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7/15/2004 12:06:00 AM

Do happy employees make companies more productive?

Researchers at Rice University and the University of Maryland believe just the opposite may be true. Their findings in one of the first longitudinal studies to look at the effects of employee attitudes on company performance suggest that a long-held assumption among managers may not be true.

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Organizational psychologists refer to it as the “happy, productive worker phenomenon,” the assumption that a company with happy employees will result in a more productive organization. While this has been the conventional wisdom among many managers for years, a recent study offers evidence to the contrary.

In a report published in the Journal of Applied Psychology, researchers confirm that there is a relationship between employee morale and organizational performance, but it may be a company's financial and market performance influencing employee attitudes, not the reverse.

Entitled “Which Comes First: Employee Attitudes or Organizational Financial and Market Performance,” the article was co-authored by Brent Smith of Rice University's Jesse H. Jones Graduate School of Management, and University of Maryland faculty Benjamin Schneider, Paul Hanges and Amy Salvaggio, who was a graduate student at the time.

“The assumption that employee attitudes should predict organizational performance was a consequence of the way research was conducted in the past,” Smith explains.

Earlier research looked at worker productivity in particular jobs to determine what factors contributed to productivity and performance, Smith says. Consequently, there was a very strong assumption that the more satisfied employees were with their jobs, the more likely they would perform better.

Despite hundreds of studies attempting to verify this theory, none were able to show a strong correlation between individual satisfaction and performance. Still, the notion that managers should be focusing on worker satisfaction continued.

Against a preponderance of earlier research on worker attitudes that focused on the individual level and in a single time frame, the work by Smith and his colleagues represented one of the first studies to empirically and longitudinally examine the relationship between worker satisfaction and company performance at the organizational level.

The team utilized archival data from a consortium of 35 large, esteemed U.S. companies that had administered a common set of attitude surveys to their employees over a period of 30 years. Using meta-analytic statistical procedures in a cross-lagged design, the researchers compared various facets of worker satisfaction between 1987 and 1995, against aspects of the organizations' financial performances in that same time frame. All of the companies were publicly owned and represented a diversity of industries.

As an indicator of the companies' financial and market performances, the researchers focused on the organizations' returns on assets and earnings per share. The employee attitude data they received from the companies covered workers' satisfaction with their empowerment, job fulfillment, security, pay, work group, work facilitation and overall job satisfaction.

“As a result of having access to such information over a period of time, we were able to tease apart the reciprocal relationships between financial performance and employee satisfaction,” Smith says. Their findings pointed to certain circumstances where the long-standing assumption was true, but a stronger case was made for companies' financial performance having an impact on employee satisfaction.

Most notably, the workers' sense of job security and overall job satisfaction were the result — not the cause — of a company's performance. Workers' satisfaction with pay, however, had a more reciprocal relationship with the organization's financial and market performance over time.

“This might suggest that as a company's performance and even its reputation improves or declines, so too will workers‚ pay and benefits, and perhaps their interest in working for the company,” Smith says. “Based on that reasoning, it makes sense that the company's performance and workers' pay satisfaction would predict each other.”

Smith cautions, however, that the issue is still a complex one. Other studies, for example, that examined related subjects such as the relationship between a company's human resources practices and its performance arrived at opposite conclusions about their casual order.

Still, he believes understanding the nature and causes of employee satisfaction should affect the bottom line of any organization over time. “They should just keep in mind that one of the biggest drivers for certain areas of satisfaction is going to be the company's performance,” Smith says.

At its annual meeting in August, the Academy of Management is presenting Smith and his colleagues with two prestigious awards for their article on employee attitudes and organizational financial and market performance: the Scholarly Achievement Award and the Outstanding Publication in Organizational Behavior Award. Smith previously received the Scholarly Achievement Award in 1998 as co-author of an article on personality and organizations.

A graduate of the University of Tulsa where he received bachelor degrees in psychology and sociology in 1992, Smith earned his master's and Ph.D. degrees in organizational psychology from the University of Maryland.

Prior to joining Rice as an associate professor of management and psychology, he was on the faculty at Cornell University's School of Industrial and Labor Relations and the Johnson School of Management from 1998 to 2001.

For more information, contact Smith at smithb@rice.edu , or Debra Thomas in the Jones School at dthomas@rice.edu .

Research @Rice, 2004