A direct link between bonuses and customer satisfaction

As part of our "We read it for you" section, Daniel Ray, a professor and researcher at Grenoble Ecole de Management and an expert on customer satisfaction, helps us understand the research conclusions presented by O'Connell and O'Sullivan.

“We’re committed to customer service….” A phrase everyone has heard and come to ignore. Why? Simply because such a gap has grown between what many companies declare and what their customers actually experience. Welcome to the era of “customer washing”.

Due to financial capitalism, most companies, and in particular those listed on stock markets, are primarily focused on short term results. In this context, it could almost be considered a joke to ask directors about the impact of customer satisfaction on their bonus. When they speak openly without the usual “customer washing”, they indicate that their variable pay scale depends mostly on their ability to “create short term value for shareholders” (in other words, maximize stock value and short term dividends).

This brings up an interesting question: As it is known that investing in customer satisfaction is profitable over the medium and long term, how do you motivate directors to care about this factor? How do you reconcile a director’s personal interests with the interests of the customers in order to encourage a sustainable company?

The end of "customer washing"

As part of their research published in 2011, O'Connell and O'Sullivan studied the link between customer satisfaction and director bonuses while taking into consideration usual financial performance indicators. They explored whether or not a director would personally gain by investing in customer satisfaction instead of other short term financial indicators. It's a fundamental issue because if customer satisfaction is demonstrated to be of personal interest to directors then customer satisfaction could once again become a priority for executive strategy.

The results? It's in a director's direct and personal financial interest to invest in customer satisfaction.

Using a sample of 748 companies, the researchers were able to analyze the real impact of customer satisfaction on bonuses while controlling for other financial variables (sector growth, company size, etc.). O'Connell and O'Sullivan underlined that their results demonstrated a direct impact by positive customer satisfaction on a director's variable pay (p. 828). In greater detail, they explain that:

• Customer satisfaction has as much or more impact on bonuses as several purely financial indicators (stock market results and Return On Assets).
• The relationship between customer satisfaction and bonuses even has an impact in the short term (e.g., when deciding the next bonus).

These results confirm that contrary to many current practices, directors have real reason to invest in customer satisfaction.

Customer satisfaction: a key indicator to decide executive compensation

According to the researchers, those in charge of setting executive compensation have become increasingly interested in a variety of factors in order to evaluate and set pay in a rational manner. They analyze various factors to determine a coherent result. If “absolute” customer satisfaction (results from customer satisfaction surveys) are coherent with “relative” results (a positive or negative difference in relation to other companies in the same sector), customer satisfaction can significantly impact executive pay.

For example, if both factors are positive and coherent, an executive’s bonus will increase. On the other hand, if the results are contradictory, customer satisfaction doesn’t impact the bonus. The results (absolute and relative) have to be coherent (both red or green) in order to impact executive pay in a significant manner. This indicates a change in times as those in charge of setting executive compensation now consider customer satisfaction to be a key factor.

A direct and indirect impact on executive pay

Daniel Ray explains that: "Previous research had already demonstrated an indirect link between customer satisfaction and bonuses: Satisfying customers leads to better financial results and therefore higher bonuses. But O'Connell and O'Sullivan highlight the fact that customer satisfaction has a direct impact, independent of other financial variables."

Implementing this virtuous cycle

These research results are still underappreciated despite the fact they unite the interests of customers, directors and shareholders. Investing in customer satisfaction creates positive results for shareholders and directors.

"It's essential for companies and shareholders to become aware of this virtuous cycle. This will enable them to implement processes that are designed to reinforce a director's motivation in this area. And of course, any manager in charge of customer relations (marketing, customer experience managers, etc.) should definitely present these results to the company's director before beginning budget negotiations…" concludes Daniel Ray.