The Human Element in the S&P 500
Mounting evidence suggests that how companies manage their people is just as predictive of financial success as what they sell.
The S&P 500 has delivered strong returns over the last decade, but not all gains are created equal. Companies that treat their workforce as a core driver of value have outperformed their peers, achieving stronger growth, higher margins, and greater investor confidence.
Workforce efficiency, retention, turnover, and alignment with strategic goals are often overlooked in favor of traditional metrics like earnings growth or operating leverage. However, mounting evidence suggests that how companies manage their people is just as predictive of financial success as what they sell.
Here are some key data points to keep in mind:
A 5-percentage-point improvement in employee retention correlates with a 0.8% annual increase in EBITDA margins.
Companies with lower employee turnover outperform their industry averages by an annualized 3.5% in stock price appreciation over 10 years .
Firms in the top quartile of employee engagement report 21% higher profitability and 20% higher productivity than their industry peers.
Companies investing in workforce development report a 2.1x ROI within three years, largely from improved productivity and reduced external hiring costs.
Why does this matter now more than ever? Labor market dynamics are shifting. In the post-pandemic economy, employees are demanding more—whether through flexible work arrangements, professional development opportunities, or a greater sense of purpose. Companies that adapt are gaining a competitive edge, while those that don’t risk falling behind, both operationally and in the eyes of investors.
The statistics above highlight a critical perspective… that how companies manage their people is as predictive of success as what they sell. For leaders and investors alike, understanding the interplay between workforce management and financial outcomes has become essential.
Microsoft’s Workforce Transformation
When Satya Nadella became CEO of Microsoft in 2014, he inherited a company that was losing relevance. Revenue growth had stagnated at 2-4% annually, and its stock traded at a 15x P/E multiple—a significant discount to its peers.
Nadella focused on a simple yet transformative idea which was to empower Microsoft’s workforce. His strategy included reskilling employees, creating a culture of collaboration, and tying management incentives to long-term outcomes.
What followed was a textbook example of how workforce strategy translates to financial results:
Employee retention improved by 15 percentage points between 2015 and 2021.
Productivity soared as employees reskilled in cloud computing, artificial intelligence, and enterprise solutions, leading to a 20% revenue CAGR in its Azure division over the decade.
Operating margins expanded from 25% in 2014 to 40% in 2023, driving net income growth of 16% annually.
The stock price reflected these changes. Microsoft’s market cap grew by $2.2 trillion, delivering annualized shareholder returns of 24%—double the S&P 500’s performance during the same period.
Starbucks’ Retention Strategy
Starbucks has long been known for its emphasis on people, both as customers and employees. In an industry notorious for high turnover, Starbucks implemented an ambitious strategy to retain talent and improve its bottom line:
Offering healthcare benefits to both full- and part-time employees, reducing turnover by 25% compared to industry averages.
Establishing the “College Achievement Plan,” funding tuition for over 15,000 employees by 2023.
The results? By reducing turnover and improving employee satisfaction, Starbucks cut training costs by $35 million annually and improved customer satisfaction scores by 15 points. This alignment between workforce efficiency and operational goals helped Starbucks achieve 11% annual revenue growth and maintain its market dominance despite rising competition.
Walmart’s Productivity Revolution
Walmart, a company historically known for cost-cutting, has turned its attention to workforce optimization in recent years. From 2017 to 2022, Walmart:
Increased its average employee training spend by 30% to develop better managerial pipelines.
Boosted wages for hourly workers, improving retention rates in key locations by 12%.
These initiatives paid off. Walmart’s operating income grew by 6% annually, driven by improved productivity and lower hiring costs. Over the same period, the company’s stock price outperformed the S&P 500 by a margin of 2-to-1.
The link between workforce performance and financial returns isn’t just isolated to technology. While it’s easy to point to technology examples, because we’re all familiar with these companies and, generally, what they’re doing from a strategic perspective, the benefits of performance management across organizations is felt across industries.
In healthcare, for example, hospitals that invest in staff training and development see a 20% improvement in patient outcomes. These improvements often lead to fewer malpractice issues and better reputations, which attract more patients and boost revenue.
Software companies with lower turnover grow their annual recurring revenue (ARR) by 40% more than those with higher turnover. Experienced developers create better software, leading to fewer bugs, faster updates, and more reliable products for customers.
Even in manufacturing - which is where a lot of my own focus, thought, and attention goes - where machinery and systems play a big role, having a stable workforce matters. Companies with less employee turnover experience 15% less downtime on their production lines. This translates to smoother operations, fewer delays, and better profit margins.
Returns & The Workforce Advantage
Markets have long rewarded companies that optimize capital allocation. Yet, in today’s talent-driven economy, capital is no longer the scarcest resource… talent is. Companies that invest strategically in their workforces are building a foundation shareholder value.
Here’s a really interesting data point. If you had invested $10,000 in the top quartile of companies by workforce stability (based on retention and productivity data), your portfolio would have grown to $54,000 over 10 years, compared to $38,000 for the S&P 500.
I really like this graphic of the cumulative outperformance of the Best Places to Work group of companies relative to the Russell 1000.
For investors and leaders alike, the message is clear. In the race for returns, people can really drive (out)performance.
What a weird and wonderful world,
