Higher employee satisfaction generates higher profits
Firms with high levels of employee satisfaction generate superior long-horizon returns.
This is the finding of Professor Alex Edmans of the Wharton School of Business at the University of Pennsylvania, who reported in July 2008 that he had analyzed the relationship between employee satisfaction and long-run stock performance over 20 years and found the organizations that created greater employee job satisfaction created greater financial returns.
Professor Edmans reviewed a portfolio of the 100 Best Companies to Work For in America from 1984-2005 (an annual list published by Fortune magazine) and found they earned an average annual return of double the average public company – averaging 14% per year return compared with 6% per year of the overall market.
He said the survey is a valuable gauge of employee satisfaction because it is based on in-depth surveys of a firm’s employees, rather than just external observations.
Beyond exploring the link between employee satisfaction and financial performance, the research could help influence socially responsible investing, which has become more widespread in the past 10 years. This form of investing requires ethical and social considerations to be taken into account along with expected financial returns when investors make decisions about buying shares.
Unfortunately, most share market decision-making is based on short-term thinking by corporate managers because their performance is being judged by investors who want to maximize their short-term returns. This short-term thinking is called myopia. Therefore Edman’s research may not lead to any trend for investors to refer to the list of best companies to work for in order to seek out longer-term returns.
The research results are consistent with the view that employee satisfaction causes stronger corporate performance, potentially through improved recruitment, retention and motivation.
Edmans said if superior employee satisfaction caused even a portion of the returns measured from the list of good companies to work for, then employee-friendly programs can substantially improve shareholder value.
Even though it is extremely difficult to directly attribute better performance to more satisfied staff, enough studies have shown a correlation that virtually proves the point.
The moral is: treat your staff better and your organization will perform better – a win:win situation.