Employee Satisfaction Has Led to Higher Equity Prices
New research shows that companies that engender high employee satisfaction are rewarded with higher stock prices and investor returns.
Many CEOs have stated that “employees are our greatest asset.” However, due to accounting rules requiring that most expenditures related to employees be treated as costs and expensed as incurred, the value of employees is an intangible asset that does not appear on any balance sheet. In his 2013 study, “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices,” Alex Edmans analyzed the relationship between employee satisfaction and long-run stock returns. His hypothesis was that employees are key organizational assets, rather than expendable commodities, who can create substantial value by inventing new products or building client relationships, benefiting shareholders. This is especially true for modern knowledge-based industries, such as pharmaceuticals or software. In addition, high employee satisfaction can be a valuable recruitment tool.
Edmans began by noting that research had found that firms with high R&D, advertising, patent citations and software development costs had all earned superior long-run returns. He hypothesized that the market may be even more likely to undervalue employee satisfaction because theory has ambiguous predictions for whether it is desirable for firm value. His database was the list of the 100 best companies to work for in America (typically, 50 to 70 are publicly traded). The list was first published in a book in March 1984 and updated in February 1993. Since 1998 it has been featured in Fortune magazine each January. It is compiled from two principal sources. Two-thirds of the score comes from employee responses to a 57-question survey created by the Great Place to Work Institute in San Francisco covering topics such as attitudes toward management, job satisfaction, fairness and camaraderie. Two hundred fifty employees across all levels are randomly selected in each firm. The remaining one-third of the score comes from the Institute’s evaluation of factors such as a company’s demographic makeup, pay and benefits programs, and culture. The companies are scored in four areas: credibility (communication to employees), respect (opportunities and benefits), fairness (compensation, diversity) and pride/camaraderie (teamwork, philanthropy, celebrations).