This Is the Real Reason the Markets Can't Head Any Higher

I freely admit that I love polls. While there's no way of excluding all biases from polls, they give us a taste in its truest form of what the American public is thinking about and what issues matter most.

One report in particular that came out last week and that always grips my attention is the State of the American Workplace. This poll, conducted by Gallup using data collected over a two-year period from 2010 to 2012, seeks to establish the amount of employee engagement that workers demonstrate toward the companies they work for. The findings of the study were both shocking and expected at the same time. 

The real reason the markets can't head higher
Of the roughly 100 million working people in the U.S. who held full-time jobs during the study, about 30 million (30%) are considered engaged and inspired at work, while 52 million (52%) are not engaged -- essentially going through the motions -- and 18 million (18%) are considered actively disengaged and basically loathe their work environment. Running the math, that's 70% of the U.S. workforce that is in some way uninspired about their job and has little interest in seeing productivity or efficiency at their company improve. This is the heart of the problem why the Dow Jones Industrial Average (DJINDICES: ^DJI  ) and S&P 500 (SNPINDEX: ^GSPC  ) , which both hit all-time record highs this year, simply can't head any higher.

A few companies are getting it right
You might think worker apathy isn't a big deal, but, according to Gallup, worker disengagement can affect U.S. businesses bottom lines by costing companies anywhere from $450 billion to $550 billion, annually. You may have also heard the phrase before that "a happy worker is a productive worker" -- well, Gallup now has statistical evidence proving that to be true.

Source: Mark Hyre, commons.wikimedia.org.

In 2010-2011, workplaces that had a high number of actively engaged workers -- in its study, 9.3 engaged workers per every disengaged worker -- delivered earnings per share that was, on average, 147% higher than its peers. The reason is that a happier workforce is more innovative and more efficient and has fewer accidents. Furthermore, allowing engaged employees to work to their strengths rather than forcing them into a specific role in the company significantly reduces stress and other chronic diseases, which can drastically lower health-care costs.

One fantastic example is Internet search giant Google (NASDAQ: GOOGL  ) . You'll be hard-pressed to find a company that does a better job at getting more out of its employees with regard to innovation than Google. However, much of that stems from fantastic compensation packages and a sea of unique perks that you'll find nowhere else. With Google shares up 778% since they debuted on the Nasdaq nearly nine years ago, I'd call that quite a success.

Source: George Kelly, Flickr.

... But many are getting it oh-so-wrong!
But, based on Gallup's lopsided figures, it appears for each company that's getting it right, there are countless more coming up short. Utilizing the same example above, in workplaces where there were as few as 2.6 engaged workers to every disengaged worker, earnings per share on average fell 2% relative to their competition.

Multiple factors go into determining whether or not an employee is engaged, not engaged, or actively disengaged. Some, listed by Gallup, include whether or not a company is hiring or downsizing, whether employees are being worked to their strengths, and even which industry an employee works in.

The last factor of industry is particularly intriguing because front-line service-oriented jobs, such as retail, are among the lowest in terms of creating active job engagement. Take Sears Holdings (NASDAQ: SHLD  ) , for example. Sears has been downsizing its stores and has reduced many of its workers' hours below the full-time threshold to ensure it's primarily exempt from the prospect of a penalty once the Patient Protection and Affordable Care Act, also known as Obamacare, goes into full effect on Jan. 1. With relatively low wages and seeing the company struggle with layoffs, it's no wonder that only 30% of the 1,242 reviews on Glassdoor would recommend Sears to a friend as a place of employment.

Another not-so-shining example is Hewlett-Packard (NYSE: HPQ  ) , which is in the process of laying off 29,000 workers to reduce expenses by $3.5 billion annually. HP has also struggled in the innovation department, languishing under weak PC sales while falling behind many of its peers with regard to its cloud transition. Similar to Sears, HP's Glassdoor recommendation rating by all employees stands at only 43%. With little hope of advancement and stagnant wages until the layoffs are complete, HP's management team certainly has a challenge ahead of it with regard to bottom-line growth.

We lack the innovation to push forward
While there are clearly some companies changing the competitive landscape and driving innovation in their sectors, this Gallup poll demonstrates just how many companies are being held back by apathetic workforces, or, even worse, workers who would rather undermine their company than help it succeed. It's practically impossible to get behind a scenario that sees the Dow Jones and S&P 500 heading higher in the absence of the Federal Reserve's QE3 when the basic tenets of productivity growth don't appear to be all there.

