Happy Employees, Happy Shareholders

Do happy employees benefit the firm and its shareholders? Or are employees more productive if they are motivated by fear of unemployment? New research by Wharton finance professor Alex Edmans and two colleagues shows that employees’ higher levels of job satisfaction often translates into higher returns for shareholders. However, there’s an important caveat: The happiness effect is much more pronounced in countries with flexible labor policies.

The paper “Employee Satisfaction, Labor Market Flexibility, and Stock Returns around the World,” co-authored by Lucius Li and Chendi Zhang, both of the University of Warwick, builds upon previous sole-authored studies by Edmans which found that companies ranked among the 100 best to work for in the United States produced annual stock returns two to three percentage points higher than peers that were not on the list.

For the new study, the researchers looked at 14 countries: Brazil, Canada, Chile, Denmark, Finland, France, Germany, Greece, India, Japan, Korea, Sweden, the United Kingdom and the United States, and produced a more nuanced picture of the value of employee satisfaction:

“For the typical 20th Century firm, the bulk of its value stemmed from its physical capital,” Edmans and his colleagues write. “In contrast, most modern firms’ key assets are their workers — not only senior management but rank-and-file employees. For example, in knowledge-based industries such as software, pharmaceuticals and financial services, non-managerial employees engage in product development and innovation, and build relationships with customers and suppliers, and mentor subordinates. Employee-friendly policies can attract high-quality workers to a firm and ensure that they remain with the firm, to form a source of sustainable competitive advantage.”

The researchers point out that in traditional factories, where employee output could be measured easily, managers motivated workers by counting the number of units they produced and paying them accordingly. In today’s companies, however, key outputs such as client relationships are intangible – and harder to measure. Therefore, paying for output is less effective, and employee satisfaction becomes a greater motivational tool.

The new study confirmed Edmans’ earlier results in the U.S.: Companies with high worker satisfaction generally produced above-average stock returns. More specifically, the U.S. firms’ average monthly alpha of 22 basis points (or .22%, meaning that if the peers’ stock rose 10% a year, the best companies’ shares would return 12.6%) was the 10th highest among the 14 countries from 1998 to 2013. Japan had a monthly alpha of 77 basis points, and the U.K. 81 basis points. Germany had a negative alpha of 45 basis points, while Denmark was negative 63 and Greece negative 58, showing the effect of high employee satisfaction was diminished in countries with low labor-market flexibility.

“Overall, our results suggest that the association between employee satisfaction and stock returns depends critically on the institutional context,” the researchers write. They conclude that “being listed as a Best Company to Work For is associated with superior returns only in countries with high labor market flexibility.”

Given that happy workers tend to work for business owners and executives who conduct themselves in an ethical and commendable fashion, I invite you to explore my Profiles in Success Project. Designed to inspire current and future small-business owners, this collection of profiles highlights personal stories and words of wisdom from a diverse group of business leaders in and around the Washington D.C. area with an emphasis on entrepreneurialism and a positive spirit. You can learn from the lessons of others while examining your own values and administrative styles – and how thy may be impacting your employees and your bottom line.

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