By Elias L. Ohneberg, CERF Research Associate, Cambridge Judge Business School, University of Cambridge
Society increasingly emphasises well-being and the importance of a healthy work environment. A survey conducted in 2022 by Gallup highlights that 23% of the working population in the United States (US) are unhappy in their jobs. With the growing movement towards better treatment of employees and the mounting evidence of widespread dissatisfaction in the workforce, it is crucial to explore the potential consequences of employee satisfaction on individual employee behaviour and performance, as well as the overall success of organisations.
Theoretical research vs casual empirical evidence on employee satisfaction
Existing theoretical evidence suggests that policies that improve employee satisfaction can increase employee effort and productivity via the norm-gift-exchange model (Akerlof, 1982). Suppose there is a social norm for reciprocating gifts, such that a gift received requires a gift in kind. Employees may view employee satisfaction improving policies as a gift from their employer. As a result, employees increase their effort provision as a gift in kind.
Despite existing theoretical evidence, causal empirical evidence on the relationship is sparse. Determining the precise impact of employee satisfaction on performance in an empirical study is, unfortunately, far from straightforward. Acquiring and measuring employee-level data on performance and satisfaction is challenging due to data availability and the difficulty of defining a precise measure of employee performance. Measuring employee performance is particularly difficult because different job positions have various desired outputs, making the use of a single performance measure impossible. Consequently, previous research has primarily focused on correlating firm-wide employee satisfaction with aggregate firm performance, typically assessed through balance sheet items or stock performance (Edmans, 2011; Green et al., 2019; Huang et al., 2015; Symitsi et al., 2021). Unfortunately, these aggregated company measures are not well-suited for examining the influence of employee satisfaction on individual performance. Multiple factors contribute to employee performance, including their knowledge, skills, motivation, engagement, support from colleagues, and the organisation’s overall effectiveness. As a result, it is difficult to isolate an individual’s contribution to organisational outcomes and attribute those outcomes to their performance.
Exploring the role of employee satisfaction on mutual funds
To address this issue and provide a more nuanced understanding, my paper with Dr Pedro Saffi (University of Cambridge) explores the role of employee satisfaction on performance in US active equity mutual funds. Mutual funds serve as an ideal setting for this research because they offer a tangible, quantifiable connection between employee effort and performance. Portfolio managers’ decisions within asset management companies to construct portfolios can be readily and accurately evaluated through fund performance indicators, such as fund returns and volatility. Furthermore, changes in these indicators can be directly linked to a manager’s effort and risk-taking. Similarly, the efforts of marketing and sales employees of asset management companies can be assessed through the fund’s ability to gather assets.
We use approximately one million employee job reviews matched to 437 asset management companies managing 3,266 funds from 2009 to 2019 from Glassdoor.com to measure employee satisfaction. This rich dataset allows us to compute satisfaction scores for specific sub-groups within each company’s workforce. We evaluate satisfaction levels for employees in positions directly related to mutual fund performance and those in marketing and sales roles, which should influence the assets under management of the mutual funds.
Selection bias and empirical design
Despite our ability to define clear and quantifiable performance and satisfaction measures in our mutual fund setting, we must remain careful in our empirical design. Due to our reliance on review data from Glassdoor.com, a mutual fund is only included in our sample if at least one employee decided to write a review on Glassdoor.com. Therefore, our sample of mutual funds may be subject to selection bias. Selection bias may arise if mutual funds with an existing employee job review on Glassdoor.com are fundamentally different to mutual funds without an existing review. To account for this potential bias, we employ a Heckman-Selection model. This model tackles our sample selection bias by directly modelling the probability of a mutual fund’s inclusion in our sample. As an essential instrument in modelling sample inclusion, we use the staggered adoption of Anti-SLAPP (Strategic Lawsuit Against Public Participation) laws across the United States. A SLAPP suit is a lawsuit that aims to censor criticism by burying the defendant in legal costs. Anti-SLAPP laws provide extra layers of protection to reviewers on Glassdoor.com. As a result, the passing of Anti-SLAPP laws increased the number of reviews written and lowered average employee satisfaction scores on Glassdoor.com (Chemmanur et al., 2019).
The effect of reverse causality in employee satisfaction
Even after adjusting for potential selection bias, we still face another significant problem: reverse causality. The effect we estimate using our empirical techniques might be due to improved mutual fund performance causing higher employee satisfaction. For instance, if a mutual fund performs well, the company may generate higher profits, which could allow the company to increase employee benefits that, in turn, impact employee satisfaction. To mitigate this reverse causality concern, we implement an empirical design that exploits mergers between asset management companies. We assert that an individual mutual fund manager cannot influence whether a competitor acquires the asset management company they work for. Consequently, when a high employee satisfaction firm absorbs a manager employed by a low employee satisfaction firm through the acquisition of their company, the employee experiences an external increase in employee satisfaction unrelated to their personal attributes or performance. In line with this idea, we analyse if mutual funds acquired by companies with higher employee satisfaction exhibit superior performance post-merger compared to those acquired by companies with lower employee satisfaction scores.
The positive influence of employee satisfaction on mutual funds
Throughout all our empirical designs, we find that the employee satisfaction of individuals in investment roles positively influences mutual fund performance. Moving from the lowest to the highest possible employee satisfaction score on the 5-point scale increases mutual fund risk-adjusted performance by 1.44% per year. Additionally, we demonstrate that higher marketing and sales personnel satisfaction is associated with larger mutual funds. Our findings, thus, underscore the importance of employee satisfaction in shaping the success of mutual funds. More broadly, the insights provided by our study highlight the need for companies to consider employee well-being as a potential driver of organisational performance and growth. Through a better understanding of the role of employee satisfaction on job performance, organisations may expand more resources into developing strategies and policies aimed at fostering a positive work environment, which in turn, may lead to improved outcomes for both employees and their companies. This blog is based upon my working paper, co-authored with Pedro A. C. Saffi, Satisfied Employees, Satisfied Investors: How Employee Well-being Impacts Mutual Fund Returns (February 21, 2023). Available at SSRN: https://ssrn.com/abstract=4338441 or http://dx.doi.org/10.2139/ssrn.4338441
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