Satisfied Workers Generate Greater Returns

Discussion
Jan 15, 2008

By George Anderson

Some companies may be slow to recognize it, but the value of employees continues to go up and, according to Wharton finance professor Alex Edmands, businesses that do the best job of making workers feel valued are those that tend to perform best.

"One might think this is an obvious relationship — that you don’t need to do a study showing that if workers are happy, the company performs better. But actually, it’s not that obvious," Prof. Edmans told Knowledge@Wharton. "Traditional management theory treats workers like any other input — get as much out of them as possible and pay them as little as you can get away with."

Many modern managers understand the role that employee satisfaction plays in long-term corporate performance but the short-term thinking that defines much of American business often results in decisions that come at the expense of workers.

"This is a large concern people have had for a couple of decades now — that the American corporate system is short-term or myopic," he said.

As support, Prof. Edmans points to corporations that have made Fortune’s list of the 100 Best Companies to Work for in America. Companies that made Fortune’s list between 1998 and 2005 returned 14 percent per year compared to six percent for the overall market.

"When I was at Morgan Stanley, we would value firms according to their tangible assets, cash flows and earnings — which is common across most of Wall Street and much existing academic research. But nowadays, significant components of a firm’s value cannot be captured by accounting numbers," said Prof. Edmans.

Discussion Question: Do you believe there is a direct correlation between employee satisfaction and company performance? Have retailers learned to value intangibles such as employee satisfaction in achieving company performance goals or does the emphasis remain solely on traditional accounting measures?

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20 Comments on "Satisfied Workers Generate Greater Returns"


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M. Jericho Banks PhD
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M. Jericho Banks PhD
14 years 4 months ago
Employee dissatisfaction increases employee pilferage. For NBA fans, that’s a four point play for the opposition. A common NBA scenario would include the minus-two points you failed to score on an easy-yet-bonked layup combined with the plus-two points the other team scored on the resulting fast break due to your boneheaded play. That’s a deficit of four points. In retail, mistreated employees not only cost you sales (subtract two points), but take you to the cleaners with theft (subtract two more points). That’s a four point play against you. Despite the Kumbaya employee satisfaction philosophies espoused by those in the business of selling same, it’s naive to believe a single formula can help everyone perform better. This mirrors the demise of CRM (Customer Relationship Management). In that example, it turned out that customers are not fond of being managed. Today’s employees are not fond of being managed, either. The logical (and successful) response to the ennui associated with CRM was CMR, Customer Managed Relationships, in which shoppers were able to shape their unique interactions with… Read more »
Tommy White
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Tommy White
14 years 4 months ago

I have written a book, THE WRECKLESS MANAGER, on this subject. It covers a no-B.S. way of managing others that allows managers and employees to be their natural selves, to harness the power of the human spirit, and produce extraordinary results. In my thirty plus years in retail operations, I have seen a direct result between a positive management style which produces high employee morale resulting in increased profits. Managers that work from a place of insecurity and fear will always be trumped by managers working from the good place of security and clarity.

John Lansdale
Guest
John Lansdale
14 years 4 months ago

No brainer–unless you own the company and have to pay. Employees are an investment. Making them feel good doesn’t come from the personnel/PR department though. It comes from them adding value and knowing it. Personnel/PR might help by keeping communication open and honest so–all–work accomplished is recognized.

Tom McGoldrick
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Tom McGoldrick
14 years 4 months ago

Having spent a good part of my career showing my clients the linkage between employee satisfaction, customer satisfaction and financial performance, it is hard to believe this is even news. Way back in the ’90s we were doing linkage research for retail organizations, banks and restaurant chains.

We have learned that satisfaction is necessary but not sufficient to drive financial performance. Employees also have to feel that the company they work for values quality and is customer focused.

