantages. It allowed the researcher to examine stock returns of the named firms from 1984 through 2011, a substantially longer time frame than was used in most studies on this topic, and one that contained both recessions and boom periods.
An outside company has compiled the list, based on surveys of employees and managers at large firms, since 1984; Fortune began publishing the list in 1998. The surveys assess employees’ trust in management, pride in their work, and camaraderie with co-workers, and gauge the company’s level of diversity and turnover. They also measure a company’s approach to compensation, benefits, time off, and work–family policies.
Because of the concern that firms experience a short-term, publicity-related bump in their stock price immediately after appearing on the list, which is published in January, the author used February as the starting point for calculating returns each year. To eliminate the possibility that the returns reflected factors other than worker satisfaction, the author controlled for such key variables as dividend yield, trading volume, and past returns.
Across all control variables, the author found that the best companies generated substantially higher returns than peer firms that did not make the list. They showed annual returns that were an average of 3.8 percent higher when the author controlled for risk factors; 2.3 percent higher when the author controlled for ups and downs in their industry; and 2.9 percent higher when the author controlled for a combination of firm size, book-to-market ratio, and strong recent performance.
Nevertheless, Wall Street remains largely oblivious. Examining how these results jibed with analysts’ forecasts of earnings after one, two, and five years, the author found that companies on the list beat the estimates by significantly more than their peer firms did across all three periods.
In addition, the market’s immediate reaction to the earnings announcements themselves was nearly four times as positive for the best companies as for the broader market, another indication that the firms’ upbeat performance caught analysts and investors by surprise. The author argues that just as researchers have relied on traditional models of firm valuation, analysts, too, still judge firms by using metrics that don’t take into account intangibles such as employee satisfaction.
The author also notes that although managers should be encouraged to invest in their employees’ happiness on the job, they should not expect immediate benefits. It may take several years to change the organizational culture, and even longer to see improvements in stock returns. “To encourage managers to invest for the long run, it may be necessary to insulate them from short-term stock price movements,” the author writes, “for example, by giving them stock and options with long vesting periods.”
Finally, the finding that employee satisfaction can boost companies’ future stock returns has implications for corporate social responsibility (CSR). “CSR involves firms considering the interests of stakeholders other than shareholders, such as employees, customers, and the environment,” the author writes. “To my knowledge, this is the first paper that identifies a CSR dimension that improves stock returns, over a long time period and after controlling for risk.”
Companies that have high levels of employee satisfaction generate significantly better stock returns over the long term than similar firms that do not make the same commitment. But Wall Street is still slow to catch on to a correlation, and firms with exemplary workplace cultures consistently beat analysts’ earnings predictions.