New research by Wharton finance professor Alex Edmans and Lucius Li and Chendi Zhang, both of the University of Warwick shows that “higher levels of job satisfaction among employees can indeed produce higher returns for a firm’s shareholders. But there’s an important caveat: The effect is much more pronounced in countries that have flexible labor policies, where hiring and firing is easier, than in heavily regulated economies,” according to Knowledge@Wharton.
The findings are detailed in the paper “Employee Satisfaction, Labor Market Flexibility, and Stock Returns around the World.”
They write: “For the typical 20th Century firm, the bulk of its value stemmed from its physical capital. In contrast, most modern firms’ key assets are their workers — not only senior management but rank-and-file employees Twitter . For example, in knowledge-based industries such as software, pharmaceuticals and financial services, non-managerial employees engage in product development and innovation, and build relationships with customers and suppliers, and mentor subordinates. Employee-friendly policies can attract high-quality workers to a firm and ensure that they remain within the firm, to form a source of sustainable competitive advantage.”
“In old-fashioned firms, such as factories, employee output could be measured easily in units produced. Thus, there was little role for employee satisfaction in motivating workers. Instead, managers could motivate workers by counting the number of units they produced and paying for output. In the modern firm, key outputs are intangible, such as building client relationships. Since these outputs are harder to measure, pay-for-output is less effective, and so employee satisfaction is an increasingly valuable motivational tool.”
This research builds upon previous studies by Edmans which found that companies ranked among the 100 best to work for in the United States produced annual stock returns two to three percentage points higher than peers that were not on the list.