Editor’s note: Jeff Ellis is director, customer value assessment with Maritz Marketing Research, St. Louis.

The issue of how, or even whether, to tie compensation to customer satisfaction results seems straightforward and simple. But in reality, this issue is quite complex with no clear solution. It should be emphasized up front that our company strongly supports reward systems which place positive consequences into the hands (or wallets) of those responsible for some incremental performance. And while it’s tempting to categorize reward systems as "do this, get that," the fact is, there are many complex factors which must be accounted for in such a design. A properly designed and successful reward system will meet the following requirements:

  • it provides a clear understanding of the objective;
  • it effectively translates the objective to the performance plan;
  • it is embraced by those affected;
  • it is focused on success, rather than failure.

Critical success factor #1: provide a clear understanding of the objective. Sometimes, the wrong objective is trotted out, and forms the basis for compensation. The danger here is that an organization can succeed in paying significant sums of money for performance which meets the criteria of the plan, but does not address corporate objectives. This problem is particularly acute in the area of customer satisfaction.

Frequently companies state an objective like, "raise customer satisfaction." Not only is this a nebulous goal, it does not relate well to the core focus of the business, i.e., to make a profit. Customer satisfaction should be viewed as a variable component of financial goal attainment. The only reason for a company to invest in measuring and influencing customer satisfaction is to achieve positive business (financial) results. While the components that comprise customer satisfaction will vary by product, service, market, consumer demographics, etc., the presence or absence of customer satisfaction will cause consumers to exhibit positive or negative behaviors. And that - quite literally - is the bottom line.

So the true objective is not "raise customer satisfaction," but to "generate greater profits by influencing the balance between positive and negative customer behavior." The key is in recognizing that customer satisfaction is not the goal, but a contributor to the goal.

Critical success factor #2: effectively translate the objective to the performance plan. This is the area that requires the greatest thought and effort. After properly identifying the objective, all can be lost by failing to design an effective performance plan. The plan must:

  • provide goals which are objective and attainable;
  • provide rewards which are commensurate with the effort required;
  • provide for positive, immediate, and certain consequences;
  • account for everyone who influences attainment of the objective; and
  • remove obstacles to success
    • company policies or procedures
    • conflicting goals
    • management interference.

As it relates to customer satisfaction and compensation, this list of "plan musts" is impossible to meet unless the sponsoring company understands the difference between customer satisfaction (a desired state of mind among customers) and the numeric indicator of customer satisfaction (customer satisfaction index or CSI). For this understanding to take place, there must be agreement that customer satisfaction is composed of dozens of "moments of truth." Every transaction and interaction a customer has with a business represents an opportunity to influence customer satisfaction, and thus, subsequent behaviors.

The good news is that individual employees, work groups, and operational units can affect customer satisfaction by managing the moments of truth. This is possible because the moments of truth are within the span of employee control. To the extent that employees can manage the moments of truth, they can be held accountable for them. On the other hand, it is unreasonable to expect an employee - any employee - to directly influence a global measure such as a CSI. It is far more logical to measure and reward performance over which the employee has some control. Therefore, it makes the most sense to reward for improvements to the moments of truth, those elements which drive satisfaction, which contribute to positive customer behavior.

Fortunately, if a customer satisfaction study is designed appropriately, the moments of truth are evident in the attributes measured. With very little processing, it’s possible for work groups to identify the specific activities they perform which influence the attributes measured in the study. Once the activities are identified, then it’s a matter of establishing standards and measurements of performance (internal metrics). There is a tendency to utilize the very visible macro-measure for the purposes of a reward or compensation system, when in fact, the most effective and efficient method is to use the micro-measures (internal metrics). Not only will this provide a more effective reward system, but it also matches up with the customer satisfaction measurement process. A company is better served by placing the emphasis - and the compensation - on internal measures, rather than external measures.

An additional pitfall in the design process is rewarding counterproductive behavior. It’s not that unusual for a company to realize that the reward plan benefits everyone but the company. For example, a company might introduce a sales incentive program which rewards employees for selling more of Product A. One quarter later, salespeople are earning maximum incentives, and sales of Product A are up 15 percent. The program looks like a huge success until the company examines the sales for Product B and Product C, which are off sharply during the quarter. The problem? Reward-based programs work; sometimes too effectively. While rewards will drive behavior, it’s up to the company to ensure that the behaviors do not produce unintended results.

Here’s a customer service example: Clients complain that when they call, the phone rings and rings before being answered. The solution requires the secretarial and clerical staff to answer each call by the third ring. This mandate is supported by communications aimed at affected employees, with the intent being to emphasize the importance of each call.

The effort is further supported by rewards to the staff based on the number of calls answered by the third ring. The result: percent of calls answered by the third ring skyrocketed from 25 percent to 85 percent.

Everyone is happy - except the clients, because now the number of callers placed on hold (so that the next line can be answered within three rings) has also skyrocketed. Who could have known? Well, the secretaries would have known, which leads to the next critical success factor.

