1

Employee Morale Effects on Business Profitability

Lillian A. Tagle

Department of Organizational Leadership, South Texas College

ORGL 3311: Issues in Organizational Leadership - Online

Dr. Emma L. Miller, Ph.D., MBA

October 2, 2020
 2

Abstract

There are many ways a business can try to ensure continuous high profits using strategies learned

through higher education and work experience as well. Every business leader sets a high

expectancy for employee productivity and wants to see results, but as with any business deal,

there must be certain terms that are met. One giant factor that has major impact on businesses is

employee morale. In this paper you will see how companies can destroy employee morale, and

we will also look at the technique’s employers can utilize to cultivate high employee morale to

reap the benefits in their businesses. This paper will present article summaries of these ideas and

concepts and how they affect business profitability and productivity.

Keywords: employee, morale, profitability, productivity, profits, strategies

 3

Employee Morale Effects on Business Profitability

It is an understatement to say that owning and running a business is well, a full-time job.

Many factors that come into play, from creating a business plan, securing loans and financing,

finding a property and of course, staffing your business, can be very overwhelming. Many

business owners would venture to say the obtaining the right people for the job is the number

one, and quite possibly the toughest, responsibility of having a successful and profitable

business.

Thankfully, there are those employees that find their niche and by all appearances, seem to

be the right fit for the company and the duties of the job. The right employees can make or break

a business, meaning the difference between clients or customers returning for future business,

referring new customers by word of mouth, or taking their business to the competitor and letting

others know when they do. With so much at stake regarding the profitability of the business and

ensuring it is successful, there is a huge responsibility on the part of the employer to ensure that

they do all they can to keep the great employees, and keep them happy in their work. The

hypothesis of this is paper is: H1- The overall success of a business is in direct correlation to the

behavior or morale, of the employees. You see, the happier the employees are with their work

and with the leadership, the happier they will be in producing their work which in turn influences

the customers and ultimately the bottom line. We will review articles of similar topics to

understand whether my hypothesis is supported or not supported by the results of the studies and

research done by others.

Literature Review

Employee Satisfaction vs Customer Satisfaction

 4

A 2009 article written by Satoris Culbertson brings to light the results of a meta-analysis

study done by Steven Brown and Son Lam of the University of Houston. In their research they

wanted to prove that an “employee with a positive attitude toward his job will behave in ways

seen as more pleasing to customers” (as cited in Culbertson, 2009, p.76). Their research using 28

studies that directly linked employee satisfaction with satisfaction levels and service quality

ratings of an individual customer, found that higher levels of customer satisfaction were indeed

related to higher levels of customer satisfaction as well as higher customer ratings or service

quality (as cited in Culbertson, 2009, p.76). The researchers state in their study that they find that

the saying, “The customer is always right,” can hurt a business, since siding with the customer

can demoralize an employee and effect their job performance. Ultimately, they found that

employee satisfaction directly correlates with the satisfaction of the customer, even if they have a

different interaction with a different employee every time they transact with the business

(Culbertson, 2009). There were some features of this study that were not mentioned in my

hypothesis such as the type of job being performed, and relationships between customer and

employee, but the results of the study still support my hypothesis.

Employee Morale and Productivity

As Culbertson’s (2009) article found, if the employee is happy the customer will be

happy, resulting in more business and ultimately more profits. But what about the productivity of

the employee and whether they are happy or not? In a 2006 study by Osho, Ashe, and

Wickramatunge (Osho, Ashe, and Wickramatunge, 2006), they wanted to see how much an

employee’s productivity was affected due to low or high morale. In their writings, they give an

example of the service-profit train, which establishes the relationships between profitability,

customer loyalty, employee satisfaction, employee loyalty, and productivity (Osho, Ashe, and
 5

Wickramatunge, 2006). This service profit train shows profit is a function of employee

satisfaction (Appendix 1). Their study gathered information from 5 engineering companies,

surveying 25 individuals from each company.

