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Employee Satisfaction & Stock Performance

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The Great Place to Work Institute conducts a number of studies into the best companies to work for in the United States. The most well-known of these is Fortune magazine’s 100 Best Companies to Work For®. The Russell Investment Group (itself named to the list in prior years) has conducted an analysis of the stock performance of Fortune’s “100 best” companies vs. wider indices, and through last year the “100 best” outperforms the market, providing a 10.30% annual return compared to 2.95% for the Standard & Poor 500.

Clearly, high employee satisfaction leads to great stock performance!

Well, that’s what The Great Place to Work Institute would like you to believe. I have some concerns about this, however.

• The results should compare the stock performance of the “100 best” to the “243 not as good” (the companies that applied for the award and did not win it). To be eligible for the award, a company has to have 1,000 or more U.S. employees and be at least seven years old: that’s a different universe than what is measured by the S&P 500 or the Russell 3000. For a true experiment, we need to compare to firms that we know had lower employee satisfaction but that could have won the award otherwise.
• Successful companies are better places to work. Does high employee satisfaction cause success or does success cause high employee satisfaction? I’m pretty sure in the case of Google, for instance, their success comes from the genius of PageRank, not from any of their cool benefits like giving employees 20% of time to produce their own products (something that hasn’t produced much in the way of significant income yet). A company that is financially successful can afford more elaborate perks and benefits, leading to great employee satisfaction. While I firmly believe and argue that employee satisfaction itself can lead to financial success, the two factors are intertwined. When it comes to employee satisfaction vs. financial success, which came first, the chicken or the happy farmhand?
• High levels of employee satisfaction don’t offer as sustainable a result as you’d expect. What is a surprise to me is how differently the two funds behave. The fund that is updated every year with the 100 most recent winners provided a 10.30% annual return compared to 6.44% for the fund that represents a buy and hold from 1998. Employee satisfaction is built over time and is typically an enduring asset. Again, if it were so important in financial success, I’d expect it to provide even better returns over the long haul.

I do believe that employee satisfaction is important to long-term organizational success, but proving the ROI can be troublesome.