A new study shows that companies with high levels of employee satisfaction tend to outperform the market.
The study by Alex Edmans of Wharton Business School, Chendi Zhang of Warwick Business School, and PhD. student Lucius Li of Warwick Business School investigates the stock returns in countries with flexible labour markets of companies with very high employee satisfaction in different countries around the world.
The working paper was posted recently at the website of the National Bureau for Economic Research.
Professor Edmans had previously analysed the returns on those companies in the United States that were in the annual “100 Best Companies To Work For” list compiled every year by the Great Place to Work Institute and published in Fortune. They found that these companies had higher stock returns than the market as a whole.
Edmans and his colleagues focus on stock returns after the lists have been posted as a way to compensate for the possibility of reverse causality, where high performing companies cause happier employees. By looking at stock returns over the year after the publication of the list, the hope is to capture any long term effects of employee satisfaction.
The current study expands on this approach by looking at other countries. Great Place to Work publishes equivalent Best Companies lists for a number of countries, and Edmans and his fellow researchers found 14 countries in which at least ten publicly traded companies appeared on the Best Companies list at least once between 1998 and 2013.
Among those countries, eleven, including the U.S., all saw positive abnormal risk-adjusted returns, that is additional returns above the market, for hypothetical portfolios made up of those publicly traded companies appearing on a Best Companies list.
Because of small sample sizes in most of the countries (since only a few publicly traded companies showed up on the Best Companies lists), it’s hard to be sure that this is an actual relationship, and not just statistical noise. Still, in those countries with large enough sample sizes to make more definitive conclusions, the Best Companies outperformed the markets: Chile, Sweden, the U.S., and Japan all had statistically significant abnormal risk-adjusted returns by firms on their respective Best Companies lists.
While the researchers saw positive abnormal risk-adjusted returns in most of the countries, the actual magnitude of those returns varied quite a bit. They went on to propose a possible explanation for that diversity: countries with more flexible labour markets, in which it’s easier for companies to hire and fire employees, are likely to see more of a relationship between employee satisfaction and value.
If hiring is easy and there is a good amount of competition for labour, higher levels of employee satisfaction can be a powerful recruitment tool. Similarly, high value employees who have options to leave are more likely to stay if they are at a job where they are happy. Finally, the researchers point out in the working paper that “workers exert effort to avoid being fired from a satisfying job, and thus employee satisfaction has greater motivational impact when the likelihood of firing is stronger.”
Conversely, less flexible, more highly regulated labour markets in which there are greater barriers to hiring and firing should see less of a relationship between satisfaction and performance, owing to the damping down of the above factors.
To test this, Edmans and his colleagues ran a version of their statistical model that also included measures of labour market flexibility in each country, based mostly on government regulations on hiring and firing. In this version of the model, they found that the labour market flexibility explained a lot of the variation in the different countries’ abnormal return rates for Best Companies, supporting the above hypothesis.
For more detail, check out the original paper at NBER.