4 Ways to Quantify the ROI of Company Culture Building
Company culture building initiatives are no longer “nice-to-haves” when there’s extra wiggle room in the budget, and for good reason. Modern companies pour massive amounts of money into their company culture. This is because it has become clear that these initiatives are not just for the benefit of their employees, but also act as long-term /investments/for the company.
When employees are seen as long-term assets, an organization’s approach to human resource management (HRM), namely hiring, retention, motivation, and recognition, becomes much more crucial in the overall business strategy. With the proper workplace environment, investments in human capital should bountifully produce monetary gains for your firm.
Direct monetary gains
Building competitive advantages
Strengthening your reputation
Boosting employee motivation
Alex Edmans, a Professor of Finance at London Business School, studied companies listed in Fortune Magazine’s “100 Best Companies to Work For in America.” These organizations were awarded their title based on employee satisfaction levels, defined by variables such as “respect, fairness, pride, and camaraderie.”He determined that “these companies generated 2.3% to 3.8% higher stock returns per year from 1984 through 2011” then their peers with significantly lower employee satisfaction levels.
Edmans was able to isolate satisfaction levels by taking into account “firm size, recent performance, dividend yield, growth opportunities, risk, and several other factors,”and effectively determined that these gains were driven directly by employee satisfaction (as opposed to good performance leading to higher profits which subsidized employee happiness-boosting initiatives).
The same effect has been seen on company profits by the American Society for Training and Development in 2000. In a study of 100 companies, it was found that those which invested an average of ~$1,600 or more per employee on development and learning initiatives experienced 24% higher annual gross profit margins than those which did not This $1,600 spend per employee was found to be the sweet spot, as below that average, companies did not experience profit boosts.
These findings directly contradict traditional notions that market value and employee satisfaction are intertwined in a zero-sum equation. Namely, that a dollar given to employee betterment is a dollar stolen from shareholders. This previous ideology had been convenient in allowing companies to neglect human resource management. However, very little tolerance for this perspective exists in the modern workplace market.
Now, it is doubtful that implementing a new human resource management tool such as Rapport in Q1 will raise your profits or stock prices immediately. The idea is that through sustained efforts to boost company culture, you will see these monetary gains in the /long term/ and watch them further perpetuate themselves through positive feedback loops, as detailed below.
Jay Barney, a well-regarded strategic management professor, developed the resource-based view (RBV) of competitive advantage. He argues that “firms develop sustainable competitive advantages by building resources that are both valuable and hard for competitors to poach”. For the modern organization, these resources are usually its employees. This is because it is the knowledge and capabilities of human capital which produce a firm’s competitive advantage, not physical assets.
You can better understand this by looking at the context in which companies are evolving. As many industries become disrupted by tech, the innovation becomes more dependent on the creative thinkers which sit behind the computers, rather than the computers themselves.
One difficulty however is fulfilling the second part of Jay Barney’s statement: employees /are/ free to leave their jobs at any time and can often be enticed by better compensation packages at competing firms. Even without a competitor attempting to recruit your staff, lateral movements for employees can offer them 8%-10% increases in salary, just for starting anew . This, Barney argues, is exactly where the role of job satisfaction must come into play.
A satisfying workplace where one feels at home, welcomed, respected, recognized, and heard is crucial for embedding and retaining top talent in your firm. It is the preservation of their skills and ideas in your organization which will maintain your firm’s competitive advantage and continuously drive monetary returns.
Robert Walters, a global recruitment firm, has found that “90% of professionals have researched the culture of a company before accepting a role.” Therefore, “To attract top caliber professionals employers must focus on first developing a positive workplace culture and then building a reputation for being a desirable place to work”.
Think of Googleplex in the early 2000’s. It became quickly idealized as the best place to work due to on-site dry cleaning, doctors, nap pods, and more. Now, these are just amenities. They don’t signal the company’s culture of leadership or recognition, but they were extremely effective in drawing in top talent and putting the company on a pedestal as a fantasy workplace environment.
Position your company to be the Googleplex of company culture. By building an immensely positive and productive workplace environment, your organization will stand out from your competitors so considerably that employees will eagerly apply to become a part of it. When your organization can attract a top tier level of talent, positive feedback loops will begin to occur, not only resulting in greater workplace production, business opportunities, and a continued inflow of incredible talent.
Salary, of course, will always be a deciding factor. However, for two out of three factors to revolve around company culture, rather than promotion or bonus structure, and for collaboration to be held as more important than salary, indicates a definitive trend in candidate preferences. A potential employee’s first and foremost consideration is how they will feel working at a company, and thus, organizations must cater towards that.
A study in the Academy of Management Review outlined a “social exchange model”which argues that pleasant company cultures are actually viewed as “bonuses”, or “gifts”, by employees. They’re somewhat unexpected, provoking a feeling of gratefulness, and inciting increased effort, even if employees aren’t rewarded for their extra initiatives.
In this case, a positive and inspiring company culture actually pushes employees towards seeing the company’s goals as their own, not only boosting citizenship and identity with the organization, but also growing one’s creativity and innovation. The intersection of motivation and innovation is the perfect launch pad for your company’s growth.
From every vantage point, “Effective training programs…help employees to concentrate on their individual career development, which ultimately assists in achieving both organizational short- and long-term objectives.”Even further, we see that “development and job satisfaction are the most important components of organizational effectiveness.”
Company culture building is a very broad undertaking which carries many nuanced variables. However, it is clear that investing in employee development and fostering a positive and supportive company culture have a direct and positive relationship with maximizing employee contributions. This in turn, produces the long-term monetary gains which are so critical for successful organizations.