Customer satisfaction incentives with budget constraints

Abstract

AbstractWe study the design of incentive contracts based on customer satisfaction (CS) surveys with reward budget limits. We extend principal‐agent models to consider budget constraints, survey response rates, and correlation between CS measure and demand. We derive the optimal incentive contract and study the impacts of these factors on contract performance. In contrast to the common belief that customer future values are the drivers of CS incentives, we show that CS incentives can benefit principals even in a single‐period setting where customers bring no future value. Improvements can be achieved without increasing total reward, because the CS incentive program reveals additional information about agents' service effort and diversifies their risk. Such effects are overlooked in existing CS research. With consideration of correlation between sales and CS measures, we provide a metrics selection rule regarding which reward(s)—CS, sales commission, or both—should be included in an incentive plan. We also study cumulative incentive schemes based on commonly used average CS measures and show that such incentive schemes may fail to motivate agents to increase service effort. Therefore, designing proper reward schemes is a critical issue for effective CS management and deserves future research.