Employee satisfaction: why should investors care?

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In a recent study, my colleagues Efthymia Symitsi, Panagiotis Stamolampros and I addressed an issue that has attracted over the years considerable attention from both practitioners and academics alike: is there a link between employee satisfaction and corporate performance?

Although such association might initially seem obvious, as discussed by Alex Edmans in the Harvard Business Review, it is far from clear whether the benefits of employee satisfaction outweigh the costs for promoting it. Shareholders are thus generally reluctant to accept this trade-off, arguing that for every dollar invested in employee satisfaction, a dollar is taken away from them.

Our findings disprove this view as they indicate that the balance between benefits and costs of employee satisfaction tilts strongly in favour of the former.

The novelty of this research lies in the manner in which we measured employee satisfaction.

Studies that examine the effect of employee satisfaction on firm performance are commonly based on Fortune magazine’s ‘100 Best Places to Work for in America’ annual list. This has the shortcoming that there is a realistic chance any conclusions drawn are driven by self-selection bias.

The reason is that for a firm to be considered for inclusion in that list, it needs to first be certified for a fee by the Great Place to Work Institute. Therefore, only firms that have, or consider themselves to have, high levels of employee satisfaction have an incentive to pay the fee, get certified and potentially be included in the list.

We overcame this issue by measuring employee satisfaction on the basis of reviews that employees post on the popular jobs website Glassdoor. This provided us also with the advantage that we were not constrained to perform the analysis for a limited number of firms and an annual time frequency.

On the other hand, a disadvantage of using online reviews is that the findings might be biased by disgruntled former employees. To mitigate this, we focused only on reviews from employees who at the time of posting their review were working in the firm.

In total, we considered about 326,000 ‘overall’ satisfaction ratings for 313 public US firms posted on Glassdoor over the period from 2009 to 2016.

What did we find in our study?

We found that employee satisfaction rating is positively related to firm performance in terms of profitability (ROA) and value (Tobin’s Q).

The relationship was robust to controlling for a variety of firm characteristics and model specifications. When the volume of the reviews was also considered in the analysis, by focusing on firms with the highest ratio of ratings to number of employees (top 25%), the impact of employee satisfaction on corporate performance was more pronounced.

These results indicate that firms rated highly by their employees in terms of satisfaction achieve superior financial performance compared to firms characterised by low levels of employee satisfaction.

Are investors aware of the results?

A related question we addressed in the study is whether the positive relationship between employee satisfaction and firm performance is recognised by investors in the stock market.

The answer to this is a resounding no. A portfolio that included the stocks of the best firms in our sample in terms of employee satisfaction rating (top 25%) achieved significant abnormal returns over the eight-year period we studied. That is, after considering the risk of the portfolio, the rate of return gained was significantly higher than expected according to standard asset pricing models.

Thus, the portfolio analysis corroborated the value-relevance of employee satisfaction and revealed in addition that this is not fully reflected in stock prices. If it was, the portfolio wouldn’t achieve abnormal returns as the online reviews from Glassdoor is public information.

Therefore, investors recognising the positive impact that employee satisfaction has for a business could straightforwardly use them when deciding which stocks to buy. This would result to an increased demand for the stocks of firms with high levels of employee satisfaction and in turn, to an increase in their stock prices, diminishing abnormal portfolio returns.

What is the key implication of this study?

Almost two decades ago, Luigi Zingales argued in the prestigious Journal of Finance that with human capital becoming increasingly important in modern corporations, the conventional view of the firm needs to give its place to a human-centred one.

Here's a quote: ‘Employees are not merely automata in charge of operating valuable assets but valuable assets themselves, operating with commodity-like physical assets.’

Which view is the appropriate one is still a matter of debate and naturally of the outmost importance for both managers and investors. Our findings, consistent with previous studies, support those arguing that in the current knowledge-based and service-oriented economy, employees are key organizational assets that contribute significantly to firm value.

Managers need to recognise that the human-centred view of the firm is relevant today and take appropriate actions to promote the satisfaction of their employees, even if these are not viewed favourably by myopic shareholders. Investing into their employees will pay dividends in the long-term. Interestingly, such investments do not need to be costly.

As Cary Cooper discusses in The Conversation UK, spending millions of dollars transforming the physical surroundings of the business is not what will make employees satisfied. In fact, according to Moneyish and a recent report from PayScale, employees simply want to be appreciated.

About George Daskalakis

George Daskalakis

George Daskalakis is a Lecturer in Finance at Norwich Business School, University of East Anglia (UEA). Prior joining UEA in July 2009, he spent a year as an adjunct Lecturer in Finance at the Department of Financial and Management Engineering, University of Aegean, Greece, and a year as an Airman in the Hellenic Air force. He holds a PhD in Management Science and Technology from Athens University of Economics and Business in Greece, a Master’s in Advanced Study in Mathematics (MASt, Mathematical Tripos Part III) from Cambridge University, UK and a Bachelor’s in Physics with Theoretical Physics (BSc Hons, First Class) from Lancaster University, UK.His research focuses on empirical finance, energy finance, environmental finance and the operations-finance interface.

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