Invest in Employee Satisfaction

GLASSDOOR ECONOMIC RESEARCH

For Better Financial Returns, Invest in Employee Satisfaction

Overview

New research led by the University of East Anglia’s Norwich Business School reveals a strong link between employee satisfaction and company financial performance in the UK.

The research, Employee Satisfaction and Corporate Performance in the UK, found that companies achieving a one-star-higher overall Glassdoor rating saw a higher annual return on their assets of nearly 1%. Publicly-traded companies experienced increased stock portfolio returns of up to 16% per year. In short, companies rated higher on Glassdoor for satisfaction by their current employees are more profitable than those with lower ratings. So, what drove the study and how did the team reach their conclusions?

Companies rated higher on Glassdoor for satisfaction by their current employees are more profitable.

Satisfied Employees Drive Business Results

Previous American studies have shown that the more satisfied the employees, the better the business results. In the UK, it had not been easy to measure employee satisfaction because companies do not share their internally-conducted employee satisfaction surveys publicly. This academic study by Norwich Business School was the first of its kind to examine the link for UK companies, both private and public, using Glassdoor’s extensive dataset.

Many British companies still tend to hold a post-Industrial Revolution view that businesses derive their value from physical assets, with people employed to merely operate those assets. But, as economist Luigi Zingales points out, ‘Employees are not merely automata in charge of operating valuable assets but valuable assets themselves.’1

In our modern, knowledge-based economy, organisations are increasingly beginning to realise that creative, innovative, satisfied employees bring enormous value to their companies. A business is only as good as the people who work within it.

That said, convincing shareholders to invest in employee satisfaction is trickier when the benefit isn’t always directly reflected in the bottom line. The financial impact of employee satisfaction had never been measured empirically in the UK — until now.

What Did the Study Explore?

Using Glassdoor UK data, Norwich Business School researchers looked at the four-year period, 2014 to 2017. They analysed 35,231 employee ratings for 164 large UK companies, both private and publicly listed. They selected ratings from current employees only (to avoid results being skewed by potentially biased ex-employees) and companies with a minimum of 25 reviews per year: at least 100 reviews in total. They also accounted for leverage, total assets, and firm size.

The research ranked the firms in their chosen sample: from those that had the best Glassdoor ratings to those that had the worst. They then chose the top-rated 25% to include in an investment portfolio. Each month, they checked these firms to see if their rankings changed, making sure that only the top-ranked 25% were included in the portfolio. The researchers had tracked the performance of this portfolio over the four-year period.

It’s worth mentioning here that the time frame studied includes the increased uncertainty in the UK labour market due to the 2016 Brexit referendum.

To determine whether there was a correlation between employee satisfaction and an impact on a firm’s financial performance, the research team was expecting to see movement in employee ratings reflected in stock price or equivalent returns.

Top 5 Findings

  1. UK firms rated highly by their current employees achieve superior profitability compared to those rated poorly. A 1-star increase in Glassdoor satisfaction rating leads to around a 1% increase in return on assets annually.
  2. Employee reviews on Glassdoor can be used to predict the financial results of UK firms, highlighting the financial value of investing in employee satisfaction.
  3. The higher performance of the stock portfolio that included the top 25% best-ranked companies demonstrated that investments in companies with high Glassdoor ratings earn superior returns. For the best-rated companies, this ranges annually between 10% and 16% on average.
  4. Performance remained strong during the Brexit referendum period, indicating that employee satisfaction can be a source of competitive advantage in challenging, uncertain times.
  5. The study proved that when it comes to investing in employee satisfaction, the benefits outweigh the costs involved.

Key Takeaways

Norwich Business School’s findings support a human-centred view of companies; they found a significant positive relationship between employee satisfaction and company profitability. The value of this is not always fully recognised by shareholders and equity investors in the UK, but it should be: it appears that investing in companies with high levels of employee satisfaction results in significant, superior returns.

Citations

1. Source: Zingales, L., 2000. In search of new foundations. Journal of Finance 55, p.1641