It’s often enough necessary to shake the head to get rid of the steady hum of bullshit being shouted at us. Innumerable studies showing us that this or that – say, diversity among management or workforce – makes a company more productive. Sure and OK, perhaps it does. The bullshit being the next step when we’re told that therefore we must have laws to impose this or that. The failure being to miss that we’ve already got a mechanism which does this, that market economy out there. More productive companies outcompete less. So, anything which increases productivity will spread through the economy over time.
Also, if it doesn’t spread then it’s not increasing productivity.
Here we’ve proof that a happier workforce is a more productive one. Excellent and why not? Which means that we don’t need to do anything in a societal or political sense. Because we’ve already got those incentives in place to get employers thinking about how to make their workforces happier. Those who don’t do it will go bust and be removed from the economy.
The great joy of this being that the more the finding itself – happier people are more productive – the less we need to do anything given that we are in a market economy.
Employee wellbeing, productivity, and firm performance: Evidence from 1.8 million employees
Christian Krekel, George Ward, Jan-Emmanuel De Neve 21 April 2019
A growing number of companies place a high priority on the wellbeing of their workers, assuming that happier workers will lead to improved productivity. This column examines this link based on a meta-analysis of independent studies accumulated by Gallup, covering the wellbeing and productivity of nearly 2 million employees and the performance of over 80,000 business units, originating from 230 independent organisations across 49 industries in 73 countries. The results suggest a strong positive correlation between employee wellbeing, productivity, and firm performance.
A growing number of companies claim to place a high priority on the wellbeing of their workers, and there is a fast-growing industry of firms selling products related to employee wellbeing. But does investing in higher employee wellbeing actually lead to higher employee productivity and, ultimately, any tangible benefits to the bottom line of businesses? Experimental evidence (e.g. Oswald et al. 2015) suggests the answer is “Yes”. However, real-world evidence is largely missing at present.
To begin to answer this question more systematically, we collaborated with the Gallup Organisation in order to look into its client database (Krekel et al. 2019). Gallup has been gathering data on employee wellbeing, alongside employee productivity and firm performance outcomes, since the mid-1990s. We conducted a meta-analysis of 339 independent studies accumulated by Gallup, including the wellbeing and productivity of 1,882,131 employees and the performance of 82,248 business units, originating from 230 independent organisations across 49 industries in 73 countries.
Higher employee wellbeing is associated with higher productivity and firm performance
Figure 1 presents our main finding – it shows true score correlations between employee wellbeing (measured as employees’ satisfaction with the firm as a place to work),1 employee productivity, and firm performance as means, taken across all industries and regions. We focus on four key performance indicators, arguably the most important ones from a business perspective: customer loyalty, employee productivity, business unit profitability, and staff turnover.2
Figure 1 Correlation between employee satisfaction, productivity, and firm performance
(Gallup client database, 95% confidence intervals)
Notes: The figure plots adjusted average correlation coefficients between employee satisfaction and different performance outcomes originating from a meta-analysis of 339 independent studies that include observations on the wellbeing of 1,882,131 employees and performance of 82,248 business units. See Krekel et al. (2019) for more details.
We find employee satisfaction to have a substantial positive correlation with customer loyalty (r = 0.31) and a substantial negative correlation with staff turnover (r = -0.25). The correlation with employee productivity is positive and strong (r = 0.2). Importantly, higher customer loyalty and employee productivity, as well as lower staff turnover, are also reflected in higher profitability of business units, as evidenced by a moderate, positive correlation between employee satisfaction and profitability (r = 0.16).3
Some differences between industries, little between regions
Correlations differ somewhat by industry. Figure 2 shows true score correlations between employee wellbeing, productivity, and firm performance as means by industry, distinguishing finance, retail, services, and manufacturing sectors.
Figure 2 Correlation between employee satisfaction, productivity, and firm performance, by industry
(Gallup client database, 95% confidence intervals)
Notes: The figure plots adjusted average correlation coefficients between employee satisfaction and different performance outcomes, by industry, originating from a meta-analysis of 339 independent studies that include observations on the wellbeing of 1,882,131 employees and performance of 82,248 business units. See Krekel et al. (2019) for more details.
