Implementing the Voice of the Customer in the Bonus System: How results of customer satisfaction studies can be used as elements of target agreements
Target agreements have become fixed components of everyday business life. Many senior managers (executives) receive at least part of their salary as variable remuneration components, and often this does not only affect top and senior management but middle management as well. As a general rule these performance-related salary components are pegged to “hard numbers” like turnover and profits. But: More and more often other relevant aspects of business are integrated in target agreements as well - legitimately. At least three reasons can be given why results of customer satisfaction evaluations are a sensible and important part of target agreements for top, senior and middle management. For once, the topic of customer satisfaction is an important ‘balance factor’, especially if turnover and profit targets have a high significance in bonus systems. If a company concentrates exclusively on shortterm turnover and profit increase, often satisfaction of existing customers suffers. A practise example: Managers of a sales division receive the target of an increase in sales for a new product. To reach this target, call centre agents are pushed to sell this product and therefore have less time to deal with customer requests or other support services for existing customers. Even though this sales activity may result in an increase in new customers, the retention of existing customers might suffer from this lack of capacity. If customer satisfaction were an additional component of the target agreements, responsible managers would have to find the balance between acquisition activities on the one hand without compromising retention of already existing customers on the other. The second reason is self-fulfilling: only if customer satisfaction analyses are anchored in important business figures it is granted that they receive the necessary attention as part of strategic business planning.
A business strategy that plans without taking the customer into account risks that company internal business processes are not aligned with customer needs. This not only leads to known problems in the mid and long term, like high customer churn rates or reduction of share-of-wallet. A consequently customer targeted process plan can result in savings even in the short term. For example, difficulties in the call centre might result in a higher overall volume of calls which need to be handled. Customers need to get in touch with the call centre more often because their requests aren’t answered right away. This decreases agent availability and overall more complaints need to be processed. These complaints carry significant costs for the company. Another important reason for the integration of customer satisfaction in important business measures is of a more psychological nature. If top management itself is being measured by satisfaction of the customer it signals a higher commitment of the most important decision makers. The prominence of customer satisfaction can be demonstrated to all employees of a company which results in a more customer oriented business culture – an essential part of successful customer retention management.
Statistical methods can help to ‘bundle’ singular items of specified topics so that finally each area of responsibility is credited with a key indicator – one figure reflecting the overall performance in this area. Furthermore it is advisable to calculate how high the impact of each area is on the overall customer retention. This is the only way to sensibly prioritize where investments to improve customer satisfaction should be initiated and how high they need to be.
But how should customer satisfaction be incorporated into target agreements? Generally the same reasoning applies that a manager should only agree on targets that he/she can influence. An overall index for the retention of all customers towards the company can and should only be set as a target for top management, because only they have responsibility for all divisions of a company which influence customer retention positively (or even negatively).Target agreements for managers of specific areas should be customized accordingly. As a rule customer satisfaction analyses are structured to reflect all processes which are measurable and important to the customer. Specific aspects asked for are usually (along with general questions toward customer satisfaction and retention) different services by the sales department, invoicing, complaint management, pricing and product design, and others. Results of these separate service types can now be used as a basis for target agreements. This way, responsible managers for sales will only receive those aspects in their target agreements which can be attributed directly to sales services, product managers are only appraised by the satisfaction about their products, complaint managers by evaluation of the complaint, etc. This guarantees the commitment of each person responsible for specific functions and also ensures that they have enough influence and power in the respective business area in order to initiate change processes.
Another important question that needs to be answered is how high an increase in customer satisfaction should be set as a target. This also needs differentiated consideration. If targets are set too ambitiously which most employees cannot reach, increased frustration may be the outcome. Target agreements should be drawn up considering the momentary level of customer retention or customer satisfaction with different processes. If a company has large deficits in customer satisfaction, targets may be set more aspiring than in a company which has already reached an acceptable extent. If a company is already high above average regarding customer retention, the mere “keeping up” of this high level can be a challenging and sensible target. Therefore it is indispensable for a company to benchmark its own performance compared to competitors. But it is not enough to just know the distance or closeness to the average of the specific industry. It is much more helpful to know on what level benchmarks of the same industry range and for example to see which levels are reached by the top ten percent of an industry. There should also be a differentiation between short and mid term targets. If a company wants to become a top-performer of their industry in the mid term, they should set step-by-step targets which only hold moderate increases each year. Furthermore it is also important, of course, which investments a company is prepared to make in order to reach progression in customer satisfaction. If customer satisfaction has a high significance and a company wants to invest in corresponding measures, targets may be set more ambitiously. Ultimately planning of target agreements with customer satisfaction key indicators is a decision by top management, that (just like plans for turnover and profit growth) should have a set place in the overall strategic plan of the company.
Author: Dr. Susanne O’Gorman A German version of this article has been published in the Financial Times Germany on February 11th 2008