If you've ever wanted a reason to be skeptical about this market rally, I don't think you need to look any further than the overall engagement of the nation's full-time labor force.

Three stocks to stump the skeptics
With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


Read/Post Comments (8) | Recommend This Article (13)

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  • Report this Comment On June 23, 2013, at 2:07 PM, Kevoon wrote:

    I'm not a bit surprised by what this article contends. Two of the three companies have suffered from this and I think it is especially prevalent in larger corporations. For the most part it is do to the top down micro-management style corporations seem to have embraced for the past decade or so.

  • Report this Comment On June 23, 2013, at 2:57 PM, Krusty66 wrote:

    And the number one reason for employee disengagement is...political correctness. Diversity training, affirmative action hiring and promoting, affinity groups, etc. 90% of Fortune 500 companies have HR departments that have an almost singular focus on this "diversity" nonsense. So a tiny number of people are appeased and a very large number sit in silence and stew, Take a look at your next stock pick's HR section of their web site before you make your next investment. See if you think that a bunch of over-the-top diversity programs are a good use of company resources and whether the vast majority of employees would really support that kind of thing. And I'll go ahead and do this before the liberals respond..."racist". I already said the word, so don't bother yelling it at me.

  • Report this Comment On June 23, 2013, at 6:09 PM, CommonScents wrote:

    What's the historic context of this poll? Is 30% lower than usual?

    I know I hated my job once when the economy happened to be growing, so the economy can grow with less than 100% inspired workforce :-)

  • Report this Comment On June 23, 2013, at 6:59 PM, peterwolf wrote:

    Uh, when your wages are taxed to death the feds and in most states ( especially suicide chambers like California, New York, Massachusetts, Illinois, etc) , you're not likely to be much 'inspired' to make a difference. You're essentially working for the government even though your check has the name of a private company on it.

  • Report this Comment On June 23, 2013, at 10:18 PM, OceanJackson wrote:

    I have to strongly disagree with this article. An employee is paid a salary, and in theory he creates more value for the company than hes paid - or else the position gets eliminated or replaced with a lower cost employee. But really, it makes more sense to discuss the employee cost of a department, than individuals. A company can get more value out of a department than they pay it in total compensation, and the work product that department is responsible for - regardless of whether it's populated by disengaged unhappy employees.

    I think basically this article uses the wrong stats to support its thesis, and needs to consider the averaging that takes place in a corporation. Also - that in a company just 1 or 2 ultra talented & passionate employees are worth hordes of bad unhappy ones - and then some, because in terms of the value they create its like a mini early stage startup scenario, you just need 1 or 2 to hit and you've made your money. Especially true of the craftsmen of the company, like software engineers. 1 really talented software engineer is worth 100 average ones. Lastly - by and large the reason the percentage of unhappy vs happy employees is so skewed, is because you need a job more than the job needs you. It will always be that way and I'd wager it always has.

  • Report this Comment On June 24, 2013, at 5:27 AM, KevinniveK wrote:

    Dum

  • Report this Comment On June 24, 2013, at 11:02 AM, todamo13 wrote:

    Simple- if a company values its employees enough to pay them well with decent benefits, the employees will most likely care more about the company (see Costco).

    Unfortunately, America has been redistributing wealth and income upwards to the executive/CEO class drastically the past 30 or so years, so despite consistent improvements in productivity, the fruits of all this prosperity haven't gone to the workers and middle class. Pretty short-sighted approach, and no surprise that most people aren't happy with their companies.

  • Report this Comment On June 29, 2013, at 4:01 PM, Plan2Prosper wrote:

    It's also quite possible the causation relationship is reversed. Companies which were already innovative and commercially successful will have more money - at least in the short run - to make their employees more satisfied. Fantastic employee perks were more common in the dot.com era and that didn't end so well for many companies involved. Conversely, a firm in trouble probably isn't in a good position to deliver mass raises to boost happiness.

    For that matter, many corporations are global. I've had the privilege of working in both the US and India for the same firm, and the latter location had a highly educated, happy, driven white-collar workforce from top schools... and an excellent local wage was between a half and a third the cost of us in the US. I'm proud to be an American, but it would be a flawed assumption to believe the innovation has to take place here.

    Don't get me wrong - as an innovation worker myself I'm in favor of good pay and a pleasant workplace and that these things help recruit and retain better people. However, in very competitive business environments, it probably isn't necessary - or even true - that generous benefits in all locations are needed or even lead to success.

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