They wanted to determine if employee satisfaction or dissatisfaction would in return, affect the

bottom line and profitability of the companies surveyed, and they also measured the correlation

between individual productivity and profit. What they found in their research was that

productivity is affected by morale. They found that the lower the morale dropped, the lower the

rate of productivity dropped, up to 56% on a scale from zero to one hundred. Low morale in

employees leads to increasing expenses due to high turnover, decreasing productivity, and

decreasing customer satisfaction. The importance of employee morale is so important that one

study revealed:

that 69% of workers experienced condescending behavior which in turn caused them to

be more likely to make derogatory comments about their company to others. This could

affect customer base ultimately preventing customer loyalty and possible loss of profit

(2003, Voss as cited in Osho et al., 2006, p.111)

On the contrary, having high employee morale leads to “increased and sustained profits

due to employees feeling their contributions are valued as important” (Osho, et al., 2006, p.111).

The study does conclude that “it is difficult to link morale with a profit due to more factors that

drive profit levels, there is a definite difference in performance based on the employee’s

satisfaction in the company”, (Osho, et al., 2006), which supports my hypothesis.

Effect of Poor Morale

As Osho et al., (2006), mentions in their findings, low employee morale can and will lead

to lower productivity in the workplace. According to Campbell (2014), the result of low
 6

employee morale can lead to the loss of business due to low productivity. Many factors

contributed to the demise of electronics retailer, Circuit City, which included: poor management

decisions, failure to anticipate changes in the market and competitors, and firing over 3,000

employees (Campbell, 2014). But, the fact that employee morale was low, did contribute to the

overall failure of this once billion-dollar business. Campbell (2014), states that due to monetary

losses, upper management decided to relieve over 3,000 of the long-term, well-trained

employees, and have them replaced with untrained and unknowledgeable people, who were, in

turn, being paid minimum wage. While Circuit City thought this move would perhaps be the

saving grace for the company, it turned out to be the worst mistake they could have made. Not

only did customers lose faith in the business, but the veteran employees who were left behind felt

unsure about their jobs and ruined hopes or dreams of advancement or promotions within the

company. This unfortunately caused the remaining employees, who had the knowledge and

experience, to work at a level much lower than they had before. Their morale was so low, that

they no longer had a desire to make sales, or as Campbell explains it, “those who were still

employed were left to wonder if they would be fired next” (Campbell, 2014, p.21). Now while

this was not the ultimate factor that caused Circuit City to eventually disappear from the retail

landscape, it was a major contributor to the end result, which was bankruptcy, closure of all

stores, and dissolution of the entire business. According to Campbell (2014), by using Gilbert’s

behavior engineering model, which provides a view as to what went wrong with Circuit City,

other businesses can learn from their mistakes. The goal of the engineering model is “improved

human performance”. Gilbert argued and believed that “human incompetence was management’s

fault” (2007, as cited in Campbell, 2012, p. 19), and could have been sole reason why many
 7

employees lost interest and fell into low employee morale, causing the entire company to fail. I

believe Campbell’s research and data supports my hypothesis.

Effect of High Morale

Boosting and promoting high employee morale does not just come by without any work

from the company leadership. There must be precise and thoughtful planning that plays into the

grand scheme of having a workforce that is happy and ready to produce. While some employees

can be intrinsically motivated, the majority need some form of extrinsic motivation. This could

be in the form of paid overtime, on-site meal services and childcare, employee healthcare, 401k

plans, and much more. According to Mathis and Jackson, these benefits can create “golden

handcuffs” that keep highly qualified employees from seeking employment elsewhere. The main

goal of the fringe benefits is to “attract, maintain and motivate qualified, competent employees”

(2003, as cited in Chukwudumebi, & Kifordu, 2018, p. 79). Their research conducted on 2000

personnel of Shell Oil Company proved that these benefits played a pivotal role in the

profitability of the company. By using the Chi-square statistical method, Chukwudumebi, &

