- Blog post
Chickens and eggs: Does employee satisfaction lead to higher profits, or do higher profits boost employee satisfaction?
It’s well established that organizations with higher levels of employee satisfaction make more money. So it’s obvious that investments in employee satisfaction yield a good return, right?
Well…maybe. But what most of those studies of employee satisfaction are showing is correlation, not causation. And there’s a plausible argument that the causation could be in the other direction.
In other words, if you happen to work in a company that’s doing well, aren’t you more likely to be happier? A profitable company can afford to invest in their employees, offering higher salaries, better perks, more training, fancier digs and all the rest. A cash-strapped organization has to make unpopular choices just to keep the doors open – salary freezes, layoffs, asking employees to do more with less. So, the argument goes, no wonder employee satisfaction in these organizations is low.
Not to mention, it’s simply more fun to be on a winning team, right?
So which is the cause and which is the effect? Does employee satisfaction lead to business results, or vice versa?
That’s more than a theoretical question — because it might be a huge mistake for a struggling company to spend money it doesn’t have on programs and incentives designed to keep employees happy. Maybe the fastest route to employee satisfaction is getting the bottom line right.
And the question is even more relevant if you’re a manager or HR exec at one of those struggling organizations. If you’re asking for resources to improve employee engagement and satisfaction, you may be challenged to prove that such investments are necessary and effective. Senior execs are likely to be focused more on the finances than on employee engagement, and will want to hold off on investing in employees – “at least until things turn around.”
Correlation or causation?
The only way to truly find out whether employee satisfaction leads to better business outcomes is through a longitudinal study – one that looks at organizations over time.
Back in 2001, researchers did just that.
Specifically, they looked three measures – employee satisfaction, “organizational citizenship behavior” (for example, helping colleagues) and employee turnover – and how these measures related to profitability and customer satisfaction.
The researchers found that improved attitudes and behaviors preceded improvements in profits and customer satisfaction – suggesting that the attitudes and behaviors caused the better results, and not the other way around.
Implications for business
Of course, you can’t read too much into a single study, but this one reinforces what many front-line managers and HR professionals instinctively know: Business outcomes are driven by people inputs. And that’s a powerful message to keep in mind, especially when organizations are facing hard times.
When budgets are tight, employee satisfaction and development efforts look like easy targets. And it’s not just about budgets: When top execs are feeling under the gun, they may be inclined to spend less time on employee engagement efforts that cost little or nothing but require time and focus: things like maintaining transparency, listening to employees and seeking their input. Together, this lack of focus and resources can create a downward spiral, where business outcomes continue to decline.
On the upside, focusing on employee satisfaction can create an upward spiral: As outcomes improve, employee satisfaction will likely go up. Engagement will increase; employees who feel more secure will work more cooperatively with their peers; people who were thinking of jumping ship will be more inclined to stick around – all of which can lead to even better results. At the same time, more resources and attention can be devoted to keeping employees engaged and motivated, accelerating results even further.
Koys D.J. (2001). The effects of employee satisfaction, organizational citizenship behavior, and turnover on organizational effectiveness: a unit-level, longitudinal study. Personnel Psychology 54(1):101-14.
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