Impact of Incentive Programs and Motivation on Performance
Effectively structured programs can increase performance by up to 44 percent in teams and 25 percent in individuals. Perhaps the most rigorous survey ever of motivation research was conducted by researchers for the International Society of Performance Improvement in a study entitled: “Incentives, Motivation, and Workplace Performance.” It incorporated both a meta-analysis of dozens of academic research projects related to incentives in business, along with a detailed survey of business users in 2002-2003. The study found that properly constructed incentive programs can improve performance by as much as 44 percent in teams and 25 percent in individuals, as long as these programs obey certain principles outlined by the researchers--described below under “What Motivates.”
High performing companies more likely to use incentive programs for customer contact employees.
“The Interaction Between Marketing and Human Resources and Employee Measurement and Incentives,” a study conducted by researchers for the Forum for People Performance Management and Measurement in the Integrated Marketing Communications department of the Medill School of Journalism at Northwestern University, found that high performing organizations report a far higher level of motivating customer contact employees than do low-performing companies. Company performance was measured by rate of relative sales growth.
Incentive Plans and Nonfinancial Measures of Performance
Marketing communications, promotions, and incentive programs can be evaluated using both financial and nonfinancial measures. Financial measures are advantageous because they are relevant to corporate decision-makers, while nonfinancial measures, which are often more easily evaluated, can provide an understanding of how programs work. In this paper, the authors look at how nonfinancial performance measures (such as product quality, customer satisfaction, and market share) act as indicators for financial performance measures.
The paper evaluates 18 hotels managed by a single hospitality firm over a seven-year period. The financial performance measures are:
- profit per room,
- revenue per room,
- average rate per room, and
- occupancy rate.
The nonfinancial performance measures are:
- guest complaints, and
- likelihood of return.
Results show that nonfinancial performance measures are predictors of future financial performance. In particular, guests’ expressed likelihood to return to a hotel strongly predicts financial performance. Increased revenues are determined by the ability of a hotel to charge higher rates or to have higher levels of occupancy.
Finally, the authors consider how an incentive plan contributes to performance in both financial and nonfinancial aspects. Changes in the structure of an incentive plan for individual hotel managers result in an increase in operating profit per room.
Overall, this paper clearly shows that a well-designed incentive program can provide demonstrable financial and nonfinancial benefits.
“An Empirical Investigation of an Incentive Plan that Includes Nonfinancial Performance Measures,” Rajiv D. Banker, Gordon Potter, and Dhinu Srinivasan, The Accounting Review, Vol. 75, No. 1, 65-92.
Incentive Programs Can Be Customer Oriented
Companies use a variety of techniques to motivate salespeople to engage in specific behaviors. Most commonly, however, they will use incentives. This research paper looks at the three most common types of incentives – cash, travel and merchandise – to assess how they affect the behavior of salespeople, and looks at the perceptions that salespeople have of these incentives. Specifically, the authors interviewed 95 people engaged in sales of automotive parts and accessories for a publicly-held firm selling both retail and to the trade. A key goal for the research was to discover whether sales incentives could inhibit customer-oriented sales behavior.
Key findings: Cash was found to be the incentive in which salespeople found the most perceived value. This was followed by travel and merchandise, in that order. However, the authors also determined that “when faced with alternative scenarios in which the salesperson could actually engage in selling-oriented tactics, as opposed to customer-oriented tactics, and achieve greater rewards … the respondents in this study were generally reluctant to abandon the goal of customer satisfaction for an incentive.” That is, the results indicate that as long as the goal of customer satisfaction is clearly communicated, “salespeople are likely to sacrifice incentives in order to provide their customers with more preferred alternatives.”
Salespeople will generally “go for the cash” when all other factors are equal, the authors say, but they add that “managers may discover that by communicating their goals and by developing a culture that is designed to reinforce their values, the use of financial incentives will not result in sales behaviors that are anti-customer as some might suggest.”
“Using Trade Incentives to Promote Customer Relationships in a Retail Setting,” R. Stephen Parker, Linda S. Pettijohn and Charles E. Pettijohn, Journal of Market-Focused Management, No. 5, 2002, pp. 135-147.
Are “Spiffs” Good or Bad for Business?
The authors of this study take on an ages-old practice when then look at the use and impact of special promotional incentive funds (“spiffs”) to encourage retail salespeople to promote specific products over others. These product-specific incentives (PSIs) are paid by the manufacturer of the product directly to the retail salesperson (in some instances, salespeople accrue points redeemable for merchandise). The use of spiffs are to energize sales – and they can be used to offset retail sales compensation – but there is fear that they contribute to unethical behavior among salespeople and jeopardize trust and integrity in the marketplace.
