The Impact of Employee Attitudes on Market Response and Financial Performance
The first study of its kind, “The Impact of Employee Attitudes on Market Response and Financial Performance” sheds light on how employee satisfaction and engagement drive an organization’s bottom-line success, even if those employees have no direct contact with customers. Results of the study suggest that influencing customer behavior goes beyond advertising, beyond delivering on a brand’s “promise,” beyond customer service and beyond product research and development. Influencing customer behavior, which in turn effects an organization’s success, also requires specific efforts to maximize employee engagement and satisfaction. The study addresses a universal business principal: it is far less costly, and more fiscally prudent, to serve and nurture relationships with current customers than it is to acquire new customers. It behooves managers to recognize and cultivate employee engagement and satisfaction since they do indeed influence market outcomes and an organization’s financial performance. Dr. James L. Oakley, assistant professor of marketing, at Purdue University’s Krannert School of Management, supervised the research in which 110,000 surveys were mailed out, with a 34% response rate, to 100 randomly sampled public and private media companies. Financial data was provided to a third party and was derived directly from financial reports for these organizations. Click here for a complete copy of the research.
Linking Performance Strategies to Financial Outcomes – The Interaction Between Marketing & Human Resources and Employee Measurement & Incentives
OVERVIEW
A survey among 175 corporate executives was undertaken in late 2003 by the Forum for People Performance Management and Measurement to study the relationship of the marketing and human resources functions in motivating the behaviors of customer-contact employees and the impact of that behavior on organizational performance.
This study specifically investigated the following issues:
- Value of the interaction between Human Resources and Marketing
- Importance of top management’s customer orientation
- Most valued communications tools for customer-contact employees
- Most useful employee performance evaluation tools
- Most effective motivational tools for top performance
This Executive Summary provides an overview of the key findings from the study and then provides more specific data to support these findings. Please see Appendix A and B for a complete summary of survey results.
SUMMARY OF KEY FINDINGS:
Key findings from the study include the following:
- Marketing & HR do not communicate as effectively as they should, and both groups recognize this.
- There is wide disagreement between HR and Marketing on who the key customer contact employee is.
- Higher performing firms do a better job of sharing corporate goals with customer contact employees.
- There is a high degree of correlation between marketing integration and customer orientation by customer contact employees.
- Higher performers better understand the importance of treating customers well than lower performers.
- An open, networked corporate culture is predictive of overall performance.
- Higher performing firms measure customer satisfaction to a greater degree than lower performers.
- Higher performing firms measure employees on customer satisfaction and sales goals to a greater degree than lower performers.
- High market performers incentivize their employees based on customer satisfaction and low performers do not.
- Marketing places a higher value on printed newsletters and 1-on-1 meetings than HR.
- No specific incentives predict performance, but the most popular incentives are bonuses and recognition awards.
To read the full study, please click here.
Study finds link between employee motivation and organizational performance.
Much effort goes into influencing employee satisfaction and retention, but little is known about how those factors relate to an organization’s overall performance. In “The Effects of Employee Satisfaction, Organizational Citizenship Behavior, and Turnover on Organizational Effectiveness: A Unit-Level, Longitudinal Study,” (Personnel Pyschology), author Daniel J. Koys gathered data from a restaurant chain over a two-year period to look at how employee satisfaction, employee citizenship, and employee turnover relate to customer satisfaction and the company’s profitability.
The study explored whether employee attitudes and behavior determine organizational performance, or, conversely, whether organizational performance drove employee attitudes and behavior. Past studies have had trouble linking employee attitudes and behavior to performance because researchers used measurements from the same time period. Here, the authors infer causal relationships by looking at year-to-year effects.
The study combined data from employee surveys, customer surveys, and company records on profitability. The results showed that employee satisfaction, organizational citizenship, and turnover are significant predictors of the next year’s profitability. However, the profitability in one year is not a significant determinant of employee attitudes in the following year.
Employee attitudes have major impact on customer retention.
