Well-Being at Work as Human Capital

Introduction

Research in social science has demonstrated forcefully that workers’ well-being encompasses more than the traditional factors of wage and working hours. As discussed in Chapter 9, workers are also concerned with the ‘steepness’ of the hierarchy in their firm, by the management style, by wage differences within the firm, by the prospects for upward mobility, by the corporate identity of their firm, its social responsibility, and more. These unconventional sources of well-being at work can be seen as a form of human capital, as they potentially generate non-negligible returns in terms of commitment, productivity, and retention of employees.

In the classical definition, human capital is based on the stock of skills and experience that an employee accumulates through education, or on the job at a company. But in this chapter, we focus on those other factors of human capital that relate to their well-being. Obviously, well-being at work is not of a form of general capital, but rather a type of specific capital that represents a unique fit between the employee and the firm. It pertains directly to the relationship between the firm and the employee and includes the working conditions that are of value to the employee.

These features of the work relationship, in turn, have a clear return for the employer. Employees who feel better and happier at work are more engaged, more productive, more creative, more flexible, and better negotiators on behalf of their employers. On a broader level, workers’ attachment to the firm creates a competitive advantage for the company, by reducing turnover.

This chapter is devoted to describing the drivers of well-being at work that constitute such firm-specific human capital.

Sources of Well-being within the Organization

The main source of procedural well-being at work is related to the organization of the firm. This includes, inter alia, the degree of verticality of the hierarchy, status and career concerns, and, more generally, the mutual feedback between employees and managers.

Verticality

Usually, vertical hierarchies—those with many layers in them—are detrimental to well-being at work. A hierarchy generally restricts the potential for people’s innate need for self-determination, autonomy, and the experience of competence.

The reason that employees enjoy more horizontal organizations, and dislike long chains of command, is the notion of locus of control. Locus of control refers to the sense of autonomy, the feeling that an individual can decide how to organize themselves, when and how they perform their tasks and pursue their objectives. Understanding the entire process that one is engaged in, from the starting point to completion is essential, as discussed by Matthew Crawford (2009). This is also the condition for being able to acknowledge whether one’s undertaking was successful or not. Hence, in general, well-being at work depends on this sense of responsibility and autonomy. By contrast, a situation where employees are given clear objectives without the means or the resources to achieve them is extremely detrimental to well-being.

Feedback is important as a means of giving employees a complete view of their actions and their respective consequences. It is also important that employees feel that they are valued for their accomplishments. This is more easily done in small organizations, with a short authority chain. Note that performance feedback, given at the level of working units or divisions, is another important aspect of the governance of the firm. This is because it creates a disciplining device by diffusing the information about workers’ and managers’ outcomes. It also provides opportunities for improvement of the organization.

Another issue in a hierarchy is the way people are promoted into more senior positions within the firm. The degree to which this allocation is transparent and open plays an important role in workers’ satisfaction.

All these organizational aspects are embedded in the concept of procedural utility, in other words, the share of well-being that depends on how an outcome is achieved, rather than on the outcome alone.

Status

Status reflects the non-monetary aspect of a job, including the symbolic value of the work. It often corresponds to a rank in the firm’s organization, giving power, prestige, or tenure. It is associated with occupations, responsibilities, skills, and other means of differentiation of jobs. It is also related to hierarchical power inside the firm.

Status thus comes with a non-wage, administrative, or symbolic pay-off, and is likely to have an impact on workers’ well-being. Therefore, it potentially plays the role of a ‘job amenity’. In his theory of ‘compensating differences’, Adam Smith predicted that workers enjoying more positive amenities in their workplace would accept lower wages (or would be forced to do so by competition for these jobs). Status could be one of these amenities that workers are ready to trade for wages. In fact, several studies have shown that workers with status reached the same level of well-being at work as those with a higher wage and no status. It is thus of interest to know and measure the extent to which status is causal to well-being at work and can be a substitute for pay.

Line Managers

The economic literature has stressed the role of the manager in terms of leadership, trust, governance, and capacity to solve coordination problems in a context of uncertainty and imperfect information. In the data that we collected at Mars, this line manager fixed-effect was crucial: the personality of the line manager had an important impact on the well-being of the employees. The data also demonstrated that employees suffered when line managers changed roles. This creates a trade-off for the firm, as career progression (of managers) almost always entails mobility.

Career Progression

An important contributor to well-being at work is the possibility of learning and growing in the firm. This includes career progression. In our field study in China, this turned out to be the main criterion of attraction and retention of workers by the firm.

Inclusiveness

Organizations may be more or less inclusive, in the sense of making all sub-groups feel part of the same group. This can be measured by asking about how different types of employees are consulted about decisions, about their awareness of the ongoing discussions and decisions. How often are different types of workers asked for help by colleagues, and whom can they ask for help themselves? Measuring the degree of inclusion can help detect whether some groups are more fragile and less included, thus helping to make an ongoing diagnosis of human capital and well-being at work.