The authors provide a good overview of the literature on the use of spiffs in retail, review the potential impacts, including ethical issues, on a variety of stakeholders – the salesperson, the retailer, the manufacturer, and most importantly, the customer. While they find a number of potential harmful effects, they are not ready to say that spiffs should be abandoned, but that they should be used with care. “Careful examination of the unintentional and intentional consequences of PSIs on stakeholders undermines their indiscriminate use,” the authors argue. They add, “We would expect that successful firms are firms that do not engage in such practices.”
“The Myth of the Salesperson: Intended and Unintended Consequences of Product-Specific Sales Incentives,” by Tara J. Radin and Carolyn E. Predmore, Journal of Business Ethics, Vol. 36, No. 1-2, March 2002, pp. 79-92.
Plugging into the Service-Profit Chain
Today’s executives spend less time setting profit goals or focusing on market share and more time on “the new economics of service,” according to the authors of this article. “Successful managers pay attention to the factors that drive profitability in this new service paradigm: investment in people, technology that supports frontline workers, revamped recruiting and training practices, and compensation linked to performance for employees at every level,” the authors say.
The links in the service-profit chain, which the article examines in detail, are as follows, according to the authors: “Profit and growth are stimulated primarily by customer loyalty. Loyalty is a direct result of customer satisfaction. Satisfaction is largely influenced by the value of services provided to customers. Value is created by satisfied, loyal, and productive employees. Employee satisfaction, in turn, results primarily from high-quality support services and policies that enable employees to deliver results to customers.” The authors conclude that profitability depends on “relating all the links in the service-profit chain,” finding ways to measure and support those links, and putting them together “into a comprehensive service picture.”
“Putting the Service-Profit Chain to Work,” by James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser Jr. and Leonard A. Schlesinger, Harvard Business Review, Vol. 7, No. 2, March/April 1994, pp. 164-174.
Which Comes First, the Positive Attitude or the Positive Results?
This study addresses the issue of “whether positive employee attitudes and behaviors influence business outcomes or whether positive business outcomes influence positive employee attitudes and behaviors.” The author hypothesizes that “employee satisfaction, organizational citizenship behavior, and employee turnover influence profitability and customer satisfaction.” To test his hypothesis, the author collected data from a regional restaurant chain with 28 outlets over a two-year period via employee surveys, manager surveys, customer surveys, and organizational records. A cross-lagged regression analysis was done with the data to determine which came first, the attitude or the outcome.
Key findings: “Analyses indicate that profitability and customer satisfaction are influenced by different HR outcomes,” says the author. “Organizational citizenship behavior had an impact on profitability but not on customer satisfaction. Employee satisfaction had an impact on customer satisfaction, but not on profitability.” In short, while more research is needed to understand the interconnections in more detail, the attitudes come first.
“The Effects of Employee Satisfaction, Organizational Citizenship Behavior, And Turnover on Organizational Effectiveness: A Unit-Level, Longitudinal Study,” by Daniel J. Koys, Personnel Psychology, Vol. 54, 2001, pp. 101-114.
Does an Incentive Program’s Effect on Performance Increase Over Time?
Most people will agree that incentive pay improves performance, but there is less agreement over whether an incentive program’s effect on performance increases over time. This article presents a longitudinal examination of the multi-period impact of an incentive plan at several stores operated by a major firm in the department store industry. The store pays a cash bonus in addition to hourly base pay to sales personnel who exceed a prespecified sales goal. It also uses a significant number of temporary salespeople during peak seasons.
Key findings: “We find that the implementation of the plan is associated with increases in sales that persist and increase over time,” the authors say. “As such, the finding supports the … assumption that output increases when agents are rewarded for performance.” In addition, however, “there is evidence that the impact of the incentive contract is lower when the proportion of temporary workers is higher.” The authors argue that permanent sales personnel working under the incentive plan “develop a long-term service relation with customers, or learn how to perform their task more efficiently, which translates into future sales gain.”
“A Field Study of the Impact of a Performance-Based Incentive Plan,” by Rajiv D. Banker, Seok-Young Lee and Gordon Potter, Journal of Accounting and Economics, Vol. 21, 1996, 195-226.