In “Employee Behavior, Feelings of Warmth and Customer Perception in Service Encounters,” (International Journal of Retail & Distribution Management, Vol. 30, No. 1, 2003), authors Joseph Lemmink and Jan Mattsson show how customer emotions and feelings are influenced by employee encounters. The researchers measured customer perceptions of both positive and negative aspects for simulated service providers. The results show that employee behavior has a substantial impact on customers' feeling of warmth, representing the degree to which the customer enjoyed the service experience. The researchers indicated that the level of warmth correlates with measures like likeability, perceived quality, and service loyalty. Their conclusion: Short-term emotional feelings lead to the long-term effect of customer retention. Service firms should train and motivate employees to exhibit high levels of warmth and friendly behaviors to achieve bottom line profitability.
Employees have major impact on customer trust.
Trust plays a major role in marketing environments where consumers and service personnel interact often, according to Deepak Sirdeshmukh, Jagdip Singh, and Barry Sobol, in “Consumer Trust, Value and Loyalty in Relational Exchanges,” Journal of Marketing, Vol. 66, January 2002. This study explored which employee behaviors create or destroy consumer trust. The authors developed a theory in which consumer loyalty is determined by two types of trust:
- The trust a consumer has in management policies and procedures, and
- The trust a consumer has in front-line service personnel.
They also suggested that the degree to which a consumer has either kind of trust in an organization depends on three key elements:
- Operational competence of employees,
- Their benevolence, and
- Employees’ problem-solving orientation.
An important finding of this study is that companies should realize the important effects which managerial policies and front-line service personnel have on consumer trust. The fact that trust is such a strong determinant of consumer loyalty justifies organizational efforts to foster trust in consumer relationships.
Role of employees in repurchase loyalty confirmed.
Repurchase loyalty is often a key factor in determining the financial contribution consumers make to a business. In “Comparative Evaluation and the Relationship between Quality, Satisfaction and Repurchase Loyalty,” authors Svien Ottar Olsen, Journal of the Academy of Marketing Science, Vol. 30, No. 3, found that consumers form overall impressions of quality by integrating various aspects of products and service performance. The perceived quality of the products determines consumer satisfaction, and as expected, consumer satisfaction determines repurchase likelihood. While there were strong positive relationships between quality and satisfaction, and between satisfaction and loyalty, managers should not assume that “good enough” performance is sufficient to build the kind of consumer relationships most organizations seek, the authors asserted. Given the preponderance of product categories, businesses should focus on the different aspects of service and personal interaction that can generate differences across competitive offerings and engender consumer loyalty.
Turnover has impact on sales and profits.
Authors James Heskett, Thomas Loveman, Gary Sasser, and Leonard Schlesinger found that 20 percent of the Taco Bell stores with the lowest turnover rate enjoyed double the sales and a 55 percent improvement of profit over those stores with the highest turnover rate. Their results were published in the March/April 1994 edition of the Harvard Business Review in an article entitled “Putting the Service-Profit Chain to Work.”
Employee attitudes affect sales.
A five-year detailed analysis of 800 Sears stores by the same researchers published in the Harvard Business Review in January/February 1998 found a five unit increase in employee attitude yielded a 1.2 unit increase in consumer impression and a 5 percent increase in revenue growth. The article was entitled “Putting the Employee-Customer Profit Chain at Sears.”
HR Results Influence Business Performance
It is widely acknowledged that employee attitude and behavior play an integral role in the financial success of a business. While there have been studies attempting to prove this theory, they have primarily reviewed data from a defined point in time. The author of this study conducted research over a period of two years to prove a causal relationship between “Human Resources results” and business success. The following components were evaluated via surveys given to managers and employees at 28 locations of a restaurant chain: conscientiousness, altruism, civic virtue, sportsmanship, courtesy and employee turnover.
The results: Significant support for the idea that “HR results” influence business performance.
Key learning: Organizations must focus on the results of HR activities, not just the activities themselves. It is by managing to the HR outcomes that customer-contact organizations can fully leverage the benefits of positive employee attitudes and behavior.
“How The Achievement of Human Resources Goals Drives Restaurant Performance,” Daniel J. Koys, Cornell Hotel & Restaurant Management Quarterly, Vol. 44, No. 1, February 2003, 17-24.
