Why being good to your workers is good for your stock price

Conventional wisdom would have us believe that companies that keep their labour costs low to bolster their bottom line see greater gains for shareholders. But new research shows that those who invest in their frontline workers in fact see, over time, increases in their stock prices (among other benefits).

A first-of-its-kind study by RAND, published in May, used artificial intelligence to analyze around 800 disclosure filings for the Securities and Exchange Commission (SEC) over the last two decades. Researchers focused on large, publicly traded companies in the retail sector, which employs 15 million people nationwide, most of whom are entry-level.

Since 2020, the SEC has required companies to provide information on their “human capital management” practices – what they’re doing to attract, develop and retain workers. RAND’s AI model rated retail companies’ disclosures about their investments in frontline workers and then looked at corresponding stock price responses. The results should encourage not just investors but anyone advocating for workers: Companies that disclosed robust investments in workers saw short-term stock price increases of up to 2.5%.

We already know that investing in human capital is good for workers, especially in sectors like retail and fast food that are known for low wages and inflexible scheduling. The pandemic exposed a simmering problem for “essential” workers that continues today: Often these jobs lack good pay, benefits, flexibility or advancement opportunities. Too many workers simply do not make enough to cover basic needs like housing, childcare, transportation, and even food and medicine.

For example, the latest Economic Well-Being of U.S. Households report from the Federal Reserve found that, in 2023, one in six Americans could not afford to pay all their bills, and one in three were unable to cover a $400 surprise expense. And because workers paid low wages are disproportionately women, people of colour, and specifically women of colour, low pay and poor working conditions perpetuate long-standing gender and racial inequities. That’s why it’s no surprise that many workers mobilized in unionization efforts and policy advocacy to increase the quality of their jobs.

Workers also can choose different employers. The latest US jobs report showed that openings remain high, giving workers more choices as employers compete for a smaller pool of talent. With more available jobs than unemployed workers at the moment, employers investing in their workforce may be a step ahead in an increasingly competitive marketplace.

Make no mistake, there are employers – in all industries, public and private – that do right by their workers through a variety of high-road practices: good wages and benefits, more agency in scheduling shifts, on-the-job training, and more. For example, Bloomberg recently reported that, after one-third of its workforce quit in 2022, Ikea increased compensation and improved scheduling and orientation for its hires. In doing so, the company reduced costly turnover by about 25% in its US stores and 22% globally.

For companies committed to strengthening their human capital, the takeaway should be to better advertise their worker-forward investments. The more you disclose and share these practices, the more benefits you’ll see. Investors are increasingly interested in, and actively looking for, this information, and you don’t want to leave any potential value on the table by being opaque.

Companies that are proactive in supporting workers will also align with other forces seeking to improve low-wage jobs, such as a resurgent labour movement and new pro-worker policies. For example, a California law requires fast food companies to pay workers a minimum of $20 per hour as of 1 April. This is having a ripple effect, with higher-paid fast food employees and workers in other low-wage industries also asking for raises.

For such policies, employers can do an honest cost-benefit analysis: Yes, labour costs will increase, but, ultimately, livable wages make for more loyal and productive workers, lower turnover costs, and, as this new research shows, tangible boosts to a company’s stock value. That sounds like a win-win.

The bottom line: Companies that invest in their frontline workers – and are clearer about where/how – could see a meaningful uptick in their stock value, while also becoming more attractive to job candidates in a tight labour market. And those investments for employees are more than an uptick; they can have transformative effects on people’s lives and economic mobility.