Mary Baum
Guest
Mary Baum
14 years 4 months ago
Fortunately, I don’t have to believe it–at my client, Maritz, we have years of data from our employee-engagement programs that connect employee engagement to better business results with (figuratively speaking) an iron cable. It’s not the oft-quoted bromide that happy employees are more productive–that’s an open question. And the issue isn’t as much employee satisfaction as employee engagement. Satisfaction could come from any number of factors, and could show itself in any number of behaviors. But employee engagement–that’s what we’re after. That’s an employee who goes the extra five miles to make sure a customer gets exactly what she wants, or as close to it as possible, under very difficult circumstances. For example: Late on Christmas Eve I stopped in at my local Panera Bread to pick up my pastry order. It was lost, and there was obviously no pastry left in the store. While I was busy deciding how mad I was going to get, the store manager got on the phone to every other store in the area and located enough pastries to… Read more »
Mel Kleiman
Guest
14 years 4 months ago

I love research, and see study after study that have shown that employees who are engaged, have bought vision into the company, and are treated well do become one of the strongest drivers of success.

Just start to name the companies that you respect and want to do business with, be they in retail, hospitality, manufacturing, or technology. Then take a look at their people process and I think you will see an interesting correlation.

jack flanagan
Guest
14 years 4 months ago

To say that “nowadays, significant components of a firm’s value cannot be captured by accounting numbers” is a statement of the blindingly obvious.

Fortunately there are often many other (non-accounting) numbers that are useful. Market share trends, more granular customer data trends, employee trends (such as Mark Lilien’s comment on turnover), etc.

Likewise, it’s a bit simplistic to simply generalize that employees are only viewed as a cost, not a resource. Do some retailers act that way? Absolutely. However there are more likely far more retailers that have been on a sustainable growth path that understand (and act as if) employees are a key resource–not just a cost.

These aren’t new or difficult to understand concepts. “When I was at Morgan Stanley, we would value firms according to their tangible assets, cash flows and earnings–which is common across most of Wall Street and much existing academic research” says more about Wall Street and academics than it does about (many) retailers.

J. Peter Deeb
Guest
14 years 4 months ago

The face of a company, particularly at retail, is the front line employees. In almost all cases, the more successful retailers–particularly those who do not advertise the lowest prices–do a better job of training, compensating and recognizing employee contribution. The level of customer service delivered is usually the direct result of the culture fostered at companies like Wegmans, Starbucks, Ritz Carlton etc.

Customer service translates to sales and profits when internal customers are also serviced with the same passion as consumers.

Kai Clarke
Guest
14 years 4 months ago

This is as obvious as a well-made product. The returns have implications up and down the organization, and impact everything that the satisfied employee does. Employee satisfaction ranks with product and customer satisfaction, and the best performing companies realize this. Keeping employees satisfied translates into competitively paid employees, a more challenged workforce, and a well-communicated organization. This reduces turnover, raises the bar for other employee performance and demands better product quality at every level.

Doron Levy
Guest
Doron Levy
14 years 4 months ago

The best answer I can come up with is that some companies do and some don’t. Smaller chains seem to have more of a vested interest in making employees happy. I attribute it to the size of the company and access employees have to resources and executives. Being on a first name basis with the VP of Operations goes a long way towards building camaraderie.

In some big boxes, floor associates have never even met the store manager and work as if their own department is their own world. The challenge is keeping staff satisfied but in retail, front line staffing is everything and larger chains need to take a micro economic view when working with an individual location. The article is correct that retailers take a short term view of things and of course it is not the correct way to plan a business. Bottom line is, happy staff equals better business.

Mark Lilien
Guest
14 years 4 months ago

Wharton Professor Edmans would have a much easier time proving that employee satisfaction leads to better financial performance if every publicly-held retailer was required to publish 2 statistics each year in the annual report: (a) number of W-2’s mailed at the end of the year and (b) average number of people on the payroll each week. Informally, I’ve noticed that if a/b is 1.5 or less, that retailer is outstanding. If the ratio is 1.6 to 2, that retailer is typical (mediocre). If the ratio is above 2, that retailer is worse than average (sloppy). I’m sure the averages would differ for different categories (restaurants, unionized supermarkets, specialty clothing stores) but the point would be easily made because math is unambiguous.

Max Goldberg
Guest
14 years 4 months ago

I do believe that there is a direct correlation between employee satisfaction and retail performance. It all comes down to customer service. When consumers are happy they are loyal and become advocates for a brand. Having a strong, loyal consumer base allows a retailer to pursue strategies other than having the lowest price. It’s an interesting cycle; one that deserves more exploration.