High Levels of Warmth Affect Bottom Line
This study tested how customer emotions and feelings are influenced by employee encounters. The researchers measured customer perceptions of both positive and negative aspects for simulated service providers. The results show that employee behavior has a substantial impact on customers' feeling of warmth, representing the degree to which the customer enjoyed the service experience. The researchers indicate that the level of warmth correlates with measures like likeability, perceived quality, and service loyalty.
Key learning: Short-term emotional feelings lead to the long-term effect of customer retention. Service firms should train and motivate employees to exhibit high levels of warmth and friendly behaviors to achieve bottom line profitability.
“Employee Behavior, Feelings of Warmth and Customer Perception in Service Encounters,” Jos Lemmink and Jan Mattsson, International Journal of Retail & Distribution Management, Vol. 30, No. 1, 2003, 18-33.
Linking Employee Behavior to Organizational Effectiveness Activities
Much effort goes into influencing employee satisfaction and retention, but little is known about how those factors relate to an organization’s overall performance. In this study, the authors gather data from a restaurant chain over a two-year period to look at how employee satisfaction, employee citizenship, and employee turnover relate to customer satisfaction and the company’s profitability.
The study explores whether employee attitudes and behavior determine organizational performance, or, conversely, whether organizational performance drives employee attitudes and behavior. Past studies have had trouble linking employee attitudes and behavior to performance because researchers used measurements from the same time period. Here, the authors infer causal relationships by looking at year-to-year effects.
The study combines data from employee surveys, customer surveys, and company records on profitability. The results show that employee satisfaction, organizational citizenship, and turnover are significant predictors of the next year’s profitability. However, the profitability in one year is not a significant determinant of employee attitudes in the following year.
This is an important study because it documents that employee attitudes and behaviors can be directly linked to the profitability of a business.
“The Effects of Employee Satisfaction, Organizational Citizenship Behavior, and Turnover on Organizational Effectiveness: A Unit-Level, Longitudinal Study,” Daniel J. Koys, Personnel Psychology, Vol. 54, 2001, 101-114.
Trucking Industry Takes Aim at Turnover
The trucking industry isn’t going to go anywhere until there is someone behind the wheel. Driver turnover continues to be a problem for many trucking companies. It is not uncommon for drivers to leave a company after just two or three pay periods, so a lot of effort is going into finding out what causes driver turnover and how to combat it. The cost of training a new driver is such that if a driver leaves after only a few months, the company loses money and a constant stream of new, inexperienced drivers can cost money in terms of poor public relations and customer dissatisfaction.
This article reports that, to combat the problem, trucking companies and shippers are doing everything from improving quality of life for drivers to offering incentive programs to keep drivers on board. The main focus, according to the article, seems to be on addressing quality-of-life issues for drivers and supplementing market-scale pay rates with improved benefits, incentives, driver appreciation programs, etc., but others have dealt with the problem simply by raising pay rates significantly.
The article is mostly anecdotal, though it does discuss industry-wide quality-of-life issues and trends. It also reviews the details of the Viking Freight driver-retention program, which has maintained a driver turnover rate of below 4 percent, one of the best in the industry.
“Transportation Trucking Report 1999,” Sarah Stone, Purchasing, Vol. 126, No. 5, April 8, 1999, pp. 44-53.
Measuring the Cost of Turnover to Retailers
Retail stores in general and supermarkets in particular have long had a problem with turnover. This report on a Coca-Cola Retailing Research Council study, titled “New Ideas for Retaining Store Level Employees,” reviews statistics related to supermarket turnover and the cost of turnover that could be helpful to all retailers.
The article offers some suggestions on how to deal with turnover at supermarkets, both for hourly and management personnel. For hourly employees, suggestions include better equipment and supplies and more effective and immediate supervision. For management-level employees, the report suggests organizational direction, training and advancement opportunities.
Key findings: The study reports that half of all new hourly supermarket employees leave their jobs within 97 days of starting. It also reports that turnover costs the typical supermarket $189,977 per year in direct and opportunity costs—and that the total cost of turnover to the supermarket industry is 41 percent greater than the industry’s net profit after taxes.
“Turnover Costs Sack Retailers,” Chain Store Age, March 2000, pp. 100-102.
