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.