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HR Magazine, February 2004 - Customer Satisfaction Pays Off 

2/1/2004  By John Kiska 

HR Magazine, February 2004

Vol. 49, No 2 

Rewards can motivate employees to deliver top notch customer service.

A little monetary incentive for employees can go a long way toward pleasing the customer. When employers remind customer service staff through positive reinforcement that their bread and butter depends on what this ultimate boss thinks, the organization will profit.

Spending on customer satisfaction measurement services during 2003 was expected to exceed $600 million, according to Inside Research, a marketing research industry newsletter. Such surveys aid company executives in their understanding of how to meet customer expectations and build customer loyalty. Improving these areas is key to generating and enhancing revenues and profits, and, more frequently, these customer surveys have also meant extra pay in employees’ salary envelopes.

Developing an effective compensation system that links customer satisfaction to employee rewards requires the company to:

  • Understand what its customers expect.

  • Understand how customer satisfaction affects organizational success.

  • Develop and implement a valid customer survey.

  • Assure employees that the metrics used are valid.

  • Consider whether additional factors should affect rewards.

  • Balance customer satisfaction with employee productivity and return on investment (ROI).

Paying For Customer Satisfaction

Under turbulent economic conditions, companies continue to change their compensation practices in an effort to control costs, while at the same time further aligning employee behaviors with strategic business objectives. Better alignment means that a company and its employees are financially rewarded.

Typically, performance pay programs using customer feedback operate in a similar way. Customers answer a survey or complete a questionnaire about their experiences with the company. Companies often ask key questions regarding overall satisfaction levels. They also ask customers about their products, services and other business attributes. Overall, the company’s aim is to rate itself and its employees on how well they are meeting customer expectations. This accumulated customer information is then used to create a satisfaction score, which becomes the metric on which performance pay is calculated.

In part, the increasing popularity of these programs has been driven “by the adoption of a balanced scorecard approach to performance management,” says Bill Barnes, vice president at Burke Inc., a marketing research firm based in Cincinnati.

Positive customer satisfaction scores do not, however, automatically translate into a bonus for the employee. Although a few companies use customer satisfaction scores as the exclusive means with which to reward performance, most experts agree that the trend is for companies to use other measures as well.

Companies that use customer satisfaction to support performance-based pay “may balance it with a financial indicator such as profits or earnings per share,” says Carri B. Banka, compensation practice leader at WorldatWork in Scottsdale, Ariz. “It may also be balanced against other internal objectives such as productivity targets.”

At Sears Roebuck & Co., customer satisfaction is a key part of how store performance is assessed. “We combine customer satisfaction with other key business measures like profit and revenue to get a complete picture of store performance,” says David Gustat, director of compensation.

Whether or not they are combined with other measures, such customer satisfaction programs are used across all industry sectors. “Companies using these programs do so as part of their overall organizational focus,” Banka says.

Ravin Jesuthasan, co-leader of Towers Perrin’s Rewards and Performance Management practice based in Chicago, agrees that “organizations that are consumer-facing are more likely to use customer measures” as part of their incentive programs.

Others use customer feedback in a more focused way. “More organizations use customer feedback in their compensation programs to support their sales organizations and sales management functions,” says David A. Hofrichter, managing director of global compensation with Pittsburgh-based Mellon Financial Corp.’s Human Resources & Investor Solutions. It’s a way for companies to reward “key account representatives with major account responsibility” and to ensure that they are focused on client needs, he says.

In terms of the percentage of performance pay attributed to customer satisfaction, Mike Garelik, a compensation practice leader at Watson Wyatt Worldwide in Philadelphia, remarks that, “I’ve seen it as low as 5 percent to 10 percent. However, the ideal range is 20 percent to 25 percent.”

Experts generally agree that these programs should include executives and front-line service staff. This way, everyone is “rowing in the same direction,” says Peter Andrews, chief executive officer at In-Touch Survey Systems, an Ottawa-based customer satisfaction research firm.

Focus on the Customer

There are a variety of reasons why companies choose to reward their executives and employees based on customer satisfaction. One of the primary reasons is that companies continue to strive toward building an organizational culture focused on delivering superior customer service and ultimately improving financial performance. Linking performance pay to customer satisfaction will “develop employee behaviors that are required to build and nurture an organizational culture centered on customer service,” says Vafa Akhavan, executive director of consulting at J.D. Power & Associates, a global marketing information services firm based in Westlake Village, Calif.

For some industry experts, straightforward economics drives the decision. “Companies that use customer feedback in performance pay include those that deliver services face-to-face with customers. For these companies, customer satisfaction is critical to customer retention,” says Randy Keuch, director of strategic awards and global compensation at Pfizer Inc., a New York-based pharmaceutical company. “These companies know what it costs to attract a customer and what it costs to lose one,” he says.

For others, these programs are about implementing operational improvements. “Companies in the business-to-consumer sector are continually looking at ways to improve operational performance,” Akhavan says. “By linking customer satisfaction scores to performance pay, this helps to focus managers and their staff to create a continuous improvement culture.”

