A lot of industry pundits suggest that tying compensation to customer feedback is a good thing. But is it really?!?
My take: I’ve seen situations where tying compensation to feedback scores has helped a lot and I’ve seen situations where it has failed miserably. So the correct answer is much more nuanced than a simple you should or you shouldn’t tie compensation to customer feedback.
Before I give my advice, here are three key underlying principles:
- If there is significant compensation tied to any metric (including customer feedback), then people will look for ways to manipulate the measurement.
- If people don’t understand a metric, then tying compensation to it will have little impact on their behavior and any downside in compensation will create a very negative response.
- If people don’t understand how they personally can affect a metric, then tying compensation to it will have little impact on their behavior and any downside in compensation will create a very negative response.
One of the bad situations that I’ve seen is when a CEO falls in love with a metric like Net Promoter Score (NPS) and insists on immediately tying large chunks of compensation to it. Executives often don’t understand how they impact the measurement, can’t explain some of the movement, and therefore become resentful of the overall NPS program.
Does that mean that I am against tying compensation to customer feedback scores? No! Since customer perceptions determine loyalty, feedback is an important barometer of the future health of the business. So it makes sense for it to be part of a compensation package.
Alas, here are my recommendations:
- Create a metric (it can be made up of one or several customer feedback measurements) that is easy to understand and make sure that you educate the organization about what it is, why it’s important, and what they can do to affect it. Allow at least 2 quarters for educating the organization.
- Provide reporting that shows how the company and each organization is doing in terms of the metric. Make sure that you can provide an analysis of internal activities along two dimensions 1) how correlated is the activity to the metric?; 2) how well is the company performing in those areas (based on customer feedback)?
- Develop specific customer feedback goals for the entire executive team. Start by using shadow goals (without any compensation impact) for at least two quarters so the execs can understand how they can affect the measurement.
- After the executive goals are in place, use a company-wide or division-wide metric to raise awareness of the importance of customer feedback. Incorporate it into the overall profit sharing or bonus structure in the firm.
- If your metric has some slight unexplainable variance (which many do), tie compensation to bands of performance instead of to a single number. This focuses people on moving in the right direction and away from obsessing about a single number.
- Consider starting with a compensation plan that is biased towards upside. In other words, you may want to introduce the plan where there is little negative impact on compensation if the group doesn’t hit a goal, but there is positive impact of they exceed it. This can help eliminate some of the negative perceptions early in a program.
The bottom line: Companies should tie compensation to customer feedback scores… slowly.
Bruce
A nice idea and some good principles.
But why tie compensation to customer feedback without a through understanding of how it drives value creation for the firm, or ideally, value co-creation together with customers/partners?
It’s about value (co-) creation, not about customer feedback.
Graham Hill
Customer-centric Innovator
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Bruce: I particularly like the measured, deliberate approach you have taken for your recommendations. In general, I agree that customer feedback is valuable for considering in compensation programs. Like anything else in customer service, the devil is in the details, and when customer feedback is linked to compensation, I’ve learned that “ready/ fire/ aim” is one of the worst mistakes a company can make. I’m interested in your opinion on two issues:
1) Customers aren’t professional service evaluators. And because customer experience can be impacted by many factors outside of an employee’s control (a car cut me off before I entered the restaurant parking lot, and my kid spilled soda all over his clothes), is it appropriate (or ethical) to allow that situation to influence the evaluation an employee might receive (which it undoubtedly will)?
2) If the psychological relationship between personal appearance and customer experience isn’t fully understood, could employee compensation be impacted by racial, gender, or other bias? In another scenario, would a company be at risk for unintentionally creating a two-tier compensation package–a higher one for people of normal weight, and a lower one for severely obese? (see my blog Race and Gender Impact Customer Service Bonuses)?
Graham, I believe in co-creation as well. How many companies are doing it in a meaningful way and across the whole organziation? How long do you think it will take this concept to be adaopted widely?
At this point co-creation is a buzz word that is yet to see full adoption. Until then we need to get organziations aligned around the customer and submit themseleves to his / her judgement.
Linking compensation to customer’s judgement is a huge commitment. Before I bet on co-creation, I would be happy to see serious linkage to customer judgement (a.k.a. feedback) As practitioners who guides organziations, we need to also demonstrate a practical path, not just cite the latest buzz words.
Lior Arussy
Since this comment doesn’t seem to appear on Bruce’s blog, I’m posting here. Check out the blog for more great discussions.
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Excellent post and discussion Bruce!
Too often companies compensate for bringing in new customers (sales commissions) but rarely (never?) reward their employees for retaining customers. There has to be balance.
I agree that there is risk and that most customer feedback metrics can be gamed. However, I believe that most employees do it for one of two reasons:
1 – They don’t understand how their job can and will impact the score;
2 – They don’t believe that management really has an interest in delivering good experiences. (Management has to walk the talk)
The steps you outlined are definitely a step in the right direction. Dawna and others also add some interesting and useful suggestions.
However, what is usually lacking is patience and communication. People want to see results now and don’t take the time to correctly implement changes. I would go so far as to say that your time lines are too short.
Having said that, I think this is a great post and discussion on a topic that definitely needs more of it. Keep up the good work!
Cheers!
Eric
Excellent post, Bruce, and good discussion about a critical topic.
For my 2007 article Find the “Ultimate” Loyalty Metric to Grow Your Business, I interviewed a number of experts and concluded that while NPS can be useful it’s not the “one number.”
The issue of how to motivate the organization is critical. In addition to the points that Bruce made I would add that choosing and using the right metric is essential — it should be one that clearly links to improved business performance.
Then if you motivate people to do the things that will improve the score, the theory goes that the business outcomes you seek will happen.
But as any sales manager knows, as soon as you start measuring and rewarding for something, let the games begin! So one of my conclusions was that you should reward managers and employees, but don’t overdo it. Don’t have loyalty metrics drive more than 20-25% of total compensation. Also watch out for “unintended consequences” and be ready to make adjustments as you gain experience.
Bruce, I agree with your comments, and especially like your recommendation for “analysis of internal activities on how correlated is the activity to the metric”. Graham’s assertion that “it’s about value creation” is also significant, as well as the need to be practical, as mentioned by the other commentators.
I’ve done significant work in my career on this topic, and I’ve found that the keys are 4-fold:
a) Differentiate between lagging indicators (which are important things stakeholders are able to observe before you’re able to measure them) and leading indicators (which are things employees can measure and manage prior to stakeholders’ observations).
b) Emphasize leading indicators primarily and lagging indicators secondarily, as components in a dashboard for visibility and constructive learning, and in the formula for incentive compensation.
c) Start small in terms of a pilot program, the lagging metric selected, and employees’ perceptions of upside/downside risk; then increase sophistication as the organization is able to absorb it healthily.
d) Make sure employees and executives thoroughly understand the company’s motivations and vision for the metrics and incentives, provide clarity on what’s actionable for employees, and establish a constructive learning organization atmosphere around metrics momentum.
My recent posts related to this topic:
Please Give Us a Highly Satisfied Rating?!
Employee Engagement in Balanced Scorecards
4 Tips for Keeping Goals & Initiatives on Track
Lynn Hunsaker helps companies improve customer data ROI, customer-centricity and customer experience innovation. She is author of 3 handbooks. See ClearAction.biz, Twitter.com/ClearAction, Facebook.dj/customerexperience.