If you are married and male, you may have heard the expression "happy wife, happy life." It's gotten me through five years of marriage unscathed, and likely will for many more to come. It's one of life's golden rules.

IN PICTURES: 7 Tips On Buying A Home In A Down Market

One rule that doesn't get a lot of coverage - that's because I'm making it up - is "happy employee equals happy shareholder." It doesn't resonate as much as the rule husbands should live by, but it does point out an obvious reality. The happier employees are, the more productive they will be, which in turn should produce greater profits. So, before you buy your next stock, you might want to look at the 11-K to see just how generous or Scrooge-like its pension plan is. It could be the difference between a ten-bagger and a dud.

Five Top Performing DJ Industrial Stocks
Company 5-Year Stock Return 5-Year Earnings Growth
McDonald\'s (NYSE:MCD) 105.9% 88.2%
IBM (NYSE:IBM) 38.4% 46.3%
Coca-Cola (NYSE:KO) 35.5% 19.8%
Johnson & Johnson (NYSE:JNJ) 5.8% 52.2%
3M (NYSE:MMM) 2.1% 15.7%
DJIA 0.5% N/A

A Whopper of a Retirement Plan
Like with most retirement plans, McDonald's (NYSE:MCD) employees can contribute up to 50% of their pre-tax earnings in their 401(k). Most people don't. Financial planners often suggest employees contribute up to the amount employers will match in their 401(k) and then put the annual maximum in their Roth IRA (currently $5,000) and if they have anything left after paying the bills, to make a further contribution in their 401(k). The important word here is "match." Some companies won't (or don't) match their employee contributions. Not doing so is a morale deflator and to be avoided at all costs. That's not a concern at McDonalds. In fact, their match is overly generous, to the point of obscene.

The retirement savings plan provides those employees with one year of service a 300% matching contribution on the first 1% of earnings and 100% match on the next 4%. So, if you earn $50,000 annually at the Golden Arches and make a 5% or $2,500 contribution to your plan, McDonald's will kick-in $3,500. In addition, at the discretion of management, it will make a further profit sharing contribution on the next 4% in 2008. Overall, that's a 240% match. Not many can claim this privilege. Is it any wonder McDonald's five-year earnings growth and five-year stock returns are highest of the companies in the table above? Not a chance. (In hard times, companies may stop matching your 401(k) contribution, but there are ways to offset the hit, read When Your Employer Cuts Your 401(k) Match.)

A Key Sign
One of the key signs of a caring employee is the Statement of Changes in Net Assets Available for Pension Benefits, presented in every 11-K filed with the SEC. Right there in bold print are the additions to net assets with a separate section for company and participant contributions. You want the company contributions to be higher, as they are at McDonalds. In 2008, McDonald's made $74.1 million in contributions to the 401(k) and employees $48.8 million. In the future, that's the first place you should go to get an idea of a company's generosity. It doesn't mean all companies that contribute more than employees are enlightened, but it does suggest they might be.

Company Stock Ownership
Another interesting detail of the McDonald's 401(k) is that it limits contributions for buying company stock to 20%. Therefore, in the example above, the employee making an annual contribution of $2,500 with company additions of $3,500 can invest no more than $1,200 in McDonald's stock. The rest must go in various funds made available by the company. It's curious what some of the other companies from the list above allow.

IBM (NYSE:IBM), for the most part, has a good plan offering employees a very competitive match along with a large number of investment options, including the IBM Stock Fund, which invests in its own shares. Unfortunately, there is no maximum like McDonalds. That's a mistake. While it's good to have employees buying your stock, the dotcom bubble is a reminder how a belief in your company can turn into a financial nightmare. There needs to be a cap for the protection of employees. Besides, most of the mutual funds available to employees already invest in Big Blue, so a cap shouldn't be a concern.

Coke (NYSE:KO) also has a reasonable plan, matching the first 3% of an employee's compensation dollar-for-dollar. Unfortunately, there is no cap, and worse: all company contributions initially go towards buying company stock with employees able to convert the shares later. The problem is they probably never do. Coke stock accounts for 51.6% of the plans assets. It needs to be lower. (No more excuses. Make sure you are financially secure and independent for your golden years, read Compound Your Way to Retirement.)

The Bottom Line
Treating employees well isn't some fluffy human resources concept. It is the first rule of business. Shareholders can't benefit unless employees are genuinely happy to go to work. Sure, recent earnings reports have surprised to the upside, proving cost-cutting does work. Long-term, however, if you can't keep your employees happy, you won't grow the top line and that's where the real money comes from.

Related Articles
  1. Investing Basics

    What is a Settlement Date?

    A settlement date is the day a security trade must be settled.
  2. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  3. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  4. Fundamental Analysis

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  5. Investing Basics

    Explaining Options Contracts

    Options contracts grant the owner the right to buy or sell shares of a security in the future at a given price.
  6. Home & Auto

    When Are Rent-to-Own Homes a Good Idea?

    Lease now and pay later can work – for a select few.
  7. Economics

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  8. Economics

    Explaining Carrying Cost of Inventory

    The carrying cost of inventory is the cost a business pays for holding goods in stock.
  9. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
RELATED TERMS
  1. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
  2. International Financial Reporting ...

    A set of international accounting standards stating how particular ...
  3. Days Sales Outstanding - DSO

    A measure of the average number of days that a company takes ...
  4. Equity

    The value of an asset less the value of all liabilities on that ...
  5. Derivative

    A security with a price that is dependent upon or derived from ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
RELATED FAQS
  1. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>
  2. What are the best ways to use your 401(k) without a penalty?

    The best way to use your 401(k) retirement savings account is to take normal distributions after you reach retirement age. ... Read Full Answer >>
  3. Can I take my 401(k) in a lump sum?

    Establishing a retirement savings plan during your working years is a necessary part of comprehensive financial planning. ... Read Full Answer >>
  4. Can I use my 401(k) to pay for my college loans?

    If you are over 59.5, or separate from your plan-sponsoring employer after age 55, you are free to use your 401(k) to pay ... Read Full Answer >>
  5. Can I take my 401(k) to buy a house?

    Once you reach 59.5, you can use the funds in your 401(k) retirement savings account to buy a house or any other expense ... Read Full Answer >>
  6. Can my company ever be entitled to take my 401(k)?

    Depending on the terms of your 401(k) plan, your employer may be able to retain some, or all, of the contributions it has ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!