Like Your Job? The Stock Market Will Probably Like Your Company …

Companies trying to decide whether it’s worthwhile to create a friendly workplace could do well to consider this: Companies that employees report to be a good place to work have significantly outperformed the S&P 500 over the past six years.

The data comes from Glassdoor Inc., an online job and company information website, which solicits employees to post anonymous reviews of their employers. The employee ratings are aggregated and analyzed to produce an annual list of the best places to work, published since 2008. As with restaurant review sites like Yelp or travel sites like TripAdvisor, the quality of the reviews and information people offer can vary widely. But aggregating thousands of employee ratings gives some sense of how workers generally perceive their company.

And it turns out that companies that were identified as good places to work generally outperformed the S&P 500 over the next year.

The research from Andrew Chamberlain, the chief economist of Glassdoor, used the simplest method possible. Each year, buy stock in each of the companies that were the best places to work. When the new list comes out, sell the stock in companies that dropped off the list and buy stocks in the new additions. Since 2008, the S&P 500 has returned 121%, but the companies that employees rate well have returned 218.5%.

Why would companies that employees like do so much better than overall companies? Mr. Chamberlain said he wasn’t sure what the research would show. After all, it could be the case that money spent on employee perks is a sign of a loosely managed organization, or one that’s lost focus. Instead, the significant outperformance of good places to work could have three explanations, he said.

It could be that employee satisfaction simply reflects the company’s financial health. “When companies are doing well and they’re flush with cash, they have the luxury of improving company culture,” Mr. Chamberlain said. “When the company starts performing poorly, that’s the first thing that gets cut.” Anyone who has ever worked at a flailing company knows how bad it is for morale. So the employee satisfaction ratings could simply reflect the company’s financial health.
It could be that companies with good cultures are better able to retain their most talented employees. “That improves your performance,” Mr. Chamberlain said., “If you have a toxic company culture, you chase away your best workers.”
The final possibility is that publicity for places with good office culture attracts investors. Perhaps algorithms search for positive information about a company, or some investors hunt out places with happy workers.

It could be some combination of the three factors–or it could be a quirk. Six years is not that long. But Mr. Chamberlain is not alone in finding that companies with satisfied employees fare better. Alex Edmans, an economist at the University of Pennsylvania and London Business School who studies corporate finance, looked at companies identified by Fortune magazine as part of its annual list of the “100 Best Companies to Work For in America.” From 1984 to 2009, those companies significantly outperformed their benchmarks, his research found.

Mr. Edmans said the data showed that “employee satisfaction is positively correlated with shareholder returns and need not represent managerial slack.” He also said the information suggests “the stock market does not fully value intangibles.”

But investors who think they see easy money beware: that it worked in the past is no guarantee the strategy will remain effective in the future. For one thing, as the relationship between rankings and stocks becomes well known, the strategy should become less effective.

“If the market has now learned of the positive correlation between list inclusion and future returns, one should expect the returns to go down over time,” Mr. Edmans cautioned in his paper. And if companies think there’s a stock boost from inclusion on the list, they could focus on gaming the rankings rather than working on the underlying issues that truly boosted their performance.

For investors there may not be easy money on the table, but for managers and CEOs, the research strongly suggests that it’s not bad for the firm or bad for the economy when companies make themselves a satisfying place to work.

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Original post –

Like Your Job? The Stock Market Will Probably Like Your Company …

Author

Josh Zumbrun