Research: Workplace Injuries Are More Common When Companies Face Earnings Pressure
N. Bugra Ozel
May 18, 2017
At a steel mill in Seguin, Texas, an employee suffered burns to more than 60% of his body after hot liquid steel spilled onto him. He died in a hospital three days later.
A 21-year-old plastics worker was treated for severe burns to his hand and had to have four fingers amputated after he was injured on his first day on the job at a factory in Elyria, Ohio.
A flawed network of pipes and valves at a manufacturing plant in La Porte, Texas, led to the release of a poisonous pesticide that killed four workers.
These are just three examples of recent workplace injuries and fatalities. U.S. companies are facing pressure to meet earnings expectations, and research indicates that meeting analyst forecasts is a more important benchmark than meeting the prior year’s earnings or avoiding losses. While these issues may seem unrelated, we wondered whether there is a connection or correlation. Do workplace injuries occur more commonly in companies that are facing increased pressure to meet earnings expectations?
In our study recently published in the Journal of Accounting and Economics, we test whether there is any relationship between workplace safety and managers’ attempts to meet earnings expectations. To do so, we used establishment-level injury data (e.g., individual store or factory) compiled by the Occupational Safety and Health Administration (OSHA) from 2002 to 2011 and matched it to earnings data. This yielded a sample of 35,350 establishment-year observations for 868 firms, excluding financial firms and firms in regulated industries. Our investigation focused on those companies that met or barely beat analysts’ expectations, and we uncovered a previously undocumented phenomenon of higher workplace injuries at these firms in particular.
The numbers are telling. Controlling for other factors, injury/illness rates are 5%–15% higher in periods where a firm meets or just beats analyst forecasts. The injury/illness rates for such firms are also significantly higher than those for firms that miss or comfortably beat analyst forecasts.
We found that pressure to meet earnings forecasts can relate to workplace safety in at least two ways: high workload and cuts to safety-related expenditures. When managers believe their company may be close to missing earnings benchmarks, they may increase employees’ workloads by pressuring them to work faster or for longer hours. In addition, employees may compromise their own safety by overexerting themselves or ignoring safety protocols that slow workflows. All of these behaviors can undermine worker safety.
Managers may also circumvent or overlook explicit and implicit safety-related measures, such as maintenance spending on equipment and employee training. When managers engage in such practices, workplace safety deteriorates and workplace injuries mount.
What does this mean in terms of real people? According to the injury data from OSHA, we find that about one in every 24 employees is injured in firms that meet or just beat analyst earnings forecasts, compared with about one in 27 workers in firms that miss or comfortably beat forecasts.
We identified three factors that characterized the companies that beat earnings benchmarks. First, we found that benchmark beaters in industries with high unionization report lower injury rates than those in industries with low unionization by about 6.4%. That’s because unions typically serve as a proxy for employees’ power to ensure safe work environments. They negotiate safety protocols and compliance into their contracts, and workers can report safety issues to their union representatives.
A second factor emerged when we compared the insurance premiums of workers’ compensation programs. These state-mandated programs differ considerably in their policies and coverage requirements. The premium in North Dakota, for instance, is $0.88 per $100 of payroll, while California’s is $3.48 per $100 of payroll.
It turns out that benchmark beaters in states with high workers’ compensation premiums have a nearly 5% lower injury rate, compared with those in lower-premium states. In other words, in states where workplace injuries are more costly, managers appear to be more diligent about their workers’ safety and less willing to increase workloads and demands on employees.
Finally, we found that companies doing considerable business with the government have better workplace safety records. Federal and state governments typically require that companies submitting bids for contracts maintain adequate workplace safety. Indeed, companies that do not meet certain workplace safety benchmarks may be barred from competing for such work. It’s likely that contract requirements cause managers to remain cognizant of workplace safety as they race to meet or beat expectations.
The effects that we document may represent the tip of the iceberg about employee health, as OSHA only collects data on relatively serious and physical injuries and illnesses that require hospitalization or days away from work. Additionally, our results suggest that disclosures about workplace safety could serve as signals to investors that managers are engaged in short-sighted activities to meet earnings targets. In other words, unusually high injury rates may signal that the firm is engaged in practices that resulted in a transitory boost to earnings that investors should not expect to persist.
When managers and workers lose sight of workplace safety while focusing short-term financial targets, the consequences can be severe. At the company level, the costs include fines, litigation, increased insurance and workers’ compensation premiums, and negative publicity. For workers, however, the price may be significantly worse: pain, lost wages, and, in the very worst scenarios, loss of life.