Analysis of the Reading Which Comes First: Employee Attitudes or Organizational Financial and Market Performance?

Nishant Agarwal September 17, 2013

Objective
The objective of this paper, in simple words, is to establish the direction of causality between an organizations nancial and market performance measures such as ROA and EPS and its employees attitudes, such as overall job satisfaction, satisfaction with security, pay etc.

Gaps in previous research Finding Opportunities for contribution

The authors Schneider, Hanges, Smith, and Salvaggio primarily contribute by nding certain gaps in research previously conducted on this topic. They observed that researchers micro-orientation towards the job attitude-performance relationship is somewhat surprising; given that the interest in employee attitudes had much of its impetus in the 1960s when organizational scientists such as Argyris (1964), Likert (1961), and McGregor (1960) suggested that the way employees experience their work would be reected in organizational performance. Majority of the researchers exploring employee attitudes and organization performance always explored this relationship at an individual level. The authors argue that such a relationship should be analyzed at an organization level, by aggregating the individual level data. Another opportunity for a new contribution originated from the fact that most of the research, even at a macro level, was not done across time periods. Denison (1990) measured employee attitudes in 34 publicly help rms and analyzed the correlations between employee attitudes and organizational performance. Though Denisons data was time series of 5 successive years, it was not a time series in the true sense, because he measured only organizational performance over 5 years, keeping the attitudes benchmarked to the rst year. Schneider, Hanges, Smith, and Salvaggio therefore conducted a true time series analyses 1

by measuring both the variables across a period of 8 years. The nal opportunity for contribution, and perhaps the most crucial one from the perspective of this study, was from the fact that most studies assumed a one directional causality, with the employee attitudes being the cause and the organizational performance being the result. In this study, the authors assume no such direction for causality, and in fact attempt to show that this causality ows in both directions; at times organizational performance being a signicant cause for a certain employee attitude.

Methodology
The authors have adopted a complex methodology for this study, though it was necessary given the nature of the problem being analyzed. They collected data from a consortium of U. S. Companies. The companies in the consortium were large organizations, mostly featuring in the Fortunes list of most admired companies. The time period under consideration was 1987-1995. The number of companies available for analyses varied over these 8 years, with the year 1992 oering a maximum of 35 companies, while the minimum was 12 companies in 1989. The authors measured time lagged correlation between employee attitudes and ROA and EPS using a two pronged approach. They rst assumed one of the employee attitudes (e.g. overall job satisfaction, security, pay etc) to be the predictor of each of ROA and EPS, and then measured the correlation across time periods. Then the roles were reversed, with each of ROA and EPS being the predictor of the same employee attitude. The same process was done for each of the attitudes, and the nal results were compiled (Table 6 in the article).

Results
The result from the analyses conducted by the authors showed that both satisfaction with security and pay had a positive relationship with both ROA and EPS, with the relationship much stronger in the reverse direction, i.e. ROA and EPS proved to be a strong predictor of satisfaction with security and pay, though in case of former, the relationship was equally strong in both directions. Results concerning relationship between overall job satisfaction and the performance criteria created a stir in the research community. The causal directionality from nancial and market performance to overall job satisfaction proved to be very strong. This does not however mean there is no relationship in the other direction; just that in one direction it is stronger. This research demonstrates that employees can derive satisfaction in their work from the fact that their organization is doing well nancially as well as in the stock market.

Strengths and Weaknesses: The critique

The biggest strength of the analyses is the longitudinal design of the research. With a proper time series data on both predictor and predicted variables, the bidirectional relationship could be analyzed. Also, the fact that the data was aggregated at the organizational level proved to be benecial, since it enforced the macro outlook of the research. The biggest limitation of the research is also the most obvious one. The correlation between two variables does not necessarily imply causality. For establishing a signicant causal relationship, one needs to dive further into the data and possibly build a regression model between these variables. There is a lot more complexity surrounding the EPS and ROA of a rm, with these outcomes depending on a host of other factors. Such complexities have been ignored in the research. Authors have self admitted other limitations, such as lack of Generalizability of the results to smaller companies, and the lack of information about how the survey was conducted

Opportunities for future research

As mentioned previously, a deeper relationship between various variables can be explored through regression analysis, moderator mediator analysis and other statistical techniques. Another interesting research study could be the analysis of changes in employee attitude with time, and the demonstration that nancial performance has changed in the similar direction in the same time period.