Work-Family Benefits: Which Ones Maximize Profits? [*].(Brief Article)

Since regression analysis can establish correlation but not causality, we cannot rule out that it is high profits which is leading firms to establish such work-family programs. However, we doubt that this is the case since, as our results show, certain types of work-family benefits are associated with lower profits. We are also aware that there are important non-observable influences on profit rates (such as demand factors and managerial effectiveness) since our independent variables only explain 27-28% of the variation in profit rates (R-squared is .2822 in Model 1 and .2744 in Model 2).

In both Models 1 and 2, the dummy variables denoting years indicate whether profit rates for all firms were significantly different in a particular year than they were in 1995 (the year for which a dummy variable was omitted). Significant and negative coefficients for 1991, 1992, and 1993 reveal that profits were lower in these years, a result of the economy-wide recession. The insignificant coefficients for year 1994 indicate that profit rates in that year were not significantly different than they were in 1995.

Model 1 suggests that, in general, work-family programs have a positive effect on profit rates [5] (with an F-value of 2.15 corresponding to a p-value of 0.0296). This lends support to the efficiency compensation theory which states that by providing above-market compensation packages, employers are able to reduce turnover, absenteeism and tardiness and increase productivity, and thereby increase the profitability of the firm. Model 1 further indicates that, collectively, work-family benefits are under-provided by firms in our sample. The coefficient on a benefit, often called the marginal effect, indicates the degree to which the profit rate would rise if the benefit were increased by one unit. A positive marginal effect implies that profits could be increased further by expanding that benefit.

In examining the individual covariates in Model 1, however, not all programs have a positive, uniform impact on profits. Two programs, in particular, are shown in this model to affect productivity. First, offering workers the option of taking time off when a family member is sick affects profits positively. Secondly, offering job sharing has a negative impact on profits (with a marginally significant coefficient). The coefficient on family sick clays seems to be in contrast to a previous finding (Johnson and Provan, 1995) that taking sick leave to care for dependent children does not enhance productivity. There are two possible explanations for this disparity. First, it may be that offering sick leave could allow a firm to pay lower wages if workers view this benefit as providing a compensating differential. In addition, if few employees actually use this benefit, higher profits may result. A second, compatible explanation is that employees' productivity is not enhanced directly by the taking of the sick lea ve itself (as Model 2 will show). Rather, productivity is affected indirectly by reduced stress and greater job contentment flowing from the knowledge that the option of taking sick leave to care for ill children is available when necessary. The negative coefficient on job sharing probably reflects diseconomies of scale when two workers are doing a job usually performed by one.

Model 2 shows the impact on firms' profits of both the degree of participation in work-family programs and the generosity of benefits. An F-test confirms that there is a marginally significant effect (with a p-value of 0.0625) of work-family benefits on a firm's profitability. Some individual benefits stand out in terms of their potential impact on profits. For example, an increase of $1,000 in adoption benefits received increases the profit rate by one additional percent. For the average firm with sales of $140 billion, this translates into $140 million in additional profits. This effect seems to us to be very large considering that most workers do not avail themselves of this benefit. It is possible that adoption benefits are acting as a proxy for other, unobservable firm and management attributes that increase productivity. For instance, the offering of these benefits may reflect a positive attitude of management regarding accommodation of the needs of working parents.

The collective results, however, obscure important individual differences. Note that not all work-family benefits are cost-effective for the firm. Subsidizing onsite child care, for example, results in a significant loss of profits to the firm, indicating that any productivity gain received through this program is more than offset by the high cost of providing such a benefit. Clearly, this suggests that, within the Working Mother other sample of firms, subsidized onsite child care is an over-provided benefit.

The fact that alternative scheduling programs can have dramatically different effects on productivity can be seen from the positive and significant coefficient associated with the percentage of employees working at home, in contrast to the negative and significant coefficient associated with the percentage of employees participating in job sharing. If the proportion of employees working from home increases by one percentage point, the firm's profit rate increases by an additional six-tenths of one percent. For the average firm in the sample, this results in a rise in profits of $84 million. The size of the impact is rather dramatic, and the sign of the coefficient is consistent with the efficiency compensation theory. Perhaps, people who work from home realize that they are fortunate to be able to do this and therefore work harder to avoid losing this job. This attitude would also result in lower turnover and absenteeism for people who work from home. Additionally, employees who work from home may work longe r hours because they do not have to commute to their place of employment, and are constantly available for work. The results imply that the firms sampled can profitably expand this benefit, as it is currently under-provided.

In contrast, opportunities for job sharing appear over-used and firms could increase their profits by scaling back in this regard. If the proportion of employees that job share increases by one percentage point, then the firm's profit rate declines by two-tenths of one percent, resulting in a loss of profits of $28 million for the average firm in the sample. It is possible that job sharing is unprofitable because having two people working at one job may increase costs such as medical insurance premiums or may increase time spent on unproductive activities such as writing memos, meeting, or discussing how work will be divided. Some benefits such as flex-time, compressed workweeks and part-time work, however, appear to be used at the optimum level as they do not significantly increase or decrease the profit of the firms.

Discussion

This article focuses on the corporate financial impact of a subset of benefits called work-family programs. To our knowledge, the marginal effect of various work-family benefits on profits of firms across industries has not been studied, thus making it difficult for firms to assess whether they are providing the right benefits at the correct levels to maximize profitability.

The impetus for the study came from a number of factors indicating that a careful analysis, rather than casual empiricism, was needed to understand this issue. First, demographic changes in the work force led to mounting pressure on firms to provide these work-family benefits and firms responded by increasing the availability of such programs. Second, evidence links work-family stress to lower job productivity. Third, previous survey evidence points to the effectiveness of these programs. Both managers and employees believe that these work-family benefits improve productivity

To analyze which work-family programs affect firms' profits and to determine the extent of this effect, two variants of a reduced form model are estimated, using a fixed effects model. If the efficiency compensation theory is valid, and higher compensation increases worker productivity, we would expect to see a positive effect of work-family benefits on a firm's profits. Furthermore, if a particular work-family benefit has a positive impact on profits, then increasing the scope or generosity of that benefit will increase the firm's bottom line. We would therefore say that this benefit is under-provided. On the other hand, if the work-family programs do not enhance worker efficiency, or the marginal costs exceed the additional revenue generated at the current benefit level, we would expect to see a negative effect of such benefits on firm's profits. In either case, the benefit is over-provided and firms would increase profits by scaling back or, in certain cases, eliminating the benefit.

The first model we estimate takes into account only the absence or presence of the program; it does not consider the extent of usage of each program. The rationale behind this model is that the very presence of such programs can increase profits either by enhancing the reputation of the firm in the labor market and improving the quality of new hires, or by actually increasing worker productivity by reducing stress and/or raising job contentment. The second model takes into account the extent of usage of each program. Clearly, the second model implicitly recognizes the fact that a firm's offering of a program is not synonymous with its actual use. The results of both models need to be seen together since positive effects on profits can be clue not only to actual usage, but can also be the result of various positive effects (examples of which were mentioned above) attributable to the mere presence of a program.

Results from both models show that not all programs have the same, or even a positive, impact on profits. Depending on the direction of impact, we may draw inferences about the optimal level of benefits provided. For example, our results show that a sick leave option has a significant positive effect on profits, while the actual exercising of the sick leave option does not affect profits. A plausible explanation is that it is not the actual availing of sick leave that seems to be significant, but rather the knowledge of its availability that may increase productivity in various ways -- through increased job contentment, reduced worker stress or enhanced labor market reputation.

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