What would happen if CEO pay were tied to customer satisfaction?
CEO pay and customer satisfaction are topics that receive a lot of attention, yet the two are not often tied together. Why not?
The astronomical rise in CEO compensation has been well covered in the business press, finding little correlation between CEO pay and company performance. Still, according to the Economic Policy Institute, from 1978 to 2013, CEO compensation—inflation-adjusted—increased a mind-boggling 937 percent. In fact, the CEO-to-worker compensation ratio was 20-to-1 in 1965, grew to 122.6-to-1 in 1995, and was 295.9-to-1 in 2013.
This increase in CEO pay is due mainly to a mix of annual bonuses, long-term incentive payments, restricted stock awards, and stock options and stock appreciation rights; these awards are commonly tied to share price. But there’s a problem. CEO compensation will increase with any overall stock market rise, which in most cases will lift all boats, with a CEO’s performance, not necessarily being a chief contributor.
In fact, the highest paid CEOs are not the best performers. Michael Cooper of the University of Utah’s David Eccles School of Business co-authored the study “Performance for pay? The relation between CEO incentive compensation and future stock price performance.” According to Cooper, “The more CEOs are paid, the worse the firm does over the next three years, as far as stock performance and even accounting performance”. This finding makes me think of Daniel Kahneman’s fantastic book, Thinking, Fast and Slow, in which he convincingly argues that superstar performances are rarely, if ever, sustained for long, as they eventually regress to the mean.
So what might happen if CEO compensation was instead tied—even partially—to customer satisfaction? For starters, one can’t deny that higher customer satisfaction drives higher business performance—no doubt the reason why customer satisfaction is so well covered in the business press. Harvard Business Review devoted seven articles to the topic in 2014 alone.
- On average, loyal customers are worth up to 10 times as much as their first purchase (Source: White House Office of Consumer Affairs)
- A 2% increase in customer retention has the same effect as decreasing costs by 10%” – Leading on the Edge of Chaos, Emmett Murphy & Mark Murphy
- A quantitative study across more than 150 businesses, spanning various industries and functions, linked certain culture factors (shared by companies such as Amazon, Virgin, and salesforce.com) to customer satisfaction, revenue and profit growth, innovation, and new product success. These factors are important predictors of future results and create superior value for customers and sustainable growth in value for stockholders
Another big-time benefit is that by tying CEO compensation to customer satisfaction, you also tie CEO compensation to employee satisfaction. It is a long-established fact that the more engaged and satisfied employees are, the more productive they are.,“[b]ecause a direct chain links the employee experience with the customer experience, leading to sales, driving revenue, enhancing an organization’s reputation and improving overall corporate performance”
A Gallup poll found only 13% of employees around the world are actively engaged at work, and more than twice that number are so disengaged they are likely to spread negativity to others. In fact, lost productivity due to employee disengagement costs more than $300 billion in the U.S. annually.
So rather than tie CEO compensation to stock price, which is not a consistently reliable reflection nor predictor of business performance, there is good reason to tie it to customer satisfaction, which is an undeniable driver of business performance. What’s not to love? Happy employees, happy customers, and…happy shareholders! If CEOs can pull that off, they too deserve to be made happy for their efforts.