Employee satisfaction: cause or result of company success?
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The title makes a big promise: "How Investing in Intangibles -- Like Employee Satisfaction -- Translates into Financial Returns." The promise is that if you take the action of investing in things like employee satisfaction, your company's financial results will improve.
Well, maybe they will. But the research cited in this article doesn't prove that. The Knowledge at Wharton article reports on a working paper by Wharton professor Alex Edmans titled "Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices." Here's the reasoning.
"To test his theory that happy workers generate better returns, Edmans used the annual survey published by Fortune and conducted by the independent Great Place to Work Institute in San Francisco as a measure of employee satisfaction. Edmans says the survey is a valuable gauge of employee satisfaction because it is based on in-depth surveys of a firm's employees, rather than just an external observation of stated policies. Fortune began publishing the list in 1998, but Edmans also used earlier versions of the list published in book form in 1984 and 1993."
The professor then compared the list of companies with high employee satisfaction to their profitability. There was a bit of statistical mumbo-jumbo and viola, the hypotheses is proven.
It may be true that happy workers generate better corporate returns. I don't know for sure, but I do know that this methodology doesn't prove that hypothesis. All it proves is that it seems more likely that more profitable firms have workers who are more satisfied.
What if Dr. Edmans had used statistics about the height of the workers at various firms and found that, on average, the workers in the more profitable firms were taller than the workers in the less profitable firms? Would that prove that taller workers mean more profits? Hardly.
And finding out that the employees who are "satisfied" are more likely to be in profitable companies doesn't tell you much either. That's because there's nothing here that describes what, if anything, the correlation means.
Yes, boys and girls, Professor Edmans fails the old correlation/causation test. The facts that I eat apples and that I will surely die don't prove that apples are deadly.
Satisfied workers may lead to greater profits. Or, maybe, more profitable firms are more likely to create environments that satisfy workers. We don't know which is the case. And Professor Edmans' study doesn't help.
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Categories: Study or Survey, Great Working Environment, Engagement
Wally
Nice job of puncturing this woolly thinking.
The real heart of this research is, of course, the premise that many businesses will treat their people with respect and decency only if it can be proven to create a financial return.
If anyone ever proves the opposite, look out.
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Thanks for your comment, Phil. You're right, of course.
If you concentrate on short term results, there's ample anecdotal evidence that you can treat your employees like interchangeable, low-cost parts and pump up the bottom line. Chain Saw Al and his ilk have proven that you can increase profit in the short term by making jobs disappear.
They call it "increasing shareholder value" but it's not, really. It's increasing short term profit. You increase true shareholder value if you increase the long term competitive advantage and profitability of the company. And a significant part of the way you do that is to leverage the things that are unique about your company and that matter to your customers. That, in turn, almost always includes employee relationships, knowledge, and what Fred Smith has called "discretionary effort."
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I think you do a disservice to the author. The article clearly states:
Edmans cautions, however, that a correlation between employee satisfaction and stock returns need not imply causation. Although he controls for many observable variables, it is impossible to rule out the story that an unobservable variable, such as superior management practices, may cause both higher returns and satisfied employees. However, even under this interpretation, "it still remains that the market does not incorporate intangibles (whether they are satisfaction levels or good management) even when made publicly available, and that an investor could have earned significant risk-adjusted returns by trading on the Fortune list."
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I don't think it's a disservice at all. The article leads with "Contrary to management theories developed in the Industrial Age, employee satisfaction is an important ingredient for financial success." It includes statements that imply that satisfied workers produce better return and explicit statements that "happy workers generate better returns." The disclaimer you mentioned is buried in the article and runs counter to the entire tone of the piece.
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That may be true for the article, but the professor didn't write the article. The actual paper itself is filled with caveats, and specifically says he uses stock returns (rather than profits) as they address the correlation/causality issue. Profitable companies should already have high stock prices and so shouldn't give higher returns in the future. I saw him present this paper at a SRI conference and he repeatedly emphasized the caveats in the presentation. However, HR supporters in the audience got very excited by the headline results and overlooked the caveats, which is probably what happens with press coverage.
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Excellent point, John. Thank you.
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