Roger Selbert, Ph.D.
Guest
Roger Selbert, Ph.D.
14 years 4 months ago

The focus of retail industry employment is migrating from quantity to quality. Total retail employment is shrinking because of cost-cutting, consolidation and technology advances, but industry employment is growing in higher-skilled occupations, especially those involving technical, logistical and managerial skills.

Stores still have to scramble to find qualified employees who meet their needs, and still need to make competitive offers to get the people they want. The unemployment rate for people 25 years of age and older with at least a bachelor’s degree is just l.9%; that spells trouble for retailers.

As for employee satisfaction, consider Best Buy’s Results-Only Work Environment (ROWE): employees are allowed to decide how, when and where they get their jobs done. The only yardstick for evaluating employees is whether they meet goals for productivity. ROWE has had a significant impact: productivity jumped by 35%. Are profitability and stock price tied directly to intangibles? Of course they are.

Susan Rider
Guest
Susan Rider
14 years 4 months ago

Absolutely. Employee passion and motivation is a key element in the company success. For instance, you are checking into a hotel…the counter person is rude and not helpful. Do you want to go back there? It doesn’t matter how good the pool is or the bed, if you are treated badly the other assets usually don’t factor in to customer satisfaction. The leaders and companies that don’t get this fail.

We have all heard of acquisitions that seem good on paper but after the acquisition, anyone with domain knowledge is let go. What happens to the company that was acquired? It struggles greatly.

Ted Hurlbut
Guest
Ted Hurlbut
14 years 4 months ago

This is one of those things that almost seems too obvious. But employee satisfaction needs to be carefully defined. It involves a properly trained and prepared employee, who fully understands the expectations, and is challenged with achievable objectives. A satisfied employee understands that their contribution is important, and derives a genuine sense of accomplishment.

In the current environment, this is a distinct critical advantage that many smaller and independent retailers have over their larger competitors. These years have long understood that their customers turned to them for more in-depth product knowledge and a more complete range of services than they could get elsewhere. this requires the active participation of highly engaged, knowledgeable associates working throughout the company.

Brian Anderson
Guest
14 years 4 months ago

Years of research have proven that when people get a reward outside their paycheck, they deliver better performance, make more sales, hit higher targets. The big question is which performance incentive program will deliver the sales increases and performance improvements you want for your business?

Mike Osorio
Guest
Mike Osorio
14 years 4 months ago

Mary Baum got it right by emphasizing employee engagement vs. employee satisfaction. Only a truly engaged employee does the extra things necessary for exceptional customer experiences that build lasting customer relationships. The obstacles in the way of leaders working toward engaged employees include the focus on short-term financials, the simplistic idea of “happy” employees, over-extended, under-trained front line supervision, and detached senior executives.

The solutions are not easy, but start with a long term view (ala Google) and a CEO and top lieutenants that live and breathe every day their unshakable vision of customer and employee engagement.

Jeff Hall
Guest
14 years 4 months ago

George is spot on with the relationship between a company’s long-term success and satisfied workers: “Businesses that do the best job of making workers feel valued are those that tend to perform best.”

While the answer varies across industries and companies, the key is in consistently engaging with and supporting employees in such manner that they feel authentically valued.

We tend to see smaller and medium-sized companies having a strategic advantage in this arena, as their organizational dynamics result in more hands-on and nimble management styles. This allows for employee value to be created in unique and sometimes customized ways–a one-to-one approach to employee engagement driving higher levels of satisfaction, loyalty, and more positive customer-facing interactions.

Terrie Ellerbee
Guest
Terrie Ellerbee
14 years 3 months ago

In the grocery industry, you’ve got to look at your best front-end employees and reward them, for goodness sake. I know of one local regional giant who starts their cashiers at minimum wage. The head casher is the face of one particular store that I frequent. She is fabulous, knows numerous customers by name, makes decisions for the benefit of the customer and runs a tight ship. The woman makes $7.50 an hour and barely makes ends meet.

What’s wrong with this picture? When will the powers that be realize that great employees like this can’t live on those kinds of wages…? Naturally, she attends school at night so that she can find another career that will pay her basic bills!

Michael Lorden
Guest
Michael Lorden
14 years 3 months ago

If you really need verification the statements are true, I only have two words for ya…..Circuit City.

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