Happy Workers, Higher Stock Price

Alex Edmans is assistant professor of finance at the Wharton School, University of Pennsylvania.

How did you conclude that happy employees lead to higher stock prices?

My work uses the Fortune magazine study "The 100 Best Companies to Work For," which is compiled by an independent institution. The survey tries to get at the intangibles of employee satisfaction -- feeling respected, participating in decisions, enhancing self-esteem. From 1999 through 2008, the returns on portfolios based on these companies have beaten the market by an average of four percentage points a year.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Wouldn't you expect that?

If you stopped the average person on the street and said, "A new study finds that companies whose workers are happier do better," they'd say, "That's obvious." But it's not. The old view was that satisfaction was a bad thing. Every dollar given to employees was a dollar taken away from shareholders. If you spent on a corporate gym, you were not spending on dividends.

So why is employee satisfaction good for shareholders?

Because it leads to motivation, retention and, ultimately, productivity. A hundred years ago, motivation wasn't a problem. People worked in factories and produced widgets, and each widget was worth 25 cents. People were motivated to work hard because they were paid according to their output.

Now, companies look to engage their employees. Satisfied workers bring in new business, mentor subordinates, recruit people and encourage teamwork. If workers intrinsically feel that they're part of a team, they're like sports fans -- they live and die by their team and evangelize about it.

We're at nearly 10% unemployment and layoffs are the law of the land. Can companies afford to cater to workers now?

I think the economic instability might actually increase the benefit. Firms that retain and motivate workers despite current conditions will have an even greater edge.

How can investors profit from your findings?

The market doesn't take intangible assets -- such as employee satisfaction, advertising, and research and development -- into account the same way it looks at, say, cash flow. So companies with strong intangibles are undervalued, representing good bargains.

Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage, authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.