Five conditions to meet before tying incentives to customer feedback

In 2006, GE began building incentives around improved Net Promoter Scores in its businesses. Many other companies followed suit. Yet, few have gotten it right. In fact, we have heard many reports of gaming, exclusive focus on the scores and other problems. Several months ago, in my previous post on this topic, I described the challenges companies face when they tie incentives to customer feedback. This post will tackle "pre-conditions" to meet before you move forward. A future post will address some other best practices.

TIAA-CREF includes NPS in executive compensationInterest in tying incentives to NPS and other customer metrics continues. Since at least 2008, TIAA, the big insurance company, has included NPS improvement goals in senior executive compensation. In May 2010 Phones4U, a UK mobile phone retailer, announced a big increase in the weight of NPS in its frontline compensation (news article). The move received mixed reviews from sales staff.  Pep Boys, a US auto parts store chain, reports that NPS is an important part of their executive compensation system, and describes it in their proxy statement.

The obvious question:  How do you avoid the most serious pitfalls and risks?

Based on our experience, we believe five conditions need to be met before you link incentives to customer feedback:

1. Reliable metrics
2. Link to financial and strategic outcomes
3. Processes and tools for understanding root causes
4. Emphasis on learning and improving
5. Thorough, consistent communication of the incentive system's intent

We learned these lessons through work with Bain & Company clients, NPS Loyalty Forum members, and interviews we have been conducting as part of the research for our new book.

Create reliable feedback and metrics

Until your feedback system provides consistent, reliable information, you are not ready. Period.

This must not be as abundantly obvious as it seems to me, because dozens of management teams have made this mistake. If you haven't done so, please read my prior post on the dangers of tying incentives to customer feedback.

Questions that will help establish whether you have the reliability you need:

• Is your sample controlled and stable? Do you have clear, well-established procedures for generating consistent sample? Do you measure and track solicitations for feedback by customer segment, touchpoint, product ownership, tenure, etc.? Variations in sample can drive 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 be looking to generate roughly 200+ responses per operating unit per period. There's a mathematical basis for this number (based on the likelihood that a few percentage points difference from period-to-period or unit-to-unit is a result of real differences rather than simple sampling variation). I recently ran into a misguided company that was basing incentives on Net Promoter Scores determined from as few as 11 respondents. DON'T DO THAT!
• Are you achieving response rates high enough to reduce responder bias? Until you achieve 100% response, you will suffer from some measure of responder bias. In simple terms, responder bias causes problems when the people who respond are different in some way than people who don't. Busy people, such as 30-45-year-olds with young kids and challenging jobs, don't respond as often as retirees or others who have less going on. Response rates differ by level of engagement, too. The closer you get to 100%, however, the lower the impact on your measures.  For bottom-up NPS, your aspirations should be at least 60% response for B2B companies and at least 30% in most B2C situations (but this varies wildly depending on your business model). Some B2B Bain clients have achieved 80%, and some B2C clients have achieved 60%. We think they can go higher still. 

If your scores vary wildly from time period to time period, and you can't figure out why, there's a fair chance you haven't got a measurement and feedback system that is "in control" and reliable.

If your metrics aren't trustworthy, then your compensation system won't be, either. And that will create all sorts of unintended negative consequences for your business.

Establish the link to financial and strategic outcomes

Net Promoter Scores, like most metrics beyond financials serve as proxies for progress toward long term goals that lead to positive business outcomes. This requires a well-established link between customer metrics and financial and strategic outcomes for the business. How much is it worth to create a Promoter? What does it cost to create a Detractor? Without understanding this, it's hard to justify differences in compensation over the long run.

A few tips: 

• Get your CFO and finance team to take a leadership role here
• Micro: Develop good estimates of the value of turning a Detractor into a Promoter
  • Calculate the incremental revenue associated with a Promoter versus a Passive or Detractor
  • Use real data to estimate differences in credit/fraud loss rates and other operating costs
  • Work to estimate the value created through referrals and references, both positive and negative
  • Use differences in attrition rates to help establish the expected lifetime of different customer groups
  • Using agreed-on discount rates, establish the discounted lifetime value of Promoters, Passives and Detractors, based on the above differences
• Macro: Estimate the value of achieving or sustaining relative NPS leadership in terms of market share gains or revenue growth rates (this is generally most relevant for multi-business, multi-national businesses)
  • Compare growth rates among competitors in each "business-country combination" for your company (say, auto insurance in the UK versus homeowners insurance in Brazil versus life insurance in Australia)
  • Correlate relative revenue growth rates (less the impact of mergers or acquisitions) with relative Net Promoter Scores from top-down or competitive NPS studies
  • Estimate the value of achieving (or extending) NPS leadership among your competitors in each part of the business, in terms of relative growth rates -- establish the value of improvement

Make sure line management and finance really believe growing the number of Promoters will generate more profit and more growth. Help them develop a sense for the order of magnitude of that difference. Without this, your efforts will have a short half-life. No incentive system can last long if the linkage between improvement on the metrics and business outcomes is in doubt. Something else will come along (soon) to displace it.

Provide processes and tools for understanding root causes

A well-known early adopter of Net Promoter Scores launched into linking NPS improvement to executive compensation before they had developed adequate support processes and tools. Even in business units that developed carefully controlled samples and achieved relatively high response rates, they simply didn't have the disciplines in place around understanding the reasons behind the scores they were generating. "We have all this data," one perplexed executive reported. "But we can't explain any of the differences in scores from one period to the next or between one group of customers and another." Even though this company used Six Sigma and other relatively sophisticated approaches to process improvement, the disciplines around understanding customers simply didn't exist. The result: a sense of helplessness and frustration. Scores simply could not be explained or linked to actions and decisions the team had taken.