Credit Unions Take Aim at Employee Turnover
According to this summary of results from the CUES Staffing Manual for Credit Unions, 2000 Edition, the average turnover rate for credit unions is 21.7 percent. For credit unions in the top quartile, the average rate is 31.5 percent.
The high rates and the high cost of turnover cited by the CUES Staffing Manual serve as a starting point for this article on how many credit unions are looking for ways to manage and reduce turnover. Strategies cited by the author include better testing and evaluation during the recruitment and hiring process, offering competitive compensation and benefits, paying more attention to the work environment and employees’ relationships with their supervisors, and improving communication with and feedback to credit union employees.
Another strategy that is being tried by the Pacific NW Federal Credit Union in Portland, Ore., is a pay-for-skills program, which bases pay increases on a series of tests that indicate employees’ mastery of key knowledge and skills. According to the author, this is a somewhat controversial alternative to the company’s previous policy of automatic annual merit increases, and its long-term success hasn’t yet been determined.
“Take a Bite Out of Turnover,” Diane Franklin, Credit Union Management, September 2001, pp. 44-47.
What Keeps Employees From Leaving?
The author, a human resources director for the Research & Development function of McCormick & Co. Inc., a leading producer of spices, herbs and flavors, spent three years investigating “the central questions and concerns that continually emerge from conversations with McCormick R&D employees and job candidates and which seem to go right to the heart of the retention question: ‘Why do individuals choose to stay or leave?’”
Some of the key questions the research uncovered include:
- Whom will I work with and learn from?
- Will I work with state-of-the-art equipment and technology?
- Will I continue to develop professionally?
- Will I be able to stay in touch with professional colleagues outside the company?
- Will my contributions be recognized?
- Will I be working with a reputable firm?
Key findings: The author concludes that, for McCormick, paying attention to these questions and making sure that company actions and frontline management are working in concert to provide a positive work experience have helped it to keep its best people.
“Holding on to Your Best People,” Fred Demers, Research Technology Management, Industrial Research Institute Inc., January 2001.
The Risks and Costs of High Turnover
This article provides a review and overview of research and opinions on customer retention, focusing on the costs generally associated with turnover and the potential risks to companies that ignore high turnover.
While the author does not offer any original research, the article provides a clear synopsis of the costs of turnover—ranging from reduced productivity before the employees leave to the specific costs related to replacing employees who have left. It also provides a significant number of strategies for retaining employees.
Key findings: Retention strategies are not limited to compensation. Training opportunities, career development and personal growth opportunities, incentives and a variety of other strategies are suggested.
“Going, Going, Gone,” Robert W. Moody, Internal Auditor, June 2000, pp. 36-41.
Smart Leadership Will Take Control of Retention Management
This article looks at the emerging skilled worker shortage from the point of view of leadership development and training. Emerging leaders must recognize and manage retention in their organizations to see them through the emerging skilled labor shortage.
A widening skills gap, driven by the “educational demands of knowledge work,” growing worker discontent and an improving economy will make “managing unwanted employee turnover…the most important business issue of the next decade,” says the author. “Failure to make employee retention a priority may be at the least a form of organizational denial and, at worst, a recipe for steady decline.”
The author believes that “leaders and their skill in building a climate of retention, a culture that speaks to employees in a way that encourages them to stay, will be an organization’s best defense against unwanted turnover. Leaders are the secret weapon in keeping valued talent longer.”
Key findings: The author reports on “10 retention talents essential for leaders to understand and perform.” They include: Building trust, building esteem, communicating, developing an enjoyable work climate, being flexible, developing talent, building performance, understanding retention issues, monitoring retention and finding available talent.
“Retention Leadership,” Craig R. Taylor, Training & Development, March 2004, pp. 41-45.
Costco Beats Wal-Mart in Retaining Employees
The authors investigate the relative success of Costco Warehouse Corp. and Wal-Mart Stores Inc. in retaining employees and find that Costco comes out ahead—largely by paying better wages.
“We found that by compensating employees generously to motivate and retain good workers, one-fifth of whom are unionized, Costco gets lower turnover and higher productivity,” the authors state. According to their investigation, only 6 percent of Costco employees leave after the first year, compared with 21 percent at Wal-Mart’s Sam’s Club stores.
