Managers take note, it pays to care

• Chendi Zhang finds positive link between happiness and share prices 
• Google is seen as an example of a firm looking after its staff well
• Its caring attitude is part of its success according to new WBS research
• In the knowledge economy making sure workers are happy is vital

It can’t just be because Google have slides at their offices around the world that the company has been named by Fortune as the best company to work for in the US for the last six years.

It is frequently reported that the Californian tech company receives two million job applications a year. As well as the slides Google also has a free cafeteria for staff, on-site perks that include medical and dental facilities, valet parking, oil change and bike repair, a free laundry service, plus 12 weeks paternity leave. Staff are also encouraged to take time off to educate themselves, with up to $150,000 in reimbursements, and they have unlimited sick leave.

With, according to company review site Glassdoor, some of the highest average salaries in the technology sector it is no wonder graduates are clamouring to get into one of Google’s 70 offices in 40 countries around the world.

Google’s motto ‘don’t be evil’ may be mocked by cynics, but the ubiquitous search engine has developed a caring attitude to its employees.

Laszlo Bock, Senior Vice President, People Operations, at Google, says: “It turns out that the reason we’re doing these things for employees is not because it’s important to the business, but simply because it’s the right thing to do. When it comes down to it, it’s better to work for a company who cares about you than a company who doesn’t. And from a company standpoint, that makes it better to care than not to care.”

From a business and shareholder standpoint it is also better that Google cares about its workers. For Chendi Zhang, Associate Professor of Finance, has found that higher levels of job satisfaction lead to a better share price in the future, so truly looking after workers is good for business and something shareholders should insist on.

“Happier employees are beneficial for the firm and shareholders,” says Zhang, who did the research alongside Phd student Lucius Li, of Warwick Business School, and Alex Edmans, of London Business School.

“In the past paying employees was seen as a cost, as for firms in the 20^th century it was about their physical output, so employees could pay workers according to the number of units they produced.

Why looking after workers is good for business

“But modern firms work in the knowledge economy and so employees are very important, much more than in the past. In research-intensive industries, such as technology, employees are making contributions, and in many modern firms they are adding intangibles to the company like client relationships, rather than in a factory where they are costs. Employees benefit in these modern industries as it is hard to link pay to output, so worker satisfaction is important to keep them motivated.

“Google is ranked as the best place to work and its share price is very high. Indeed, in the software industry employees are key to these firms’ success, it is the workers’ skills, ideas and technical expertise that propels the company forward. Thus, it is important these companies look after their employees and maintain a good relationship with them because they are vital.”

However, Zhang and his colleagues found this relationship between happy workers and higher share price breaks down in countries with more restrictive labour regulations.

Hiring and firing in the US is a fairly simple process, but in Germany the labour market is not as flexible. As well as the US the researchers looked at 13 other countries; Brazil, Canada, Chile, Denmark, Finland, France, Germany, Greece, India, Japan, Korea, Sweden and the UK.

Overall they found the link was still there, and in fact the US firms’ three per cent above-average stock returns placed them just 10^th, with the UK showing 10 per cent returns and Japan nine per cent, though some countries had small sample sizes.

More importantly, those countries where labour market flexibility was low showed negative returns, such as Germany, Denmark and Greece.

“We found that this link between job satisfaction and higher share price does not work if the law already provides a lot of benefits to the employee; where this is the case then the effects are diminishing,” says Zhang.

“In countries like Germany they already have a lot of benefits. If the government provides benefits and welfare to the employer, there are fewer incentives for companies to implement worker-friendly policies, because satisfaction in terms of job security and fair treatment is already high.

"There is much less hiring and firing going on in these countries, so companies are less inclined to work on keeping workers happy as they are unlikely to move away.

“When countries have a flexible labour market the share price is higher for those firms with high levels of job satisfaction, like in the US and UK. One of the motivating factors of having a great place to work is that employees will work harder to avoid losing their job there.”

How does keeping workers happy help with motivation?

To make sure it is not the high share prices causing happier workers, Zhang and his colleagues studied the link between employee satisfaction and future stock returns, as a high-performing company would already have a high stock price and so would not produce a great return.

“We have found a definite link,” says Zhang. “Keeping workers happy helps with motivation, productivity, recruitment and retention. It is not just about higher wages either - there are many other happiness-enhancing practices such as flexible hours, non-financial perks and giving value to an employee's job through social responsibility projects.

“Google and Apple are very good examples. Google has very employee-friendly working conditions and it is now one of the most sought after places to work. These are two very successful companies and it should make managers and investors realise how policies helping their employees can bring increased shareholder returns.”

If more firms follow Google’s lead it might not just be the workers flying down slides but investors as well.

Chendi Zhang teaches Corporate Finance on the Distance learning MBA and Mergers and Acquisitions on the suite of undergraduate programmes.

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