Quantifying the Link between Employee Engagement and Customer Satisfaction in the Car Rental Industry

Abstract

In the retail service industry, employee engagement may play an important role in customer relationship management, as employees often interact directly with customers. This paper investigates the link between employee engagement and customer satisfaction. We analyze this potential link using a unique data set from a large car rental company. Our analysis accounts for the possibility that employee engagement is endogenously determined. To address potential endogeneity of employee engagement, we make use of instrumental variables based on location and time varying employee composition. Our analysis confirms that there is a positive effect of employee engagement on customer satisfaction, which can in turn increase customer loyalty. The causal link between employee engagement and customer satisfaction is especially important, as our analysis using LASSO (for variable subset selection) highlights that customer satisfaction is among the most important predictors of customer loyalty. Ultimately, our findings have implications not just for customer targeting but also firm resource allocation decisions regarding employee motivation.