High Employee Satisfaction Linked to Better Corporate Earnings

Could high employee satisfaction mean more positive earnings for companies?

Alex Edmans, an advisor at Research Affiliates and a professor at the London Business School, discussed his research that looks into the link between employee satisfaction and performance in a recent video conversation for Research Affiliates.

In 2011, Edmans published research on employee satisfaction and whether it matters in terms of corporate performance and stock market returns.

“Employees are a key asset, so there is a good reason for a link between them and a company’s future stock performance,” he said.

To measure employee satisfaction, Edmans used the list of the “100 Best Companies to Work For in America,” which has been available since 1984. The list includes quantitative factors, such as pay and benefits, as well as qualitative factors, such as trust and management, pride in job, and camaraderie with colleagues.

To measure financial performance, Edmans looked at future stock returns.

Through his analysis, what Edmans found was that a value-weighted portfolio of the “100 Best Companies to Work For in America” earned an annual four-factor alpha of 3.5% from 1984 to 2009, and performed 2.1% above industry benchmarks.

The Best Companies also exhibited significantly more positive earnings surprises and announcement returns.

These findings are consistent with human capital-centered theories of the firm in that employee satisfaction is positively correlated with shareholder returns.