It’s no secret that the stock market has traditionally seemed to favor tough employers. Wall Street often reacts favorably to news of a corporate layoff by rewarding the company with an uptick in the stock price. Firms like Costco that have a strong employee commitment and an employee-focused philosophy are often taken to task by analysts for being overly generous. Studies have also shown that CEOs who preside over layoffs are positively reinforced. A study of 229 firms that had layoffs by a University of Arkansas of Arkansas professor showed that CEOs of the firms with recent layoffs received 22.8 percent more in total pay than CEOs of firms that did not have layoffs.
To many, this type of market-driven people management is short-term thinking that flies in the face of the age-old mantra that “your people are your greatest assets.” Now, a new study by Wharton finance professor Alex Edmans points to the fact that employee satisfaction is not just a nice thing, but an integral ingredient in financial success. His research analyzes the relationship between employee satisfaction and long-run stock performance, showing that intangibles matter and that “nice guys” do indeed finish first.
His research compared companies on Fortune’s annual list of the “100 Best Companies to Work for in America” to the the overall market between 1998 and 2005, finding that the “best companies” returned 14 percent per year versus 6 percent a year for the market at large.
Edmans notes that while it may seem obvious that happy workers perform better, traditional management theories have actually treated workers like any other commodity.
Another, more subtle implication of the research, says Edmans, goes to the nature of short-term thinking among corporate managers. Even if managers believe employee satisfaction enhances long-term corporate performance, they may not act on their beliefs because investing in employees often reduces earnings in the short term.
“This is a large concern people have had for a couple of decades now — that the American corporate system is short-term or myopic,” Edmans notes.
That concern, he adds, is driven by managers who argue it is not possible to credibly communicate to investors that profits might be lower in one period in order to invest in employee satisfaction that may pay off in the future.
Edmans points to Google as an example of a company that vindicates the long-term approach of focusing on employee satisfaction. However, he does not think that research alone will result in changing the short-term, reactive focus to a more long-term one because manager compensation is often linked to share prices.
We’re encouraged by this research because it validates something that we see in our practice over and over again: treating employees well is not only the right thing to do, it’s usually the most profitable thing to do. Stress, burnout, resentment, and anger have a high price tag, something that employment lawyers and disability claims managers can attest to.