This is an interview with Alex Edmans, Professor of Finance at London Business School. Alex will be speaking at Engage or Bust! on November 24th, a one-day event run by government taskforce Engage for Success. The event will look at ways organisations can improve engagement and features senior HR directors alongside academics giving you practical insight into how you can take action in your own organisation. The event takes place at the QEII Centre in London. To attend at the discounted rate of £199, please register and enter code HRZONE.

Jamie Lawrence, Editor, HRZone: There are obvious difficulties with putting financial value on intangible concepts e.g. engagement. What has happened to allow this connection to be made more strongly/clearly?

Alex Edmans, Professor of Finance, London Business School: The biggest challenge with putting financial value on intangibles is causality. Does employee engagement cause superior firm performance, or does superior firm performance cause employee engagement? This question has been studied by management/strategy professors for decades but people haven’t found a way to get around it.

I come from finance, and in finance we have techniques to get to causality. So, I brought finance techniques to a decades-old management/strategy question which allowed me to establish a stronger connection.

Jamie Lawrence, Editor, HRZone: Where do you feel the exec remuneration debate will go? It seems society is stuck between the ‘let’s get the multiplier between CEO and lowest-paid employee down as much as possible’ argument and the ‘CEOs have touch decisions to make and we must compensate them’ argument. Where is the overall research sitting at the moment?

Alex Edmans, Professor of Finance, London Business School: I don’t know of a single piece of research which suggests that the multiplier between the CEO and lowest-paid employee (or the median employee) matters. Certainly, there are cases in which CEOs are overpaid, and those cases should be fixed – but an overpaid CEO is one who’s overpaid compared to his/her peers or performance, not the lowest paid or median employee.

Such an employee simply does a different job, and is not a relevant benchmark. Moreover, regulation of this ratio may backfire – the CEO might fire lowly-paid workers, or make them part time, or outsource them to India, to make the ratio look more favorable – see my CityAM article on the topic. 

Jamie Lawrence, Editor, HRZone: Could you make some comments on the link between job satisfaction and company value and maybe just outline how the logic works here – is it that satisfaction increases productivity which increases value?

Alex Edmans, Professor of Finance, London Business School: Satisfaction has two main benefits. First, it’s a valuable recruitment and retention tool, helping the firm get the best people. Second, it’s a valuable motivational tool. In the past, managers have thought they could motivate purely by money, and didn’t need to provide satisfaction – e.g. pay $1 per shirt you make, so that will induce you to make more shirts.

But, nowadays, most employee tasks can’t be measured (e.g. do you mentor your subordinates). Thus, the way to motivate is to provide satisfaction, so that the employee feels aligned with the company and so will do stuff even if it’s not explicitly rewarded by money. 

Jamie Lawrence, Editor, HRZone: How has organisational perception of CSR shifted e.g. from a PR exercise to one that directly impacts value? When you see CEOs that just ‘get it,’ what tends to be their attitude or mindset?

Alex Edmans, Professor of Finance, London Business School: People used to think that CSR was an optional extra, or just PR, but now many CEOs see it as critical for generating competitive advantage. When CEOs get it, their mindset changes. The old mindset is that you only invest in something if you can expect a quantifiable return (e.g. build a factory as you know that it will manufacture cars).

The new mindset is to invest in something because investment is a responsible action, even if there’s no directly quantifiable benefit (e.g. allowing for a flexi-time work policy).