Kifordu (2018) were able to prove that their hypothesis was correct and that employees who are

satisfied with their jobs, can and will produce higher quality work. They concluded that this was

due to the employees not having to be so worried about how they would pay for certain things

such as their living arrangements, their food, and even their vehicle. With Shell providing these

fringe benefits, they were ensuring that the employees that they had were happy, and as a result,

the morale was high which causes productivity to be high, which ultimately make the company

profitable (Chukwudumebi, & Kifordu, 2018). Of the six conclusions Chukwudumebi, &

Kifordu (2018) reached, one was simply this:

 8

Fringe benefits has effects on workers motivation as end of year and other bonuses for

instance are said to increase employment stability and highly motivates workers towards

higher productivity (p. 90)

The downside of offering such fringe benefits, is the extremely high price tag, which not

all companies can afford, thus making them less profitable. But there is a way to boost employee

morale without affecting the bottom line and still stay in the black, which we will see in the next

article. Therefore, although this article did seem to support my hypothesis, it is clear to see that

boosting employee morale can cost a company a large amount of money, which in turn lowers

profitability.

Profitability of High Morale

Accordingly, Brenner (2010), found that offering employees a way to serve outside the

four walls of the business also boosted their morale without the massive price tag that fringe

benefits can carry. Brenner (2010) stated that employee volunteer programs boast a high value

and benefit that can boost company profits and ensure success without the high price tag that can

come with fringe benefits. He notes that these types of programs appeal to veteran and newer

employees, spanning all generations. Brenner states that “volunteering appeals to millennial

employees’ sense of personal fulfillment and the baby boomer employees’ belief in the value of

social change” (p. 32). Although these benefits are not very easy to measure the quantity of, they

are very real. Brenner (2010) reports that there are 9 benefits that can occur for employers who

offer EVP, specifically, productivity and employee retention. These two benefit categories in and

of themselves are one of the costliest to a business and having employees who are productive and

content, will have a ripple effect throughout the entire business in a positive way. Alternately, if

employees are feeling the opposite, the effect on the business can be very negative. Brenner
 9

(2010) states that EVPs provide an avenue for employees to gain training outside of the job and

develop leadership skills which they will bring back to work with them and will boost their

health, which in turn means less absenteeism. In a survey with members of The Forum of

Executive Woman (2005, as cited in Brenner, 2010) found that 83% of respondents said

leadership was the No. 1 skill learned through volunteer work. Additionally, research at IBM and

British Gas found that “employers with employees who volunteer gain a more highly skilled

workforce with competency gain of up to 14-17% as a direct result” (2003, as cited in Brenner,

2010, p. 33). Implementing an EVP can boost employee loyalty, improve employee skills and

leadership and also boost competency which all have a direct effect on productivity and

profitability and can help businesses become successful and profitable, thus supporting my

hypothesis that employee morale has a direct impact on the success of a business.

Well Defined Morale

Decker et al., (1998), presents a case in which employee morale was found to be

extremely low due to changes in the dean of a college. The changes in leadership caused staff to

feel left out and unfortunately many started seeking other jobs outside the college. What was

fortunate about this situation was that the college was able to form a continuous quality

improvement committee which was able to define the factors that contribute to workplace

morale. This CQI developed what they called a process management model (Appendix 2)

consisting of members from departments within the college that were experiencing low morale.

The process management model was used by the CQI to “formulate a list of input requirements

that when applied to tasks and activities in the workplace, would produce the desired outputs

necessary for good morale and employee satisfaction” (Decker et al.,1998, p. 66).
 10

They gathered information and responses which were then summarized and ranked in order of

importance and urgency (Decker et al., 1998). Their research found that there were 8 areas in

which employees need to be seen and heard, to feel that their contributions were important and in

order to lift employee morale. Those eight areas were as follows: “good communication, input

into decisions, a problem-solving process, a manageable workload, unity of purpose, mutual

respect, and empowerment” (Decker et al., 1998, p. 66-67). By focusing on these areas, the

college was able to make a turn around and bring in more unity and sense of purpose to the staff.

They created programs that honor and recognize employees for their contributions and held

seminars promoting cooperation and kindness. Every department that was once being negatively

impacted by low morale began to see a turnaround in behaviors and acceptance of changes.

