Why Making Your Employees Happier Pays Off

by Arthur C. Brooks

November 28, 2025

The world of management is always wide open for new ideas and perspectives to make companies more efficient and profitable. Some recommendations have merit, but others are seen both inside and outside companies as gimmicks, fads to be endured until abandoned by managers when they move on to the Next Big Thing.

I want to introduce a management anti-fad: To raise business performance, increase the happiness of the people doing the work. Recent research, including studies conducted both by independent academics and by firms themselves, shows that understanding well-being and maximizing it through managerial practices not only raises employees’ quality of life—it significantly increases productivity and profitability as well.

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This idea is as old as humanity itself, you might correctly think, but if it were so obvious and simple to put into practice, then every company would be doing it. Many leaders are also skeptical of the claim. Sure, a company should treat its employees well, but shouldn’t a company’s primary focus be productivity and profitability? How can leaders be sure that employees’ happiness will lead to business success?

I know of one company that points toward answers: the investment firm Irrational Capital conducts research on the happiness-to-success theory. Using both public and private data sources on employee satisfaction, its researchers found that over an 11-year period ending in March 2025, S&P 500 companies that scored in the top 20% on several key employee-happiness measures outperformed (in stock price) those in the bottom 20% by nearly 6 percentage points. Meanwhile, the top 20% in “extrinsic” rewards like pay and benefits only beat the bottom 20% by 2.07%.

Irrational Capital researchers found that there were six specific factors behind employee satisfaction. In order of their positive impact on a firm’s performance, they are:

• Innovation: Managers’ openness to ideas and input

• Direct management: Clarity and truthfulness of communication

• Organizational effectiveness: Nonbureaucratic, efficient management

• Engagement: Supportive leadership for learning and growth

• Emotional connection: A culture that fosters friendships among colleagues

• Organizational alignment: A match between a company’s external mission and its internal culture

To me, these six factors imply six goals for managers who want to raise employee satisfaction that translates into higher firm performance. Here are three “Happiness Exercises” to help put these goals into action.

Look for a new way to solve one nagging problem. 

Leaders tend to assume that asking for advice is a sign of weakness. In fact, this is antithetical to innovation. In my own experience as an executive, even though final business decisions rested with me, it was helpful to recognize that I did not have all the answers. I frequently turned to my senior staff for ideas counsel. This week, ask an employee for advice.

• First, identify one problem that has been nagging at you.

• Then, explain to one member of your senior staff how you are thinking about solutions—but specifically ask them for a different solution, and whether they see any blind spots to your approach.

Of course, you may not solve your tricky problem by next week, but you will discover a new way to think about it. Best of all, if you ask for advice honestly, you will signal to your employee that you are, indeed, open to innovation—Irrational Capital’s hallmark factor of happy employees and profitable companies.

Tell your employee that thing you’ve been avoiding. 

One difficult part of direct management is acting and speaking with complete clarity and truth. Particularly in times of uncertainty, employees are attuned to doublespeak and obfuscation. Always be truthful and clear about what they need to know for their jobs and careers. They can handle hearing, “I don’t know what’s going to happen,” as long as it’s the truth.

In the last several weeks, you have likely put one conversation on the backburner with an employee. Perhaps it is an uncomfortable disciplinary conversation; maybe you must turn down a request for a raise or reduce a bonus; it could be a discussion about the uncertainties of a project’s continuation, for which you have no concrete answers. These are all difficult conversations to have and will likely lead to disappointment and some hard questions, but evidence shows there’s a real benefit to being forthright. This direct management style is correlated strongly to employee happiness: The latest data from Irrational Capital shows that major companies who excel in direct management outperform (again, in stock price) their competitors by over 7%.

So this week, stop avoiding that difficult conversation. Approach your employee with clarity and truth, rather than hovering in a state of silent uncertainty.

Schedule a team lunch…and don’t go to it. 

Research has long shown that those who have friends at work are more engaged and productive, and have less intention to turnover. Upon hearing this data, many leaders schedule mandatory team gatherings and place themselves at the center of the ecosystem.

Unfortunately, scholars have found that spending time with the boss creates more negative emotions for employees than anything else across a normal day. (These researchers showed that time with the boss induces more negative emotions than commuting or household chores, for example.) This doesn’t make you, the boss, a bad person; it is human nature to not be perfectly comfortable around a person who has power over you.

This week, you should take this data seriously: Schedule and pay for a team lunch with no agenda. But here’s the kicker: You’re not invited. To begin creating an organic culture of friendship—and happier employees—you should help construct the ecosystem then get out of the way.