This article was originally published by Creating Loyalty.
About half of the large companies in the United States include customer feedback within their incentive compensation, according to a special survey we conducted on this topic in 2005. In The Walker Insight Report on Tying Employee Compensation to Customer Loyalty Programs, decision-makers said this helped align their organizations to be customer-focused, drove process quality improvements and generated repeat business and positive financial results.
We observed another good reason to believe customer feedback in your incentive plans has real value. Users of the customer component gave their compensation programs higher overall effectiveness ratings than those received by programs without a customer component. What’s more, nine in 10 were in favor of maintaining this practice.
This is not to say a customer feedback-linked incentive pay is a simple or seamless exercise. There are challenges to overcome and helpful principles to follow. It’s good to start by building on the main purpose of any incentive program—rewarding the desired behaviors that help drive corporate objectives and performance. This means the incentive must have an impact to avoid simply adding cost. It also means avoiding unintended outcomes that run counter to your objectives.
To learn from the problems experienced by some users, as well as from the advice of other experts in compensation and best practices we researched, I here offer a set of guidelines for applying customer feedback to your incentive compensation program:
- Make sure the program improves customer experiences, not just answers and scores. The most serious potential issue would be if the scores are manipulated by employees. This occurs when employees directly ask customers to rate them highly or subtly mention that good scores on the survey will boost the employee’s pay or ask customers to fill out the survey in their presence. This illustrates the danger of unintended consequences—employees striving toward a goal with the company failing to receive the benefit of the desired behavior. Plan counter-measures to employee manipulation when setting up a program or evaluating your existing program.
- The metric must be easy to understand and use for communicating progress. Some programs have a customer component calculation that is too complex, causing confusion among employees. That, in turn, lessens the desired motivation. Programs should have a simple structure with clear, stated goals and align with corporate initiatives to have the most impact. In addition, programs should communicate results and progress toward goals early and often.
- Programs must offer a clear line of sight or job linkage to be relevant to a wide range of stakeholders. Employees must be able to see how their job connects with the customer metric. Programs should be structured, so they see "their role in the goal" for understanding and serving customers better, increasing customer retention, loyalty, profitability and shareholder value. Many organizations have different setups for measuring individual, group and company performance. When goals for these levels are incorporated together, they guide individual actions and team activities while aligning with enterprise-wide goals.
- Internal drivers may be a tangible and important part of the customer metrics mix. Programs where the customer component is strictly a "score" or level of satisfaction applied to all incentive recipients have less meaning to certain employees than some internal metrics that "drive" satisfaction and loyalty. A support service employee having a difficult time understanding his or her contribution to overall "satisfaction" and "loyalty" might relate much more to a key driver of loyalty, such as on-time delivery. The internal may be a more tangible and appropriate metric, which is still "customer focused." Giving employees the right drivers of satisfaction and loyalty makes a better connection to the desired behavior. For this reason, some companies balance an equal mix of the internal and external customer metrics per employee.
- There are boundaries regarding what portion of the total incentive should be customer focused. It seems that programs are more successful if the incentive for a customer satisfaction or loyalty component is at least 15 percent and not more than 25 percent of the incentive compensation. When a larger portion than that is used, some people may lose perspective and be lured into manipulative behavior. When the customer portion falls below the low threshold, it sends a message questioning the importance of customer focus. What should the remaining 75 percent to 85 percent of the incentive be based upon? In most cases, companies balance out the incentives with a combination of employee productivity, MBOs or individual objectives, and a share of the company’s financial performance.
- Use baseline results to set attainable, but real, improvement goals. A certain tension or "sweet spot" exists between goals that are aggressive, yet attainable. When using customer survey results, rules of statistical precision can play a role to set goals marking real improvement rather than just statistical fluctuation. Never set a goal without benefit of baseline results and some understanding of how fast customer perceptions can realistically change.
The typical company using customer feedback in compensation has been at it for a few years, learning and making adjustments along the way. While this article shares some of their key learnings—with much more detail available in the full executive report—we aren’t suggesting a "silver bullet." The best application for your enterprise is to be gleaned from among these best practices combined with your own experience and corporate strategy.
In closing, if we expect our companies to become more customer-focused, it makes perfect sense to pay our key stakeholders to accomplish just that. So whether you have been tying employee compensation to customer loyalty results for years or are thinking of starting a program for your company, stick with it, because it works!