MOTIVATING CEOs TO FOCUS ON CUSTOMER SATISFACTION: IS LONG-TERM COMPENSATION THE ANSWER?

Abstract

In recent years, the fi nancial value of customer relationships has received more attention from senior executives, who increasingly tend to see customer satisfaction as a valuable corporate intangible asset. Finding ways to encourage senior executives to build customer–fi rm relations and improve customer satisfaction, however, has been challenging. What incentives should fi rms employ to motivate CEOs to enhance customer satisfaction and thereby improve fi rm value? And what are the related mechanisms for doing so? A recent study by Xueming Luo (University of Texas at Arlington), Jan Wieseke (Ruhr-University Bochum), and Christian Homburg (University of Mannheim), helps answer those questions. Their study examines two routes of infl uence that fi rms can use when designing appropriate executive compensation structures aimed at raising fi rms’ customer satisfaction and market value. The fi rst route calls on external marketing to implement actions that build customer–fi rm relations. Luo and his colleagues conjecture that increasing the proportion of CEO long-term equity-based compensation will positively infl uence corporate engagement in long-term customer relationship management. Actions that build customer–fi rm relations should, in turn, improve customer satisfaction and ultimately raise fi rm value. Indeed, the “tone at the top”—often used to describe CEOs’ focus on fi nancial matters, such as quality fi nancial reporting and effective control systems—also applies to marketing efforts aimed at “knowing the customer,” including efforts to establish effective customer service departments that respond quickly to customer complaints. The second route of infl uence involves internal marketing, expecting that long-term equity-based CEO compensation will encourage actions to build employee–fi rm relations that positively affect customer satisfaction and fi rm value over time. Here the state of employee morale, internal communications (followed by actions that “walk the talk”), and performance-based salaries all contribute to employee attitudes toward the business and its customers. Both of these “marketing routes” use organizational actions to positively infl uence customer satisfaction—a key leverage point for raising sales, profi ts, and fi rm value. The external route specifi es direct fi rm efforts to improve customer satisfaction, while the internal route focuses on building those employee behaviors and attitudes that facilitate improved customer satisfaction. Furthermore, Luo and his colleagues proposed that the strength of the effects of CEO compensation structure on corporate actions to build customer and employee relations depends on market instability. Unstable markets often feature rapidly changing customer demands, short product cycles, and fi erce market competition (Dobni & Luffman, 2003). So in unstable markets, fi rms may have a greater need to motivate CEOs with compensation structures that build effective long-term customer–fi rm relationships as competition for customers becomes more intense and customers tend to be less bound to suppliers. Finally, Luo and his colleagues proposed that changes in corporate actions to build customer– and employee– fi rm relations positively infl uence changes in fi rmspecifi c customer satisfaction measures. Those changes in customer satisfaction partially explain the associations between changes in corporate actions to build customer—and employee—fi rm relations and changes in fi rm market value, making customer satisfaction a channel whereby CEO longterm equity compensation can affect fi rm market value.