For generations, economists have told a simple story about how companies work like a juice machine. They combine ingredients – people, buildings and software – and transform the output into useful products. Employees are just another input in the production process, an undifferentiated cost that’s thrown into the juicer.
But today’s economy has evolved significantly from the 20th century, dominated by manufacturing, agriculture and manual labour. Today, we rely more heavily on sophisticated services, technology and workers that are more valuable than ever as more diverse, knowledgeable and flexible individuals. They’re a valuable asset and source of innovation, not just a means to an end.
Companies are a Garden, Not a Machine
So then, how should we view companies today? A vegetable garden is a new story that’s getting more attention from economists today. Although you’ve got more unpredictable variables – seeds, soil and climate – when you combine them with whatever Mother Nature brings, you get valuable produce. And unlike the company-as-juice-machine metaphor, when the health and happiness of the individual plants are tended to, much like every employee, your product and yield can improve. Whether it’s employees in a tech company, or tomato plants in a backyard garden, tending to them can help build a great company culture that delivers on financial performance.
There’s a new study we joint published this week that supports the notion employees are key assets of a firm. The study, Employee Satisfaction and Corporate Performance in the UK, from the University of East Anglia’s Norwich Business School examines the link between employee satisfaction on Glassdoor and real-world financial performance for companies in the United Kingdom.
Happy Employees Drive Business Performance
The results are striking. The authors show a strong link between a satisfied workforce – in the form of higher Glassdoor company ratings – and the financial performance of UK companies in the sample. Even after controlling for many other factors including industry, sales growth, company size, whether the company is private or public, and more – company ratings on Glassdoor still had a statistically significant and positive link to company profitability.
On average, the study finds having a 1-star higher rating on Glassdoor predicts about a 1 percent higher annual return on company assets – a statistically significant boost. According to the authors, “firms rated highly by their current employees in terms of satisfaction [on Glassdoor] achieve superior profitability compared to those rated poorly.” It’s information that can be useful to companies and investors as this positive association suggests that, “online employee reviews can be used to forecast the financial results of UK firms.”
Beating the Stock Market
The study also looked at stock returns for companies with top Glassdoor ratings in recent years. The researchers used several rigorous methods to measure whether companies with more satisfied employees earned an extra stock market return – known as “alpha” in the financial world – and found an annual alpha of roughly 16 percent on average for an equally-weighted stock portfolio after accounting for other factors like company size, momentum, and riskiness of the company’s stock.
This shows that investors in the market don’t fully account for how satisfied employees can improve business outcomes when they value stocks. “[This finding] corroborates the link between employee satisfaction and corporate performance in the UK and also suggests that intangibles are not fully priced in the UK market.”
Perform Well by Investing in People
This new study is significant for several reasons. It’s the first study ever to examine the link between Glassdoor ratings and company financial performance outside the United States. In a previous 2017 study published in the peer-reviewed journal Economics Letters, the authors found Glassdoor ratings predict better performance in U.S. companies – a result this study now confirms for UK employers as well.
This is also the first study to examine the link between employee satisfaction and financial performance for both privately held companies and publicly traded employers. Unlike in the U.S., financial data are available for many private companies in the UK, allowing researchers to confirm past results for public companies also hold among private firms.
The study is based on Glassdoor data for all available employer reviews for employees of UK firms between 2014 and 2017. For their analysis, the authors used only companies with at least 100 reviews in the four-year period considered. Their final sample includes 35,231 Glassdoor reviews for 164 UK employers.
The authors argue their findings suggest employees in today’s companies are an important resource – not simply a homogeneous cost of production. In their words, “Our results support the human-centered view of the firm as we find a significant positive relationship between employee satisfaction and firm profitability.”