The Role of Corporate Culture and Identity in Well-being

A further, less visible, feature of the organization concerns corporate identity and corporate culture. In a general sense, culture may be defined as the body of shared beliefs, understanding, values, goals, and practices that characterizes a group in a persistent way, due to the fact that it is transmitted by older group members to younger ones. The importance of culture in shaping preferences, choices, and behaviour is now the object of an abundant literature, even in economics.

Economists have described corporate culture as an instrumental device used to reduce uncertainty and transaction costs in firms and organizations, and allow the coordination of individual expectations and decisions. Workers who need to interact frequently and solve a variety of problems repeatedly often unintentionally develop their own specific system of conventions, understanding, and knowledge. This shared culture then substitutes for explicit communication. But corporate culture also shapes workers’ preferences, attitudes, and modes of thinking. Thus it affects their ability to work productively and autonomously, and feel included. In other words, the culture may have a positive or negative effect on well-being.

Measuring the Dimensions of Corporate Culture

The most famous typology of corporate culture has been proposed by the Dutch social psychologist Geert Hofstede (2001). His work suggests a classification of cultures that help describe the differences between countries, firms, organizations, and even families, based on a standardized questionnaire.

In the context of the firm, some elements of Hofstede’s classification are particularly relevant, for example:

• Power distance. This refers to the attitudes of employees to inequality, authority, and hierarchy; preferences for centralized or decentralized structures, for directive versus democratic managers.

• Uncertainty avoidance. This captures the notion of stress and anxiety in the face of unknown futures, aversion to imprecise rules, preferences for completely explicit procedures, preferences for long tenure, strong loyalty to the employer, preferences for larger organizations, innovation versus rules, etc.

• Individualism versus collectivism (group). This addresses the importance of individual (rather than group) performance and incentives, of individual decision-making; of wage-equality versus acceptance of competition and wage-differentiation, etc. Linked with this classification is the type of group thinking that takes place. How are collective decisions taken? Is it expected that meetings will lead to a consensus, or is a person in charge of choosing between different conflicting options that are proposed during the meeting?

• Social responsibility. Social responsibility potentially constitutes an important element of the specific corporate culture of the company. To capture this, it is possible to introduce questions about the perceptions of employees concerning the socially responsible behaviour of their company, as well as the behaviour of employees themselves as consumers. An additional consideration is whether social responsibility is seen as an intrinsic motivation on behalf of the firm’s management, or as an extrinsic motivation, i.e. a profit-maximizing device. It is often believed that extrinsic motivations tend to crowd out intrinsic motivations. However, in the case of SR, this needs not necessarily be the case, if employees understand that SR is now embedded in the core of the business model instead of something that comes later, after profit-maximization.

Measuring the Intensity of Corporate Identity

In order to measure the intensity of corporate identity—the degree to which employees adhere to the firm’s style and identify with it—we developed a system based on the idea that identity is mediated through language. When people live together, work together, and interact frequently, they start developing communications shortcuts that are specific to what they do, otherwise known as jargon. This is in line with the view of corporate culture as a set of conventions and language elements that save on the costs associated with explicit coordination.

The more people master the specific corporate jargon, the higher their degree of corporate identity. In the case of Mars for instance, the metrics capture workers’ degree of knowledge of the specific terms relevant to the firm, as well as their awareness of the specific ownership structure of the firm.

Using the Measures of Corporate Culture and Identity

After having measured the intensity and dimensions of corporate culture, the next step is to look at how these correlate with well-being at work. It is expected that people who share a greater intensity of corporate culture are happier in the firm. This measurement can thus be used as a tool to evaluate the fit between employees and firms. For instance, if corporate identity is associated with a culture of hierarchy and clear rules, a person coming into that community with different values will not fit, and will probably not reach a high level of well-being at work.

Well-being, Social Capital, and Trust

‘Man is by nature a social animal’, wrote Aristotle (Politics, I). More recently, in Maslow’s (1943) pyramid of human needs, love and belonging come just after basic physiological and safety needs. The World Happiness Report, prepared at Yale University under the auspices of the United Nations, finds that having someone to rely on is one of the most powerful drivers of happiness. Clearly, the sources of individual well-being cannot be circumscribed to individual circumstances. They also include the set of social interactions through which individuals are interconnected. Since the seminal work of Robert Putnam (2000), social capital is generally defined as the quantity and quality of social relations in a community.

It is defined as a ‘capital’ because people’s social networks are accumulated over time (like financial capital) and yield benefits (inclusion and cooperation). As a network, social capital also includes a notion of externality, i.e. mutually reinforcing benefits for all members.

Importantly, social capital has a local dimension and is by nature restricted to a community, i.e. a sub-group of the population whose members interact directly and frequently, share common norms and a sense of common identity. De facto, it has been shown that staying rooted in the same neighbourhood for a longer time is associated with higher levels of all types of trust, especially neighbourhood trust (Helliwell and Wang, 2011); conversely people who live in districts where the population is dense and highly mobile are less likely to trust their neighbours. It is likely that the same rule applies to firms: social capital is lower where the turnover of workers is higher. Because of this local-norm-enforcing nature, social capital can constitute an alternative or an addition to market allocation and explicit rules, and is welfare-increasing.