Key findings: Taking Wal-Mart’s $2,500 cost of testing, interviewing and training a new hire, “paying higher wages translates into more efficiency,” say the authors.
“The Costco Way,” Stanley Holmes and Wendy Zellner, BusinessWeek, April 12, 2004, pp. 76-77.
Internal Branding: The Key Driver of Cultural Change
Most companies focus marketing efforts and resources on external audiences and customers, leaving internal audiences – such as employees and key stakeholders – largely ignored. Internal marketing is a tough sell for many reasons. For example, many argue that customers and sales must be the number one concern of the organization. Others point to lack of measurement and the challenge of calculating the return on internal communication efforts as the main obstacle to their implementation. Ironically, while many executives are quick to criticize internal communication, the inability to affect real cultural change is also one of their most common complaints.
This study supports the concept of internal branding and argues that inward-focused brand initiatives can accelerate changes in employee attitudes and ultimately behavior. Moreover, it argues that internal branding can be the driver for real, measurable cultural change within a company. Specifically, the study uses several case studies featuring well-known U.S. companies which demonstrate how companies can create effective internal communication and experience direct results – ultimately changing employee attitudes and behavior regarding the organization. The study argues that similar to an external branding campaign, internal branding initiatives should set clear objectives and prioritize communications with regard to audience, frequency and method of contact. This approach will allow the organization not only to maximize its impact, but increase the opportunity for measurement.
Limited Brand’s creation and distribution of The Guide, an innovative catalog of human resource benefits, is cited as one example of effective internal branding. Written from employee insights and designed more like a fashion magazine than a catalog, The Guide was targeted at a largely young and female audience, chiefly employees in retail stores nationwide. Today, it is considered to be one of the most effective internal campaigns in company history and continues to be utilized.
Another good example is Big Lots’ re-branding effort in 2003. Big Lots is currently the largest closeout retailer in the U.S., with more than 1,100 stores nationwide. However, three years ago, before undertaking a serious centralized internal branding effort, the company looked very different. Like many retailers, Big Lots grew organically without acquisition. In 2001, the company found itself on the verge of becoming a national brand with stores from coast to coast. However, the stores were operating under a variety of different names. Big Lots knew it was critical to create one, clear identity and embarked on a nationwide initiative to create a master brand – “Big Lots.” The strategy included an updated visual identity, a company video, regional managers’ meetings, brand toolkits for employees and a company newsletter. Big Lots also revamped their Associate Handbook to make it more fun and relevant and, moreover, to carry the new brand message to all levels of the organization.
“Looking Inward: How Internal Branding and Communications Affect Cultural Change,” Bill Faust and Beverly Bethge, Design Management Journal, vol. 14, no. 3 (2003).
The Transition to Self-Directed Work Teams: A Managerial Perspective
Self-directed work teams (SDWT’s) are autonomous work units capable of self-management. Generally, members of SDWT’s have no direct managerial supervision in the traditional sense. SDWT’s have become the norm in many organizations faced with competitive pressures, elevated quality expectations, and calls for worker empowerment. It is currently estimated that nearly three out of four top 1000 U.S. firms have SDWT’s. However, while organizations are increasingly adopting SDWT’s, many managers do not know how to effectively shift to their new roles – roles that move away from traditional day-to-day supervision and towards support chiefly through providing resources, training and encouragement. This study is designed to help managers effectively navigate through the transition to SDWT’s.
In essence, management is the use of influence tactics to encourage positive team member attitudes, behavior and performance. This study takes a longitudinal approach, and explores changes in managers’ usage of influence tactics during the transition to SDWT’s within one large U.S. manufacturing plant. As expected, the results of the study indicate that managers decrease their use of “hard” tactics (legitimating, pressure and coalition) when shifting to an SDWT. However, surprisingly, they do not increase their use of soft tactics (rational persuasion, inspirational appeals, and consultation) when switching to the SDWT structure. A potential explanation for this is that it is easier for managers to stop the use of inappropriate behaviors than it is for them to increase the use of new, appropriate behaviors. It is important that managers recognize this tendency and be pro-active about increasing their use of soft tactics when switching to SDWT’s.