For Sears’ Gustat, incorporating customer satisfaction into pay programs is pure business strategy and common sense. It is a means of becoming more familiar with one’s own business and how it operates. “Companies must understand how customer satisfaction aligns with business priorities and objectives,” he says. “There must be a clear connection between customer satisfaction and top bottom-line performance. Once this is in place, then linking performance pay to customer satisfaction helps to execute and drive a company’s strategy forward.”

Getting the Right Measures

Asking customers whether they have been satisfied with a company’s services is not as simple as it may appear. Of course, the customer-satisfaction survey must ask the right questions, but also the company needs to know how to interpret customer responses correctly. “Once customer satisfaction is tied to compensation, companies need precision in their measurement system to ensure changes are not based on random statistical fluctuations,” says Ross Goodwin, senior business consultant at Hewlett-Packard Co.’s Business Innovation and Transformation Services Group in Windsor, Calif.

To ensure that the right things are being measured, Goodwin adds, “companies need to conduct qualitative research to identify key measures or attributes of what’s important to customers.” Without this baseline research, companies are guessing at how important a measured attribute may actually be to their customers.

Burke’s Barnes agrees. “A company looking to establish a strategy around innovation must ask its customers what innovation means to them,” he says. “Without doing so they run the risk of measuring and rewarding the wrong behavior. Companies make the mistake of measuring what’s easy, which doesn’t necessarily reflect customers’ requirements or needs.”

There is a further risk, Barnes says: Employees might not trust the information gathered by the surveys. As a result, the program could fail to yield the desired operational and behavioral changes.

To counter this potential risk, “employees must feel comfortable that the measures are valid and accurate,” Banka says. “They need to understand how the metrics work. This information must be communicated to them on a regular basis.”

Another consideration is the organizational level at which companies measure and pay employees based on customer satisfaction. Banka notes that she has “seen companies reward employees using companywide customer satisfaction measures, as well as those based at a business-unit or product-line level.”

The trend, Barnes says, is to “drive to the lowest level in the organization,” thereby maximizing the line of sight between the customer and staff delivering the service. The closer employees are to influencing customer satisfaction, the more likely it is that the program will produce operational changes that improve customer opinions.

To complicate matters, since companies across all sectors are asking customers what they think, it’s harder to get customers to respond to surveys. As a consequence, many companies offer incentives to customers, but that may result in biased survey results.

However, using incentives is a “reality today for most companies seeking to collect customer feedback,” Andrews says. “People are busy and don’t want to be bothered unless they have had an awful experience. In those cases the numbers really get skewed. Incentives help to get people engaged in the process, and by sampling enough customers there is much less risk of the numbers being inaccurate.”

Watson Wyatt’s Garelik suggests that “when you start to think about using customer satisfaction measures in compensation programs, the survey design and methodology needs a greater level of sophistication” than that of typical survey programs.

A Measurement Alternative

“Conducting surveys on a continuous basis to achieve the precision required to support performance pay programs is very expensive,” Akhavan says. This is why it is important to take a strategic approach.

To this end, “performance-based pay programs using customer satisfaction should take a dual approach of measuring customer satisfaction to include internal process measures that tie back to customer satisfaction,” Barnes says.

For example, a company may measure shipping times as one of its key customer satisfaction indicators. Using the dual approach, a survey would ask customers how satisfied they are with shipping times. However, the company would also collect and report internal measures. These measures would help support or refute customers’ perceptions.

Companies that use such a dual approach should split the incentives equally, Barnes says. “If a company pays 10 percent of performance pay based on customer satisfaction, 5 percent should be based on external measures of satisfaction as defined by customer perceptions and 5 percent based on internal measures.”

Other industry observers agree with this approach. “Once measures of customer satisfaction are identified, internal processes and information systems should be used to track performance,” Goodwin says.

The result of this approach is to reduce the weight or impact given to customer perceptions.

Challenges for HR Executives

All compensation and reward programs must be evaluated in terms of financial impact on the company. “While these incentives can be highly effective in improving customer satisfaction, human resource executives need to be equipped with the proof of a real ROI to ensure the continued credibility of their program,” Towers Perrin’s Jesuthasan says.

In addition, “companies must balance the cost of satisfying customers against productivity,” Pfizer’s Keuch says. “In a call center there is the demand to process a certain number of calls per hour, but if customers aren’t satisfied and [too much] time is taken to respond to customer requests, then it impacts on productivity.”

However, HR executives need to be wary of simply looking at the numbers. As in most compensation-based programs, there will be trade-offs. Given the lead role that HR plays in developing and nurturing companywide behaviors, executives must be careful not to reward behaviors that result in other unwanted ones. Banka emphasizes “the need to ensure all desired organizational behaviors are identified and taken into account when designing the program. For example, an employee may work well with customers, but not with staff, since the latter may not be part of the reward structure.”

Customer-based performance pay programs can be tricky to design and to implement, so “companies should consider moving slowly into linking compensation to customer feedback, and remember change will take time,” Mellon’s Hofrichter says. In addition, “companies must be willing to experiment and become educated with these programs to see what moves the needle.”

For many practitioners, however, the rewards are justified. Moreover, current trends suggest that this compensation practice will get refined as it becomes more popular.

John Kiska is a management consultant and freelance writer based in Ottawa.

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