Companies that focus on improving employee satisfaction, effectively in creating happy workplaces, perform better in financial terms. Two weeks ago I posted a blog on the research into the performance of companies in the US Great Workplaces list from 1998-2000. This showed that the stock market value of the companies these lists increased at a considerably greater rate than the average stock market company.
That research was done by the widely respected business magazine Fortune. But, I have been asked, is there an academic peer-reviewed study that shows the same. And the answer is Yes. About to be published in the Journal of Financial Economics is Does the stock market fully value intangibles? Employee satisfaction and equity prices, by Alex Edman of the Wharton School at University of Pennsylvania. This is a paper for serious economists with some weighty analysis. Take the key conclusion:
“A value-weighted portfolio of the ‘’100 Best Companies to Work For in America’’ earned a four-factor alpha of 0.29% per month from 1984 to 2009, or 3.5% per year.”
What does this mean? An alpha is the amount by which a fund manager outperforms the market. For example, they might seem to have done well if they get an 11% return, but if the stock market as a whole rose by 12% then they clearly under-performed it. Their alpha would be -1%. So Edman found that investing in the Great Workplaces list over that 25 year period would have brought a return above the market average by 3.5% per year.
This is a big difference. Over the 25 year period investing in these companies would have produced 136% more than investing in a stock market tracker. So if an investment in the stock market generally produced £100,000, investing in the great workplaces would have produced £236,000.
How to make your organisation more successful
Edman’s paper covers the academic literature on this subject and examines other possible explanations. The conclusion is clear: “This paper finds that firms with high levels of employee satisfaction generate superior long-horizon returns, even when controlling for industries, factor risk, or a broad set of observable characteristics.”
Many companies know this. Some years ago both Microsoft and Google set themselves the target of being the best place to work in Europe (and, in the target year, one came 1st and the other 2nd). They did this because they knew it made commercial sense, and this research backs that up.
The simple fact is that happy workplaces, with high levels of employee satisfaction, perform better in hard financial terms. If you want to make your organisation more successful, then the best way to do it seems to be to focus on creating a great workplace for your employees.