Exploring the Employee-Customer-Profit Chain at Sears
The authors of this article look at the turnaround at Sears, Roebuck and Company in the way it does business, effectively changing its focus to take advantage of the “employee-customer-profit” chain. “Any person with even a little experience in retailing understands intuitively that there is a chain of cause and effect running from employee behavior to customer behavior to profits,” the authors say, “and it’s not hard to see that behavior depends primarily on attitude.” They look in detail at the way in which Sears went about effecting this change in attitude, and try to create a model that other companies can follow.
Key findings: The authors determine that the Sears model is something that other companies can emulate. “Making an employee-customer-profit chain operational is a challenge in three parts: creating and refining the employee-customer-profit model and the measurement system that supports it; creating management alignment around the use of the model to run the company; and deploying the model so as to build business literacy and trust among employees,” the authors say. They add the warning that emulating the model isn’t enough: “Because this system is to be the cornerstone of management decision making, it is critically important that every manager – especially those at the top of the company – understand the system and buy into it wholeheartedly.”
“The Employee-Customer-Profit Chain at Sears,” by Anthony J. Rucci, Stephen P. Kirn and Richard T. Quinn, Harvard Business Review, Vol. 76, No. 1, January/February 1998, pp. 82-97.
Go Beyond Customer Satisfaction to Customer Loyalty
There is a significant difference between satisfaction, which is a largely a passive customer condition, and loyalty, which is an active or even proactive relationship between customer and supplier. According to the authors of this article, “truly aspiring to meet customer needs, developing direct measures of loyalty, retention, and attraction based on these same needs, and linking those measures to internal processes and financial outcomes is what finally puts companies on the path to creating shareholder value through loyal customers.”
The authors examine the literature and create a model for developing customer loyalty, based on a Dow Chemical model, which follows five steps: 1) Developing a loyalty model that looks at “ the essential and defining needs that often differentiate one customer from another,” 2) Segmenting customers to “identify key drivers that that differentiate segments from one another,” 3) Revisiting your value proposition to “develop initiatives that serve each targeted segment in a cost-effective fashion,” 4) Deploying quality improvement “to bridge the gap between internal process quality as defined by the business and external perceptions of quality as defined by the customer,” and 5) Managing customer profitability by determining “ the true costs and consequent returns on investments in customer loyalty” by customer segment.
“Connecting Customer Loyalty to Financial Results,” by Joan O. Fredericks, Ronald R. Hurd and James M. Salter II, Marketing Management, Vol. 10, No. 1, Spring 2001, pp. 26-32.
Focus on Employee Satisfaction to Develop Customer Trust and Loyalty
In an examination of companies in the banking industry, the authors of this article outline the connection between employee satisfaction and customer trust in an organization. They find: “Highly profitable companies with sustained records of superior financial performance owe their success to the development of strong, ongoing relationships with their customers.” But they also find that ”the degree of loyalty your customers have toward you typically mirrors the level of commitment and loyalty you have developed among your employees.”
Key findings: “Since there is a high correlation between good customer relationships and superior financial performance, companies would be well advised to employ strategies to foster trust,” the authors say. “In fact, it is the actions of your employees (more specifically their ability to successfully resolve problems and manage relationships with customers)” that produce the types of trust relationships that most companies are looking for.
“Building Trust Through Committed Employees,” by James A. Larson and W. Earl Sasser, Marketing Management, Vol. 9, No. 3, Fall 2000, pp. 41-46.
Internal Marketing Best Practices
What commonalities exist among companies that excel at internal marketing? The first comprehensive study of successful internal marketing strategies and tactics, entitled Internal Marketing Best Practices, was conducted in fall 2005 by graduate students in the Integrated Marketing Communications department at Northwestern University. Researchers defined internal marketing as an ongoing process whereby “an organization aligns, motivates and empowers employees – at all functions and levels – to consistently deliver a positive customer experience that helps to achieve business objectives across the organization.” The eighteen companies studied were vetted by a series of uniform parameters and represented a variety of industries, both consumer and business-to-business, ranging from packaged goods manufacturers to health care to hospitality and service. Companies at the forefront of internal marketing share several broad characteristics: 1) Employee Engagement; 2) Senior Management Support; 3) Human Resources Involvement; 4) Marketing Savvy; 5) Brand Promise Delivery; 6) Relevant Communications; and 7) Integrated Horizontal Organizational Structure. The final Internal Marketing Best Practices report breaks down and scrutinizes these processes at the chosen companies, many of which are named, making for an enlightening analysis of and instructive roadmap for internal marketing, and subsequent business, success. Click here for the complete study and a white paper.
