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Before you link pay to customer feedback: five essentials

Don't link your incentive system to customer feedback until you have met these five preconditions.

Par Rob Markey

First published on septembre 22, 2011
min


The following post originally appeared on the Harvard Business Review Blog Network. More and more companies are tying incentive pay to customer metrics. TIAA-CREF, the big financial services company, includes customer loyalty score improvement in senior executive compensation. Phones4U, a UK mobile phone retailer, announced a big increase in the weight of Net Promoter scores in its frontline pay plan. Pep Boys, a US auto parts store chain, reports in its proxy statement that customer metrics are now an important part of its executive compensation system. And Enterprise Rent-A-Car links its Enterprise Service Quality index customer feedback scores to promotions. The payoff from linking incentives to customer feedback can be significant. But before you make such a move, help yourself avoid the pitfalls and risks described in my earlier post by meeting five preconditions: 1. Truly reliable feedback and metrics If your scores vary wildly from one time period or unit to another and you don't know why, you don't have a reliable measurement and feedback system. And if your metrics aren't trustworthy, then your compensation system won't be either. To test the reliability of your scores, answer the following questions: Is your sample controlled and stable? Sample variations can generate huge swings in scores and feedback. Unless you have achieved stability, you're in for some fun at compensation time. Is your data set sufficient to reduce statistical variation? In most larger companies, you'll need to generate roughly 200+ responses per operating unit per period. There's a mathematical basis for this number: so large a sample creates confidence that score variation reflects real differences rather than random swings. I recently ran into a company that based incentives on scores determined from as few as 11 respondents. Don't do that! Are your response rates high enough to reduce responder bias? People who respond to your surveys probably differ in important ways from those who don't. The closer you get to 100% response rates, the lower the impact of this bias. Bain research shows that leading companies can achieve 60% or better response rates in B2B companies and 30% or more in most B2C situations. 2. A clear link to financial and strategic outcomes Your customer metrics must correlate with financial and strategic goals. Without such a link, it's hard to justify differences in compensation. Your CFO and finance team can take a leadership role here. On the micro level, establish the economics of particular customer segments. For instance, you can calculate the value of turning a detractor into a promoter, or use differences in attrition rates to assess the expected lifetime values of different customer groups. On the macro level, you can estimate the value of achieving customer loyalty leadership in terms of market share gains or revenue growth. Unless line managers and finance really believe in the link between customer feedback and business outcomes, your incentive system won't last long. 3. Processes and tools for understanding root causes A well-known early adopter of the Net Promoter system began linking NPS improvement to executive compensation before it had developed adequate disciplines and processes for understanding its scores. "We have all this data," one perplexed executive reported. "But we can't explain the differences in scores from one period to the next or between one group of customers and another." The company's managers felt helpless and frustrated. So make sure you establish processes to help teams understand why the scores are what they are: Create robust tools and procedures for analyzing comments from customers and tracing them back to root causes. Use closed-loop processes (call unhappy customers, for example) to ferret out the specifics of a situation for customer-facing employees. You can also use these processes to inform policy, pricing, staffing, process and product improvements. Engage your customer-facing teams in working sessions to pull apart defect-ridden customer experiences. Help your employees understand the causes of different scores, and they will view customer feedback as more than just a scorecard. 4. Organized learning You'll also need to supplement the root-cause disciplines with tools, processes and leadership support for learning and improvement. One direct marketer learned this the hard way. The company had a robust "voice of the customer" program. It measured quarterly improvement in feedback scores, and it provided its teams with direct access to data, analysis and even recorded calls so they could understand the feedback they were getting. But few could see much progress. Several managers advocated dropping the system. Others ignored it, waiting for this flavor of the month to pass. However, three teams among dozens showed progress during the first quarter—and continued to improve over the next several. What were they doing differently? Their supervisors spent nearly 30% more time in side-by-side listening and coaching sessions than did the other supervisors. Two of the teams devoted time each week to reviewing their feedback in groups, and sharing tips to improve their performance. Two used peer coaching, with members observing and helping one another. When the company rolled out these deliberate learning and coaching practices to all of its teams, it soon started seeing significant progress. 5. Repeated communication Why do so many leadership teams spend countless hours devising the details of incentive systems and then under-communicate their intent? The half-life of most communications about company values is very brief, probably less than three months. If you don't remind people regularly why you reward what you do, they're likely to game the system, misinterpret its intent, or focus more on the mechanics than on the spirit of what you're trying to accomplish. These five preconditions are necessary to establish trust and credibility. Unfortunately, even with a great foundation like this, you still need to prevent the sort of gaming I discussed in my previous post: begging customers for higher scores, manipulating the sample and other shortcuts. So trust, but verify. Companies like Enterprise forbid employees from manipulating the scores in any way. Violations are rare in its culture, but when they happen, the consequences are severe and swift. Meeting these preconditions won't guarantee success. You'll still need careful experimentation to discover exactly what works for your company. Unless you have met them, though, don't expect sustained success with your incentive system. This series of posts from Rob Markey highlights the ideas in a new book by Fred Reichheld and Rob, The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World (HBR Press).

