Biting the Bullet

By Thomas P. Johnson Jr.

A new focus on service mandates the end of employee incentive systems that emphasize sales over customer needs.

Customers: Objects to be exploited or assets to be nurtured? Senior executives will uniformly say it's the latter case at their institution, yet many still abide by practices that directly undermine the customer connection.

The culprit is skewed employee incentive systems, and for evidence of the potency of this issue, look no further than the $168 billion-asset U.S. Bancorp. Chief executive Jerry Grundhofer has gone so far as to issue a public guarantee of top-quality service. He has made it his business to demolish systems that rewarded sales volume, moreover, installing in their place a blend of metrics, monitoring and incentives that emphasize the fulfillment of customer needs as the path to individual rewards.

While the ethical obligation is clear, the proper alignment of incentives is just good business. As Grundhofer explains it, pure cross-selling — or attempting to sell the maximum number of products to each customer — is counterproductive, because it inspires representatives to sell things that customers don't need. The consequences include alienated clients and inactive accounts.

From a broad perspective, the migration to customer value-creating incentives is a much-needed complement to the shareholder value movement of the last decade. In industry after industry, top executives have seen their compensation linked to the creation of shareholder value-added, or returns above the minimum level required to justify a company's continued use of equity capital.

It stands to reason that employees should be held to a corollary standard — the creation of customer value-added, or service above the minimum level required to justify the customer's continued patronage. After all, customers are the ultimate source of value at any company, and the distinctive and profitable fulfillment of their needs is the ultimate act of shareholder value creation.

The catch, though, is that this orientation leads to some difficult tradeoffs. It's hard, for example, to convince employees that eschewing sales quotas for better customer service will actually benefit their bonuses and careers. That is why management has to back up its rhetoric with incentive systems that reward the right behavior and then let employees know it's okay — expected, actually — to make the necessary tradeoffs, even if the company receives less income in the short term.

In that light, moving the institution in the direction of customer value-creating incentives becomes a strategic imperative as executives focus on how to differentiate their company from the pack. Incentives can be viewed as an explicit set of instructions on how the company wants its customers to be treated. To leave this issue untended, then, is to ask for sub-optimal results.

Copyright © 2003 by Banking Strategies, published by BAI.

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