Interestingly, results of the study also indicated that managers who are high self-monitors (high self-monitors have the ability and motivation to strategically adjust their management style as appropriate to their work environment) are more likely to increase their use of soft tactics than low self-monitors. Therefore, it is critical that managers try to recognize their level of flexibility in times of organizational change. If they identify themselves as low self-monitors, they should pay more critical attention to their use of influence tactics in order to be more effective and appropriate managers in the new SDWT environment.
“Transition to Self-Directed Work Teams: Implications of Transition Time and Self-Monitoring for Managers’ Use of Influence Tactics,” Ceasar Douglas and William L. Gardner, Journal of Organizational Behavior, vol. 25 (2004).
Psychological Contract Breach in the Workplace: Cultural Differences Matter
Organizations across the world are experiencing stiff competition and a business environment marked by uncertainty and change. As a result, many companies have shifted their psychological contracts with their employees. Psychological contracts are a set of beliefs held by an individual employee about the terms of exchange between the employee and the organization. Unlike formal employer-employee contracts, psychological contracts are perceptual and are subject to one party’s interpretation. Although economic conditions certainly play a role in how psychological constructs are perceived, this study aims to look at how cultural differences – particularly between the Chinese and American cultures – influence these perceptions. In this study, Hong Kong provides a unique environment in which to understand the Chinese perspective as Hong Kong businesses are currently laying off employees, reducing compensation, and more, in order to maintain profit margins. Data was collected from a sample of 60 American and 76 Hong Kong employees who were asked to complete a questionnaire on these issues.
The results of the study indicate that American employees displayed lower levels of job satisfaction and job performance than their Hong Kong counterparts when their intrinsic contract was breached. In other words, when expectations regarding challenging and interesting work were not fulfilled. These different reactions may be attributed to the values and expectations set in the two cultures. Specifically, while a psychological contract of intrinsic nature may frustrate Hong Kong employees, it may be their Confucian values and beliefs that allow them to accept this type of breach. In other words, Confucian values lead Hong Kong workers to view the work environment as more interdependent and more like a family. Therefore, in order to preserve group harmony, Hong Kong workers may not over-react to breaches that involve intrinsic or individual factors.
Interestingly, Hong Kong employees had greater intentions to leave the company and lower levels of commitment than U.S. employees when extrinsic contracts were breached. In other words, when promises regarding salary, job training, and adequate resources to do their job were breached, Hong Kong workers reacted more negatively than U.S. workers. This may be explained by the fact that Hong Kong workers may believe the organization is preventing them from providing for their families or causing them dishonor.
Managers should pay attention to cultural backgrounds and differences when managing psychological contracts of employees. Given the increase in business globalization, it is increasingly imperative that managers have this awareness and sensitivity.
“Attitudinal and Behavioral Outcomes of Psychological Contract Breach: A Cross Cultural Comparison of the United States and Hong Kong Chinese,” Jill Kickul, Scott W. Lester, and Elizabeth Belgio, International Journal of Cross Cultural Management, vol. 4, no. 2, August 2004.
The Road to An Engaged Workforce
The impact of three sets of organizational characteristics--organizational culture, organizational climate, and human resource systems—on employee satisfaction and engagement were examined in the 2005 study The Road to An Engaged Workforce. The primary goal of the study, conducted on behalf of the Forum for People Performance Management and Measurement and overseen by Dr. James L. Oakley, Assistant Professor of Marketing Krannert School of Management at Purdue University, was to better understand how the complexities of an organization fit together to create an optimally functioning system. Researchers discovered there are a number of levers available to managers to influence the key employee attitudes of satisfaction and engagement, and these levers are, in general, more tangible and accessible than the amorphous concepts of organizational culture and employee attitudes. They found, for example, that 1) the key drivers impacting employee satisfaction include an employee’s intention to remain in the organization, the skill variety employees are able to exhibit in their job, the level of customer service orientation achieved, and the degree of coordination between units of the organization and 2) the key drivers of employee engagement include reduced role conflict, proper training, personal autonomy, and the effective utilization of expert, referent, and exchange power by managers.
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