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News Flash: Companies Profit by Giving Employees What They Want!

Posted Oct 9, 2013

By David Sirota and Douglas A. Klein

“...there is one key to profitability and stability during either a boom or bust economy: employee morale.”
— Herb Kelleher, Southwest Airlines Founder

Crazy!  Ridiculous!  But in fact, we found that high-morale companies outperformed their industry competitors in 2012 by 368% when considering year-over-year stock market returns.  We discovered this when working on the second edition of our book, The Enthusiastic Employeei.

More specifically, we found that companies with high morale (those with scores at the 75th percentile or higher who ask “overall satisfaction with their company” on their annual employee attitude surveys) had stronger year-over-year stock performance than their industry counterparts.  These high-morale companies averaged a 15.1% improvement in their stock price, while their matched industry comparisons averaged only a 4.1% year-over-year improvement, a difference of 11 percentage points or 368%!  Moderate-morale companies (companies scoring between the 25th and 75th percentiles on employee attitude surveys) matched their industry counterparts (only a 0.8 percentage point difference), and the low-morale companies were 166% (or 13 percentage points) lower than their industry counterparts.

Are these results a fluke, a chance occurrence in this particular period? Well, we have been able to replicate the results every year we have analyzed employee morale measures against companies’ stock market performance.  For example, the 1st edition of The Enthusiastic Employee reported that in 2002, a down period for the market, companies with high morale outperformed their year-over-year industry benchmarks by more than 20 percentage points, or 1,000%.  They actually showed a slight increase in stock market value in that very bad year. The moderate- and lowest-morale companies performed somewhat worse than their industry year-over-year comparisons, by about 5 percentage pointsi.

* ppt = percentage point

Others have found similar results.  Recently, Russell Investments, the firm responsible for the Russell market indices, tracked the 1998–2010 performance of the S&P 500 against the stock returns of the publically traded firms that made the list of the Fortune 100 Best Companies to Work For.  The “100 Best” companies had an average annualized return 275% higher than the S&P 500 (11% vs. 4%).  Similarly, the cumulative return figure (the total return for each year continuously added from 1998 to 2010, and then expressed as the percentage gained) was 291% for the “100 Best” list as compared to 63% for the S&P 500ii.  

It’s not just stock performance.  Our own research shows, for example, that enthusiastic workers often increase the quality of work by huge percentages—up to a 75 percent reduction in defect ratesiii.  We and others find high positive correlations between employee satisfaction and customer satisfaction and salesiv.  In a fascinating study for the National Oceanic and Atmospheric Administration, our firm found strong positive relationships between the “organization culture” index of its various national weather service offices (as measured by an employee satisfaction survey) and a “critical success index,” which is an objective measure of tornado warning performance that takes into account positive forecasts followed by an occurrence, occurrences that were not predicted, and false alarmsv.  Jeffrey Pfeffer, in his comprehensive review of the research circa 1998, concluded that gains of about 30 to 40 percent were realized by companies across a variety of performance outcomes implementing work practices that result in high employee commitmentvi.

These findings clearly demonstrate that morale is not a soft concept; it has a profound impact on company performance.  Why is high employee morale so strongly related to performance?  Some claim that it is high performance that leads to high morale rather than vice versa: people are happy when their companies are doing well.  We find that the causality is actually two-way.  An example of how this works is in relation to the company’s customers: highly satisfied employees lead to highly satisfied customers, which results in higher sales.  Satisfied customers and higher sales, in turn, result in proud employees who can then enjoy the material benefits that come from working for a successful company.  It’s a “virtuous circle”.

What, in addition to performance, are the policies and day-to-day practices that make for a high-morale workforce?  Our book reports in-depth analyses of more than 42 years of survey research, covering over 13.6 million employees at all levels working for more than 840 companies in all industries.  Our analyses show clearly that high-morale companies satisfy the three main goals of the overwhelming majority of workers – regardless of gender, race, nationality, or age. These goals are:

  • Equity: To be treated fairly in relation to the basic conditions of employment, such as pay, benefits, and fundamental respect for people.
  • Achievement: To take pride in one’s accomplishments by doing things that matter and being enabled to do them well; to receive recognition for one’s accomplishments; and, to take pride in the organization’s accomplishments.
  • Camaraderie: To have warm, interesting and cooperative relations with others in the workplace. 

The three goals are best satisfied by specific leadership and management practices, policies and procedures that, taken as a whole, comprise a “partnership” culture. A partnership culture is one in which employees are treated as genuinely valued assets rather than as enemies to be fought, or children to be coddled, or disposable parts that can easily be replaced.  As described in detail in our book, it is the culture that is characteristic of high-performing companies such as Southwest Airlines and Costco, and, in the nonprofit sector, Mayo Clinic.  In these companies, relationships between management and employees are based on mutual obligations grounded in performance; high levels of trust, transparency and collaboration; and shared rewards.  In both good and difficult business conditions, the employee enthusiasm generated by this kind of corporate culture is a huge factor in their business success.

So, while it may sound like an oxymoron, companies do profit by giving their employees what they want.  There need not be a conflict between company and worker goals.  Companies want to be efficient, predictably and repeatedly delivering to customers what they want and that performance requires the willing cooperation of employees.  Employees want to be able to do their work efficiently and effectively in a collaborative environment where the material success of the company has a visible and positive impact on their own success.  Simply put, in order to succeed, leaders and managers need to understand what employees want from their work and companies and then give it to them!

 

For updated and detailed information about the research on which the book’s conclusions are based, visit us at http://www.sirota.com/enthusiastic-employee.

Please click on the following link to order your copy of The Enthusiastic Employee Second Edition!  Enter Discount Code: ENTHUSIASTIC at checkout to receive 35% off the retail price (excluding bundle purchase). http://www.ftpress.com/store/enthusiastic-employee-how-companies-profit-by-giving-9780133249026

For more information about Sirota, or to schedule a meeting please call us at (914) 696-4700, or email at info@sirota.com.
 

i Sirota, D. and Klein, D. The Enthusiastic Employee Second Edition: How Companies Profit by Giving Workers What They Want. (Upper Saddle River, NJ:  Pearson Education Inc. 2013)

ii Moore, T. 2011. “Investing in the ‘100 Best’ Beats the Market, Hands Down.” CNN/Money Online.

iii Sirota Consulting, LLC. (2003). Unpublished analysis of the relationship between employee satisfaction and defect rates of the Credit and Risk Group of a large financial institution.
 
iv See, for example, Rucci, A. J., Kirn, S. P., and Quinn, R. T. (1998). “The Employee-Customer-Profit Chain at Sears.” Harvard Business Review, (76), 82–97.
 
v Smith, S. B., Del Duco, S. M., and Mischkind. L. A. “The Impact of Social/Cultural Factors on Tornado Warning Performance.” Presented at the Society for Industrial and Organizational Psychology 18th Annual Conference, Orlando, Florida (April 12, 2003).
 
vi Pfeffer, J. (1998). The Human Equation: Building Profits by Putting People First. Boston, Massachusetts: Harvard Business School Press.

 

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