Once frustration sets in, the chances of recovering a focus on improvement, learning and growth diminish quickly. There may be no way back for some companies.

Therefore, make sure you have in place processes that help the team understand root causes: 

• Create robust verbatim analysis tools and procedures
• Use your closed-loop processes (Detractor call-backs, for example) to ferret out more detail about the specifics of a situation that might be helpful for customer-facing employees or to inform policy, pricing, people (staffing), process, product or other improvements
• Engage your customer-facing teams in working sessions to pull apart defect-ridden customer experiences, identifying not just what the customer calls out as the issues, but also the underlying business process, policy or other causes of dissatisfaction
• Engage in group learning processes to ensure that peers share their best practices and develop a sense of shared experience and teamwork as they understand the underlying causes of customer problems and wows

Your employees will find it nearly impossible to see customer feedback as anything more than a flat scorecard or basis for evaluation, unless the metrics are accompanied by robust, engaging processes for understanding underlying causes of differences in customer loyalty and engagement.

Emphasize learning and improving

It's not enough merely to provide the tools and processes for understanding root causes. These have to be supplemented with tools, processes and leadership support for learning and improvement.

One direct marketer learned this the hard way. They had developed a robust voice of the customer program, measured quarterly improvement in scores, and provided direct access to data, analysis and even recorded calls for their teams to understand the feedback they were getting. In all but three of their dozens of teams, progress seemed shockingly non-existent. Frustrated, several managers advocated dropping the relatively new feedback system. Others complained that there was "no line of sight" from their reps to the scores. Still others simply ignored it, waiting for this "flavor of the month" to pass.

But the three teams that showed progress in the first quarter continued to improve over the next several. What were they doing differently? They had developed distinct, thoughtful learning processes. For example, their supervisors spent nearly 30% more of their week in side-by-side listening and coaching sessions with their team members than did the other supervisors. Two of these teams engaged in group learning, devoting time each week to reviewing their feedback, discussing its meaning and sharing tips and tricks for either avoiding creating Detractors or for creating Promoters. And two of the teams used peer coaching, in which team members observe each other and provide tips and tricks for improvement. After rolling out these learning practices, along with many more, the company started seeing significant progress across the vast majority of teams.

Again, without practical ways to learn and improve, all the "carrots and sticks" in the world won't result in good outcomes. 

Communicate the intent of your program -- then do it again. Then again. Then...

Why do so many leadership teams under-communicate about the intent of their incentives systems? They spend countless hours coming up with them. They argue over metrics, weightings, goals. And then they roll them into the organization with very little explanation. Or they explain once and think it's all done.

The half-life on communications about company values is very brief.  It's probably under three months for most employees. It might be even shorter, really. If you are not prepared to remind people about WHY you reward what you do, then you should be prepared for people to game it, misinterpret the intent, and focus more on the mechanics than on the spirit of what you're trying to accomplish.  You can kiss sustainable, profitable organic growth goodbye.

The bottom line

Your team needs to trust the metric, its link to business outcomes, and their ability to learn and improve before you start linking incentives to customer feedback. 

Comments

[Keith Chapin]

Very insightful post.

I would also suggest a couple of additional issues:

Training employees in NPS ( what is is, how it is measured and how it works ) will increase buy-in and commitment of the employee to a NPS program. If employees are not committed to change, no incentive in the world will affect behavior.

Training also addresses the ongoing issue of WIIFM - What's In It For Me. Employees need to know how an effective NPS and Closed-Loop process can benefit them personally (more stable company, better career opportunities, increased compensation etc.).

Incentives tied to customer feedback should be within the reach of the employee. Yes, incentives should be a reach, but no so far out of reach that the incentive actually discourages employees. The actions required to achieve the incentive should also be directly impacted by the action of the individual or the team.

And finally, there should be no doubt about the trustworthiness of the data. The use of an unbiased, third-party data collection partner should be considered so that the validity of the metric is never an issue.

Keith Chapin
www.promotersrecommend.com

[Rob Markey]

Keith:

Great points. Training is a crucial component of any good change program, and can play a pivotal role in helping people develop a sense of control and influence over the outcomes. A good quality system for collecting the feedback can often be aided significantly by a great third-party vendor/partner. I also agree with your observation about the impact an employee can have on achieving the goal.

I might recommend exercising caution, however, around the assertion that "The actions required to achieve the incentive should also be directly impacted by the action of the individual or team." The danger lies in this statement's many possible interpretations, some of which become excuses for overly narrow measurement and goals. Under the argument that customer-facing employees should be measured and incented only on "what they control," some companies work hard to separate the impact of, say, a pricing issue from the effects of rep treatment. Sometimes they do this by trying to narrow the range of issues on which customers provide feedback ("...based only on your most recent interaction with a representative...").

Sales or service reps often have significantly more influence than many might want to believe. Try rank ordering all your sales people or reps on NPS for all interactions in which price was the primary issue under discussion. You will almost certainly find some reps consistently outperform others. Close examination (say, observation, review of call recordings, or follow-up interviews with customers) will reveal fundamental differences in how the more successful reps handle these situations.

Your point still holds. It's just a matter of degree. Incentives need to be for things over which employees have influence (rather than full control). Too many people adopt the narrow, strict interpretation.

Thanks for your comments!

Rob

[Rory O'Donnell]

Enjoyed reading this post, and looking forward to the book. I was a little taken aback at how almost identical this is to what we try to communicate to our clients. I will recommend that my colleagues read this! It brings clarity to the issue of tying compensation to customer satisaction. Without incorporating all of these things, management and front line staff might feel helpless and see the "score" as threat and not something they can affect. Doing the things described above takes a lot of time and effort, but turns the program into something to work for, everybody involved can see the goal, why it is in place, and the path to get there. Great stuff!