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Research suggests happy employees are good for firms and investors

by Ace Damon
Whistle while you work

There is an old joke about a new arrival in Hell that Satan can choose between two different work environments. In the first, worn-out workers throw huge piles of coal into a burning furnace. In the second, a group of workers standing waist-deep in the sewer, drinking cups of tea. By contrast, the convict opts for the second quarter. As soon as the door closes, the foreman shouts, “Right boys, tea is over. Time to get back in your head.

Terrible working conditions have a long tradition. The beginning of the industry was marked by its dirty and dangerous factories (dark and satanic factories). In the early twentieth century, workers were forced to perform monotonous and repetitive tasks by the needs of the production line. However, in a service-based economy, it makes sense that focusing on worker morale can be a much more fruitful approach.

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Proving the thesis is more difficult. But that is the purpose of a new study * that examines the relationship between happiness and productivity of British Telecom workers. Three academics – Clement Bellet of Erasmus University, Rotterdam, Jan-Emmanuel de Neve of Said Business School, Oxford, and George Ward of the Massachusetts Institute of Technology – interviewed 1,800 salespeople at 11 British call centers. All each employee needed to do was click on a simple emoji each week to indicate their level of happiness. These workers were accused of selling their broadband, telephone and television businesses to customers. In total, the authors collected adequate responses from 1,161 people over a period of six months.

The results were impressive. Workers made 13% more sales in the weeks they were happy than in the unhappy ones. This was not because they were working longer hours; in happy weeks, they made more calls per hour and were more efficient at converting those calls into sales. The tricky part, however, is determining the direction of the cause. Workers can be happier when they are selling more because they anticipate a higher bonus or because successful sales pitches are less stressful than failures.

Scholars have tried an ingenious way around this problem by examining a very British issue – the weather. Workers were less happy on days when the weather in their area was bad and this unhappiness turned into lower sales. Because they were making national calls, not local calls, customer dissatisfaction with the weather was unlikely to drive sales figures. So it was the mood of the worker driving sales, not the other way around.

Even if this reasoning proves to be correct, companies may not find comfort. With the exception of setting up all their call centers in Hawaii, companies can't control the weather conditions their workers face. Scholars point out that "what we are unable to do, considering our data and settings, decides whether investing in schemes to increase employee happiness makes business sense." It is possible that the costs of such schemes outweigh any productivity gains.

Clearly more research is needed. But there is evidence that happier workers are good news for shareholders and productivity. Analysts at BoA Merrill Lynch Global Research have studied stocks of listed companies on Glassdoor, a website that allows employees to rate the companies they work for. Those with the highest rankings outperformed those with the lowest rankings by almost five percentage points per year between 2013 and 2019. Analysts also used software that selected the text of employee ratings and found that incorporating this approach improved the trade-off of risk reward (measured by the Sharpe ratio) of the strategy.

Analysts have now applied the same approach to choosing stocks based on specific sectors. Once again, the sectors where workers gave the best reviews of Glassdoor between 2013 and 2019 easily outnumbered those where employees gave a positive signal.

None of this is unequivocal proof. The history of stock investing is full of strategies that worked well when retested only to disintegrate when applied in the real world. But at the very least, it suggests that companies should consider the merits of a satisfied workforce. And that may mean giving them harps and ambrosia instead of hell.

* “Does employee happiness impact productivity?” Saïd Business School Working Paper 2019-13

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