By Walter Frick
There’s a reason companies like Google and Facebook offer their employees so many perks, according to new research: Firms that treat workers better are more innovative.
One study found that companies with higher worker treatment score—for safety, employee relations, diversity and corporate governance—produced more patents and more highly cited patents.
Another study found that firms offering stock options to nonexecutive employees were more innovative, and suggested that the relationship was causal.
Yet another study, from 2010, looked at how labor laws in the US. and abroad affect innovation. The researchers discovered that laws making it more difficult to dismiss workers increased innovation.
But not everything that’s good for workers is necessarily good for innovation. A forthcoming paper found that unionization caused a significant decline in innovation, measured by the number and quality of patents issued. (Previous research on the topic has been more mixed.)
Why do some worker benefits make firms more innovative, but not others? Economic theory suggests that the answer may have to do with long-term incentives. If workers feel pressure to deliver results in the short-term, either for fear of being fired or in order to be promoted, they may be less likely to pursue riskier innovations. On the other hand, if failure in the short-term is acceptable, and if workers have a stake in the company’s long-term performance, they are more likely to innovate.
Employee stock options clearly meet these criteria by tying workers’ incentives to the long-term fate of the company.
Other worker benefits may also encourage workers to take a longer view, at least indirectly; more satisfied workers stay at the firm longer, and, therefore, have more of a stake in the company’s long-term success. Labor laws may have a similar effect.
Treating workers well is part of building an innovative company, but it isn’t enough. Employees also need to have a long-term stake in the company’s success.
Walter Frick is a senior associate editor at Harvard Business.