Happy employees generate better returns

Jan 29 2008 by Brian Amble Print This Article

Traditional management theory treats workers like any other input. Get as much out of them as possible, pay them as little as you can get away with and don't particularly worry if your employees are happy or silently seething. Unfortunately, like so much management theory, it is largely garbage.

While treating human beings like pieces of machinery – or "productive units" – might have made some sense during the industrial revolution, common sense alone ought to tell us that in post-industrial knowledge-based economies, organisations whose staff are well-treated and happy are likely to perform better than those where they are miserable.

Sadly, however, legions of dinosaur managers the world have yet to grasp this, perhaps because they remain obsessed with short-term financial results (and the personal gain this can bring).

Enter Wharton finance professor Alex Edmans with an analysis that ought to be powerful enough to make even the most unreconstructed dinosaur take notice. Namely that firms recognised as good places to work earn returns that are more than double those of the overall market.

As explained in this piece on Knowledge@Wharton, Edmans demonstrates that companies on Fortune magazine's annual list of the "100 Best Companies to Work for in America" between 1998 and 2005 returned 14% per year, compared to 6% a year for the overall market.

"This paper documents statistically and economically significant long-horizon returns to portfolios containing companies with high employee satisfaction," Edmans writes in his paper, memorably entitled Blockholders, Market Efficiency, and Managerial Myopia.

"These findings imply that the market fails to incorporate intangible assets fully into stock valuations -- even if the existence of such assets is verified by a widely respected survey."

What's more, he risks accusation of heresy from corporate America when he dares suggest that as long as managers are compensated largely on short-term share price, their decisions about investing in employee satisfaction or other intangibles will not change.

"What's needed is not just for the manager to know employee satisfaction matters, but also to have the incentive to act on this," he writes.

Well, halleluiah! This may not be the most earth-shattering paper ever written – you might even think it a statement of the obvious – but anything that helps to chip away at the obsession with quarterly numbers and short-term gain will get a big thumbs-up from us, not to mention undoubtedly raising a smile from your happy employees.