Recent studies of U.S. companies have shown that increased employee satisfaction is linked to higher value for the firm. But what about companies in other countries? A new study shows that the U.S. results are replicated only in countries that have levels of labour flexibility (ease of hiring and firing) similar to the U.S. Companies in countries with low labour flexibility show a more limited benefit from employee satisfaction.
When the most important asset of a company is human capital, attracting and retaining high-quality, motivated employees is the key to sustainable competitive advantage. High employee satisfaction makes the company attractive to the highest-quality potential employees, and keeps current employees motivated to do their best. The impact of employee satisfaction is found in the company’s results. A study, focused on U.S. companies listed as one of the ‘100 Best Companies to Work For in America’ by the Best Place to Work Institute in San Francisco, showed that companies with higher employee satisfaction outperformed their counterparts in terms of stock returns by 2-3%.
The U.S., however, has a very flexible labour market. Flexibility is measured by the ease with which employees can be hired or fired. In markets with high labour flexibility, there are limited regulations covering the recruitment or dismissal of employees. It is easier for companies in these markets to fire underperforming employees and replace them with better quality workers. In markets with low labour flexibility, hiring and firing employees is strictly regulated, imposing severe constraints on employers. For example, procedures for dismissing employees are complex and onerous, the circumstances under which dismissals are permitted are limited, and the mandated costs for each dismissal are high.
In flexible labour markets such as the U.S., the recruitment, retention and motivational benefits of employee satisfaction are intuitively strong. Unsatisfied employees have greater opportunities to find a job in which they will be happier. Satisfied employees, on the other hand, will work harder at staying in the job that makes them happy. However, will employee satisfaction in the context of inflexible markets have the same positive impact on company value as shown in earlier studies?
A new study, led by the same author of the U.S. study, expanded the examination of the link between employee satisfaction and stock returns to 14 other countries. As with the previous study, the researchers focused on companies in these countries listed by the Best Place to Work institute in San Francisco. Using two international indices — the OECD’s Employment Protection Legislation (EPL) index and the Fraser Institute’s Economic Freedom of the World (EFW) index — the study measured labour flexibility based on such issues as the complexity of procedures related to firing; regulations on hiring and firing, including regulations involving reasons for dismissal, severance pay, hours, and temporary fixed-term contracts; extra costs for simultaneous dismissals; and the power of labour unions.
The results are clear. The impact of employee satisfaction on stock returns is related to labour flexibility — the greater the flexibility, the higher the impact. Specifically, according to the study, a one standard deviation decrease in the EPL measure (indicating more labour flexibility) is associated with a nearly .5% “higher market-adjusted monthly return to being a BC [best company to work for].” Similarly, a one standard deviation increase in the EFW measure, which corresponds to a increase in labour flexibility, is associated with increase of two-thirds of a per-cent monthly return to being a best company to work for.
In sum, the U.S. is not alone in showing a link between employee satisfaction and improved corporate value. However, the defining context for this positive correlation is labour flexibility.
Even with U.S.-based studies, researchers are cautious about declaring that employee satisfaction causes better stock returns for companies. A more complete explanation would include all the management practices within those companies. (In other words, happy employees working in companies with poor strategic planning will not make those companies successful.) Nevertheless, the U.S. research does indicate that employee satisfaction contributes to the value of the firm.
Whether directly causal or more correlational, the link between employee satisfaction and stock returns is shown to be significantly weaker in countries with low labour flexibility. The business implications are clear: managers in countries with low labour flexibility should not implement expensive employee-friendly policies to help improve the value of the firm. The implication for investors is equally clear: expect a better return on investment in firms with high employee satisfaction only in countries with high labour market flexibility.
Ideas for Leaders is a free-to-access site. If you enjoy our content and find it valuable, please consider subscribing to our Developing Leaders Quarterly publication, this presents academic, business and consultant perspectives on leadership issues in a beautifully produced, small volume delivered to your desk four times a year.
For the less than the price of a coffee a week you can read over 650 summaries of research that cost universities over $1 billion to produce.
Use our Ideas to:
Speak to us on how else you can leverage this content to benefit your organization. email@example.com