Critical success factor #3: Design the plan so it is embraced by those affected. The best-designed plan will fail to achieve its full potential without ownership of those affected by it. This does not mean the plan must receive 100 percent agreement among participants on the details. It simply means that those who stand to gain the most from the plan are the ones who will ultimately determine whether the company meets its objective. Also, there is a much greater likelihood that potential flaws in the design will be spotted by those closest to the firing line, this includes customers. There’s a lot to be gained by including the voice of the customer in the design phase. So, by involving the key stakeholders during the design phase, a company will arrive at a plan that is stronger, and has the stamp of approval from the groups it seeks to involve.

Critical success factor #4: focus on success rather than failure. One strength of basing a reward system on the moments of truth of customer satisfaction is the direct influence employees can have. That is also one of the cautions for such a system. Employees can opt to provide a less than ideal exchange with the customer, especially if they perceive the reward system as punitive rather than rewarding. Although some very high-profile companies have adopted a "take away" structure which puts a percent of salary or bonus at risk, (usually based on customer satisfaction indicators), this can lead to an unpleasant association between punishment (take away) and the philosophy of customer satisfaction. Common sense and our experience in the area of performance improvement yields an "add to" structure. Under this structure, an employee starts with nothing and watches his bank account grow, thanks to providing superior customer focus.

Competition is another subset of the structure that places too much emphasis on failure. Although the business context will dictate the appropriate approach, as it relates to achieving customer satisfaction and influencing customer behavior, there is not much of an argument for rewarding only the top performing employee/group/division. This type of structure sets up a potential "win-lose-lose" situation. The top performers win, but the remainder of employees, customers, and the company are in a less than favorable position. A much better approach is to base compensation on incremental gains over a baseline of performance. That way each employee/group/division competes against prior performance, and as the critical mass moves forward, everyone wins.

Using a CSI as a compensation determinant

Although there are many compelling reasons for a company to focus on internal metrics that link to customer satisfaction, there may be reasons for a company to tie compensation to external indicators of customer satisfaction (CSI). After all, linking consequences to customer satisfaction data sends a powerful message to employees, and rewarding customer satisfaction improvements reinforces customer-focused behaviors.

Certainly there are firms that utilize a CSI to trigger compensation. However, many experts advise that the CSI comprise just one of a blend of measures which determine the level of compensation. In other words, instead of predicating the reward solely on CSI results, a CSI is combined with other measures - such as quality and productivity performance - to create a composite index which determines how large or small the reward. Here are some of the problems associated with using a CSI as the only determinant of compensation:

  • accuracy and validity of the measurement process;
  • measurement of elements beyond the control of plan participants;
  • influence of external forces (market volatility; seasonality); and
  • plan participant "tampering" with measurement process.

All four of these potential problems can create winners out of losers, and losers out of winners. In other words, there can be a major disconnect between who receives the compensation and who deserves the compensation. The degree of fallout from this injustice is linked to the type of reward. Honor and recognition awards (certificates, trophies, publicity) place the emphasis on acknowledgment of achievement. They tend to be highly celebratory and social (work groups or teams). Financial rewards tend to emphasize gain-sharing, and individualized rewards, especially when linked to base pay.

Finally, when instituting a financial-based reward system, the company must address two crucial equity issues: distributive justice and procedural justice.

Distributive justice requires that affected employees must be reasonably satisfied with their pay before the plan is implemented, and that employees must be satisfied with the amount of revenue distributed by the plan. Employees will not be fully supportive of a reward plan if they perceive it as management’s effort to address a shortfall in basic compensation.

Procedural justice touches on issues previously mentioned, namely that the design of the plan must be based on factors that are largely controllable by employees. Therefore, the company has an obligation to identify the controllable and uncontrollable factors that influence the criteria.

Many compensation or bonus programs target two specific groups: sales and senior management. Moving an external customer satisfaction indicator (CSI) is far more feasible for a salesperson with dozens of customers than for a store manager with thousands of customers. That’s why it makes more sense for the store manager to focus on the areas that:

A. They can control, and

B. Have an influence on customer satisfaction like hiring, staffing ratios, and human resource development.

Even the plans for salespeople typically focus on attributes such as responsiveness, ability to solve problems, after-sales service, and ability to communicate, consult and advise, rather than on a single overall indicator of customer satisfaction.

The customer-focused bonus plans for senior management are built on the reality that those individuals control the decisions, and the budgets. The ability of the salesperson or the store manager to delight customers might hinge on additional investments in personnel, training hours, or computer systems. Management has the power, and now the added incentive, to invest in achieving greater levels of customer satisfaction.

Reward system should be win/win

A reward system built on movement of a single external metric such as a CSI will have difficulty meeting these critical success factors. At the very least, a CSI should be only one of several measures on which rewards are based. Perhaps best of all is to translate satisfaction factors into internal measures which employees can influence. This approach yields a reward system which employees and management can embrace, and which will result in positive customer behaviors.