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(originally published by Booz & Company)


Why Happy Workers Should Make Shareholders Smile

Job satisfaction pays off with better-than-expected earnings and higher stock returns.

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.

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