For most outcomes – customer loyalty, staff turnover, and employee productivity – employee satisfaction is most important in finance, followed by retail, and then closely, by services. The correlation between employee satisfaction and business unit profitability appears to be somewhat stronger in the finance industry than in other industries, except manufacturing. In fact, for manufacturing, we find that employee satisfaction has the weakest correlation with employee productivity but the strongest with business unit profitability amongst all industry sectors. Note, however, that 95% confidence bands between industries are largely overlapping, pointing towards the universal importance of employee wellbeing across industries. We find little evidence for differences between firms based in the US and other world regions.
The analysis suggests a number of potentially fruitful avenues for future research. One potential reason for the particularly strong link between wellbeing and productivity in the finance industry may have something to do with the working conditions in that sector, in particular, relatively higher stress and lower work-life balance, which may outweigh positive benefits of higher pay. This suggests that there is more room in the finance industry than in other sectors for employee wellbeing to unlock positive productivity outcomes.
Manufacturing is highly focused on process efficiency and safety as primary metrics within plants, which relate directly to costs. Job attitudes are likely to relate to discretionary effort, which then impacts quality, efficiency, and safety within manufacturing plants and teams, possibly explaining the higher correlation between employee satisfaction and business unit profitability in the manufacturing sector.
Why would higher employee wellbeing lead to higher productivity?
Of course, from this meta-analysis alone we cannot make any strong causal claim about the effect of employee wellbeing on productivity or firm performance. There exists, however, both theoretical and empirical literature that points in this direction.
Human relations theory states that higher employee wellbeing is associated with higher morale, which, in turn, leads to higher productivity (Strauss 1968). Conversely, expectancy theories of motivation postulate that employee productivity follows from the expectation of rewards (including higher wellbeing) generated by eliciting effort (Lawler and Porter 1967, Schwab and Cummings 1970). Emotions theory argues that employees’ emotional states affect their productivity (Staw et al. 1994), and in particular, that positive emotions lead to heightened motivation, and hence better job outcomes and organisational citizenship (Isen and Baron 1991). A further channel is through positive, stimulating arousal, which can result in more creativity (Isen et al. 1987) or positive changes in attitudes and behaviour (Baumeister et al. 2007).
In line with these predictions, Oswald et al. (2015) show in a laboratory experiment that increases in wellbeing were strongly associated with increases in productivity of up to 12% in an incentivised real effort task. In another study, De Neve and Oswald (2012) find that individuals who reported higher levels of life satisfaction at ages 16, 18, and 22 have significantly higher levels of earnings later in life. This holds even when comparing between siblings and holding constant a wide range of observables including education, intelligence, physical health, and self-esteem.
Employee wellbeing also seems to pay off on the bottom line of business: Edmans (2011, 2012) studies the relationship between employee satisfaction and long-run stock market returns using a value-weighted portfolio of the “100 Best Companies to Work for in America”. The author shows that, during the period 1984 to 2011, these companies had between 2.3% and 3.8% higher returns than the industry average.
The work presented here is suggestive of a strong, positive correlation between employee wellbeing, productivity, and firm performance. The evidence-base is steadily mounting that this correlation is, in fact, a causal relationship (running from wellbeing to productivity). But clearly, there is a need for more field and/or natural experiments in real-world firm settings in order to make the business case for improving employee wellbeing clear-cut.
This calls for more consistent measurement of employee wellbeing in firms, alongside productivity and firm performance outcomes. Interventions aimed at raising productivity should target the key drivers of wellbeing at work, such as social relationships, making jobs more interesting, and improving work-life balance (Krekel et al. 2018). They should be rigorously evaluated (ideally by means of randomised controlled trials), and costs should be reported upon to identify the most cost-effective ways of raising employee wellbeing, productivity, and ultimately, firm performance.