Why Investors Should Demand Employee Satisfaction

By Daniel Ferry - July 5, 2012 | Tickers: COST, GOOG, QCOM, SBUX, WFM | 0 Comments

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What do Google (NASDAQ: GOOG), Whole Foods (NASDAQ: WFM), Starbucks (NASDAQ: SBUX), Costco (NASDAQ: COST), and Qualcomm (NASDAQ: QCOM) have in common? They were the five highest ranked publicly-traded companies in Fortune's 2007 Best Companies to Work For ranking with over 5,000 employees. All of them still rank amongst the best companies to work for in 2012, and four out of five have outperformed the market since then. If you had bought these five companies back in 2007, you'd have achieved 40% returns, even through the recession, compared to a 4.5% loss for the S&P 500 over the same period. This is far from a funny statistical fluke—the best public companies to work for have quadrupled market returns since 1997. The qualities that make a company a great workplace are often the same qualities that make for a great investment: a dynamic and rewarding corporate culture, an inspiring management team, and plentiful internal opportunities to keep workers engaged and motivated.

So how is it that happy employees translate to great returns, and happy shareholders? Google is famous for its special treatment of its creative types, including the Innovation Time Off policy, giving engineers 20% of their time to work on whatever sorts of projects strike their fancy. As an element of a structure that cultivates employee empowerment and ambition, this “free time” has taken ideas that employees have felt most passionate about and yielded some of Google's most popular and profitable products, like Gmail and AdSense. Qualcomm spends more money on orientation and training per employee than its peers, even splurging on team day trips and recreational outings, but ultimately spends less on human resources—with some of the highest employee retention rates in the industry, the semiconductor firm is able to keep the most innovative talent in-house.

The advantages to be gained from happy employees aren't limited to high-skill industries like tech. Whole Foods provides higher compensation, better benefits, and more autonomy to its workforce of over 60,000 than its grocery store peers. It also enforces a salary cap limiting executive compensation to 19 times average pay. The retailer is rewarded with an employee turnover rate of around 15%, compared to an industry average of over 100%. This engaged workforce is the store's primary point of contact with its shoppers, which helps to explain the high rate of customer satisfaction and brand loyalty. 

So if investing in your workers pays off so well, why don't more companies focus on employee engagement and satisfaction? Look no further than the quarter-to-quarter mindset of Wall Street firms and analysts. Short term shareholders see a dollar; they want it in their pocket. Investing in the workforce is not valued. Starbucks rose to global prominence in part by providing training, health benefits, and perks to its employees, called “partners,” that were unheard of in retail. The idea was that a happy and enthusiastic barrista would make customers feel good about a trip to Starbucks, and the coffee store would become a key part of customers' neighborhoods and daily routines. However, when the company ran into trouble five years ago, CEO Howard Schultz publicly complained that large shareholders would call and pressure him to cut health benefits for his employees.

Warehouse retailer Costco has also faced criticism for treating its employees “too well.” Despite outperforming the market by an order of magnitude since going public, CEO Jim Sinegal has had to deal with analysts complaining that "it's better to be an employee or a customer than a shareholder" (Bill Dreher of Deutsche Bank) and newspaper headlines which imply that by being kind to employees, Costco is cheating its investors. Yet the company has found that its workforce is a key driver of the fanatical loyalty of its customers; in recent years this loyalty has allowed Costco to push through membership price increases without complaint and to grow its customer base without spending anything on advertising. The customer experience, it appears, speaks for itself.

The prevailing wisdom in the wake of the recession, however, has been to lay off workers where possible, have remaining workers put in unpaid hours, and push down wages; all factors that I believe have created a productivity bubble. But the performance of companies that buck that trend suggest that rewarding shareholders and rewarding employees are only mutually exclusive goals in the short term. In the long term, spending money to keep employees happy will drive far more shareholder value than returning it all to investors right away. It's up to long-term investors to put pressure on management to care about their workforce, to support them when they do, and to provide a counter-balancing pressure against the “next quarter” obsession of the Wall Street gang. A happy worker, ultimately, is a happy shareholder.

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