Decker et al., (1998), notes “these actions set the stage for rebuilding teamwork, a foundation for

good morale, and ultimately, superior performance”.

Findings

In reviewing all the 6 articles, I found that each one supported my hypothesis, that

employee’s morale can have a direct impact on the success of a business. While each article had

differing methods of reaching this conclusion, the data supports that employees who have high

morale within the workplace, directly correlates with the profitability of a business. These

employees on the front lines who are daily interacting with customers or clients carry a lot of

power that is often not even realized until it is too late. There were models presented and facts to

prove that this hypothesis is correct, and each article had sufficient research proving that

employee morale is a factor that must be observed and nurtured carefully to ensure productivity

and profitability. While some articles had research based on surveys, others were gathered

through committees, yet all still led to the conclusion that supported my hypothesis.
 11

Conclusion

While it is very difficult to measure employee morale on a scale of 1 to 10 or in a pie

chart or graph, there are many organizations who have invented ways to ensure that this process

does take place. From committee meetings to one-on-one meetings with employees, businesses

must find ways to ensure that employee morale remains high. While there may come times and

situations where more effort must be given on behalf of the leadership of the business, in the

long run the benefits of a profitable and successful business will be reaped. This is not to say that

employee morale can be easily attained from one day to the next, but as with anything in life,

putting in the hard work and waiting patiently for the desired results will take place. The research

has proven that employees who are treated fairly, with kindness and allowed to make

contributions in decision-making will greatly benefit the businesses that they are a part of. Many

businesses would be wise to implement these strategies with their employees and note the

difference in behavior and commitment to work and productivity. While more research is still

needed to be done across all sectors of business, from healthcare to school systems, the ideas and

concepts presented are proof that these concepts will continue to bring about positive results

among employees and their workplaces.

 12

References

Brenner, B. K. (2010). Instituting Employee Volunteer Programs as Part of Employee Benefit

Plans Yields Tangible Business Benefits. Journal of Financial Service

Professionals, 64(1), 32–35.

Campbell, T. A. (2014). What Could Have Been Done? Circuit City: A Case Study of

Management and Employee Performance Failure. Performance Improvement, 53(4), 16–

23. https://doi-org.ezproxy.southtexascollege.edu/10.1002/pfi.21405

Chukwudumebi, C.S., & Kifordu, A.A. (2018). The Significance of Fringe Benefits on

Employee Morale and Productivity. Romanian Economic Journal, XXI (68), 78–92.

Culbertson, S. S. (2009). Do Satisfied Employees Mean Satisfied Customers? Academy of

Management Perspectives, 23(1), 76–77. https://doi-

org.ezproxy.southtexascollege.edu/10.5465/AMP.2009.37008005

Decker, K., Dupler, D., Shields, M., Smith, C., & Thomas, M. (1998). Enhancing Quality by

Improving Employee Morale. National Productivity Review (Wiley), 17(4), 65–68.

https://doi-org.ezproxy.southtexascollege.edu/10.1002/npr.4040170412

Osho, G., Ashe, C., & Wickramatunge, J. (2006). Correlation of Morale, Productivity and Profit

in Organizations. National Social Science Journal. 26. 108-115.

 13

Appendix 1

1.The Service Profit Chain

Note: The service-profit chain (Figure 1) establishes the relationships between profitability,

customer loyalty and employee satisfaction, and loyalty and productivity. Profit and growth are

stimulated by customer loyalty. Loyalty is a direct result of customer satisfaction. Satisfaction is

influenced by value of services provided to customers. Value is created by satisfied loyal and

productive employees. The satisfaction comes from high quality support services and policies

that enable employees to deliver results to customers (Bailey and Dandrade, 1995 as cited in

Osho, et al., p.111)

 14

Appendix 2

Note: The process management model was used by the CQI to formulate a list of input

requirements that when applies to tasks and activities in the workplace, would produce the

desired outputs necessary for good morale and employee satisfaction. (Decker et al., 1998)