Measuring Trust

Trust plays a crucial role in social capital. The notion of trust is very much related to the framework of the game theory, which analyses strategic interactions between interdependent agents. Trust, understood in this way, promotes cooperation by reducing uncertainty about the behaviour of others, in particular the risk of moral hazard (cheating). Accordingly, in surveys, social capital is often measured by questions about trust and confidence that others (neighbours, co-workers, etc.) will behave in a cooperative way.

Social capital is also measured by the frequency of cooperative behaviour (in laboratory and field experiments). One famous experiment is the ‘lost wallet’ experiment, first conducted by the Reader’s Digest Europe in 1996 and designed to indicate interpersonal trust in a number of countries. Since then, a question about the likelihood that a lost wallet, if found by a stranger, would be returned to the police was introduced in international surveys, such as the World Values Survey and the World Gallup Poll, as well as certain national surveys (e.g. in Canada and the United States) to elicit social trust. The question can be adapted to measure trust at the workplace the firm (‘If you lost your wallet in the premises of the firm how likely is it that someone would return it?’).

Finally, other measures of social capital within the firm also include the number and frequency of contact between workers, i.e. the social density of the social network within the firm, as well as how easy it is to ask for help and information from colleagues when needed.

The Returns on Social Capital and Trust

The relationship between happiness and concepts of social capital has then been tested, thanks to survey data containing self-declared happiness, trust, and social connectedness questions. The result is that trust, self-stated social connections, and social identities are associated with higher life satisfaction and happiness, in all countries off the world where the relationship has been evaluated. It is important to underline that it is trust in colleagues, trust in management, and other measures of social capital in the workplace that appear to be most highly correlated with well-being at work (Helliwell and Huang, 2009).

Social capital can be favourable to performance. In their real-life experiments, Bandiera, Barankay, and Rasul (2010) observed that, everything else equal, performance is higher in teams of socially connected workers, where a higher effort norm enforcement within the group exists. For instance, people will be willing to take more risk to innovate in a corporate environment where they trust their colleagues and management.

Well-being and Wage Distribution

Wage distribution within the firm constitutes one of the most widely recognized drivers of well-being at work. The idea is that workers do not only care about the level of their own wage, but, most of the time, are also concerned by the pay of others, and the general degree of wage inequality within the firm. They have preferences about the way wages are set and about the resulting wage distribution within their firm.

These concerns are based on different potential motives. Some are ‘self-regarding’, when employees just seek to improve their own situation, and some are ‘other-regarding’, in the sense that employees may care about other people’s pay even if it does not affect their own situation.

One self-regarding motive has received particular attention from researchers and seems to be widespread: the prospect for upward mobility (POUM, an acronym coined by Benabou and Ok, 2001). POUM implies that inequality is interpreted as a ladder that can be climbed. Hence, employees will accept a greater differentiation of wages inside their firm as long as they hope to progress upwards in its wage distribution. Whenever POUM is an important concern, this means that the dynamic aspect of workers’ pay, i.e. the prospective wage profile that they can expect, matters as much as the static level of wage at a given period.

Research also shows that people are very sensitive to the floor wage. They may not care about the general degree of wage inequality within the firm, but still feel bad if they are aware that some people are earning a very low wage.

Eliciting Preferences for Wage Distributions

Depending on their views and preferences, employees may feel satisfied or dissatisfied with the distribution of pay within the firm. For management to measure this dimension of well-being at work they can either use simple survey questions or implement choice experiments in the lab or ‘in the field’.

Conclusion

The drivers of well-being at work and the metrics that we have presented can be considered as part of the value of a firm. Of course, there are many things that were not covered in this chapter. Working at distance, co-working spaces, platform and mission-based contracting instead of employer–employee wage contracts take an increasing importance in work life. Technological innovations transform the modalities of work and the working relationships. The more we are able to measure the impact of these transformations, the better we can harness them to the benefit of workers’ well-being. Ultimately, the objective is to make these metrics part of the dashboard of managers at par with financial indicators, to measure the value of the firm.

Claudia Senik is professor of economics at the Sorbonne University and the Paris School of Economics. She is co-director of the Wellbeing Observatory at CEPREMAP, member of the IZA and of the Institut Universitaire de France. Educated at the Ecole normale supérieure, she received her PhD from EHESS. Her main research area is the economics of happiness, with a special interest in the relationship between income growth, income distribution, and subjective well-being, as well as well-being at work. She also conducts a research stream on gender gaps. She has published many articles in refereed journals, as well as several books, such as L’économie du bonheur, la République des idées, Seuil, 2014, and recently Les Français, le bonheur et l’argent, 2018, Presses de l’ENS, with Yann Algan and Elizabeth Beasley.

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