The following post originally appeared on the Harvard Business Review Blog Network.

More and more companies are tying incentive pay to customer metrics. TIAA-CREF, the big financial services company, includes customer loyalty score improvement in senior executive compensation. Phones4U, a UK mobile phone retailer, announced a big increase in the weight of Net Promoter scores in its frontline pay plan. Pep Boys, a US auto parts store chain, reports in its proxy statement that customer metrics are now an important part of its executive compensation system. And Enterprise Rent-A-Car links its Enterprise Service Quality index customer feedback scores to promotions.

The payoff from linking incentives to customer feedback can be significant. But before you make such a move, help yourself avoid the pitfalls and risks described in my earlier post by meeting five preconditions:

1. Truly reliable feedback and metrics

If your scores vary wildly from one time period or unit to another and you don't know why, you don't have a reliable measurement and feedback system. And if your metrics aren't trustworthy, then your compensation system won't be either. To test the reliability of your scores, answer the following questions:

Is your sample controlled and stable? Sample variations can generate huge swings in scores and feedback. Unless you have achieved stability, you're in for some fun at compensation time.
Is your data set sufficient to reduce statistical variation? In most larger companies, you'll need to generate roughly 200+ responses per operating unit per period. There's a mathematical basis for this number: so large a sample creates confidence that score variation reflects real differences rather than random swings. I recently ran into a company that based incentives on scores determined from as few as 11 respondents. Don't do that!
Are your response rates high enough to reduce responder bias? People who respond to your surveys probably differ in important ways from those who don't. The closer you get to 100% response rates, the lower the impact of this bias. Bain research shows that leading companies can achieve 60% or better response rates in B2B companies and 30% or more in most B2C situations.

2. A clear link to financial and strategic outcomes

Your customer metrics must correlate with financial and strategic goals. Without such a link, it's hard to justify differences in compensation.

Your CFO and finance team can take a leadership role here. On the micro level, establish the economics of particular customer segments. For instance, you can calculate the value of turning a detractor into a promoter, or use differences in attrition rates to assess the expected lifetime values of different customer groups. On the macro level, you can estimate the value of achieving customer loyalty leadership in terms of market share gains or revenue growth.

Unless line managers and finance really believe in the link between customer feedback and business outcomes, your incentive system won't last long.

3. Processes and tools for understanding root causes

A well-known early adopter of the Net Promoter system began linking NPS improvement to executive compensation before it had developed adequate disciplines and processes for understanding its scores. "We have all this data," one perplexed executive reported. "But we can't explain the differences in scores from one period to the next or between one group of customers and another." The company's managers felt helpless and frustrated.

So make sure you establish processes to help teams understand why the scores are what they are:

Create robust tools and procedures for analyzing comments from customers and tracing them back to root causes.
Use closed-loop processes (call unhappy customers, for example) to ferret out the specifics of a situation for customer-facing employees. You can also use these processes to inform policy, pricing, staffing, process and product improvements.
Engage your customer-facing teams in working sessions to pull apart defect-ridden customer experiences.

Help your employees understand the causes of different scores, and they will view customer feedback as more than just a scorecard.

4. Organized learning

You'll also need to supplement the root-cause disciplines with tools, processes and leadership support for learning and improvement.

One direct marketer learned this the hard way. The company had a robust "voice of the customer" program. It measured quarterly improvement in feedback scores, and it provided its teams with direct access to data, analysis and even recorded calls so they could understand the feedback they were getting. But few could see much progress. Several managers advocated dropping the system. Others ignored it, waiting for this flavor of the month to pass.

However, three teams among dozens showed progress during the first quarter—and continued to improve over the next several. What were they doing differently? Their supervisors spent nearly 30% more time in side-by-side listening and coaching sessions than did the other supervisors. Two of the teams devoted time each week to reviewing their feedback in groups, and sharing tips to improve their performance. Two used peer coaching, with members observing and helping one another. When the company rolled out these deliberate learning and coaching practices to all of its teams, it soon started seeing significant progress.

5. Repeated communication

Why do so many leadership teams spend countless hours devising the details of incentive systems and then under-communicate their intent?

The half-life of most communications about company values is very brief, probably less than three months. If you don't remind people regularly why you reward what you do, they're likely to game the system, misinterpret its intent, or focus more on the mechanics than on the spirit of what you're trying to accomplish.

These five preconditions are necessary to establish trust and credibility. Unfortunately, even with a great foundation like this, you still need to prevent the sort of gaming I discussed in my previous post: begging customers for higher scores, manipulating the sample and other shortcuts. So trust, but verify. Companies like Enterprise forbid employees from manipulating the scores in any way. Violations are rare in its culture, but when they happen, the consequences are severe and swift.

Meeting these preconditions won't guarantee success. You'll still need careful experimentation to discover exactly what works for your company. Unless you have met them, though, don't expect sustained success with your incentive system.

This series of posts from Rob Markey highlights the ideas in a new book by Fred Reichheld and Rob, The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World (HBR Press).