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Employee Engagement, Customer Satisfaction and Profitability

For a complete copy of the study, click here.

Overview

A set of organizational surveys was designed to focus on linking internal performance strategies to market and financial outcomes. In particular, our goal is to understand the organizational characteristics that best engender the necessary employee attitudes and behaviors to drive an organization’s market and financial success.

Focusing on non-customer contact employees, the study sought to understand the organizational drivers of employee satisfaction and employee engagement (the degree of employee motivation and sense of inspiration, personal involvement, and supportiveness), and the downstream effects of these employee attitudes on customers and financial performance. Data was obtained from a stratified random sample of 100 organizations in the U.S. media industry, specifically investigating the following organizational characteristics:

  • Organizational Culture
  • Organizational Climate
  • Human Resource Systems
  • Market Characteristics

The effect of these organizational characteristics was studied with respect to employee satisfaction and engagement, as well as the downstream effects of these employee attitudes on market performance, as measured by customer satisfaction, and financial performance, i.e., profitability.

This Executive Summary provides an overview of the key findings from the study and then provides more specific data to support these findings.

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Summary of Key Findings

Key findings from the study include the following:

  • There is a direct link between employee satisfaction and customer satisfaction, and between customer satisfaction and improved financial performance.
  • The key organizational characteristic for explaining employee satisfaction is organizational communication (a measure of the downward and upward communication in an organization).
  • Employee satisfaction is a key antecedent to employee engagement.

    • Interaction between managers and employees with regards to supportiveness and goal setting, as well as job design were also key drivers of employee engagement.
  • Organizational culture was another significant driver of employee engagement, where employees must be expected to cooperate and work together, but also to take charge and provide a voice for the customer within the organization.

    • A fully cooperative culture feels the need to reach consensus on a single option, where a culture promoting healthy competition provides multiple choices which are then balanced against one another in an attempt to develop an optimal solution.
  • When individuals and teams are competing to implement the optimal behaviors oriented to the market and its customers, such competition can work to the advantage of both the organization and its customers.
  • Organizations with engaged employees have customers who use their products more, and increased customer usage leads to higher levels of customer satisfaction.
  • It is an organization’s employees who influence the behavior and attitudes of customers, and it is customers who drive an organization’s profitability through the purchase and use of its products.
  • In the end, customers who are more satisfied with an organization’s products are less expensive to serve, use the product more, and, hence, are more profitable customers.

A focus on market outcomes, e.g., customer satisfaction, is warranted as they were found to mediate the relationships between employee attitudes and financial performance.

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Forum Background

What is the Forum for People Performance Management and Measurement?

The Forum for People Performance Management and Measurement is a research center within the Medill Integrated Marketing Communications (IMC) graduate program at Northwestern University. It is funded by the Incentive Performance Center, which is made up of a number of top incentive companies and industry leaders dedicated to research and educational programs that improve human performance in business. A central objective of the Forum is to develop and disseminate knowledge about communications, engagement and management such that businesses can better design, implement and manage people-based initiatives both inside and outside an organization.

A number of research initiatives by the Forum are planned over the next three years to investigate the value and importance of employee incentives along with the other key issues of communications, engagement, and management.

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Past Research

While a number of studies exist addressing the issues of incentive programs, employee engagement, and organizational performance, including a previous study published by the Forum, the present study was not designed to understand the effects of particular incentive systems, but rather to understand the organizational characteristics best suited for creating an environment likely to engender a satisfied and motivated workforce, and the downstream market and financial effects of such a workforce. There have been previous research efforts to understand these relationships – and these will be addressed below – but few have attempted to model organizational characteristics, employee attitudes, customer response, and financial performance simultaneously, typically due to the difficulty in obtaining such data for a reasonable set of organizations.

Though there have been some empirical studies regarding the link between employee satisfaction and customer and financial outcomes, the results of such studies have been equivocal at best, both in terms of the nature of the relationship and its causal direction. In addition, all of the previous studies have examined the relationship in the context of a face-to-face interaction between employees and customers.

This is the first study of which we are aware attempting to study this link in a context that does not involve face-to-face relationships between employees and customers. Those employees engaged in face-to-face interaction with an organization’s customers often comprise a small number of the organization’s overall human assets. For those employees not actively engaged in face-to-face relationships with customers, their attitudes and behaviors with respect to these customers are still vitally important. For these employees, their interaction with customers is indirect – through the organization’s products and services which are, themselves, the result of the market-related activities and behaviors of these employees. Hence, the products and services produced by the organization’s employees to be consumed by the organization’s customers are the embodiment of the attitudes and behaviors of the employees who produced them.

In the present research, we study the attitudes of employees related to satisfaction and engagement. Individual employees are responsible for implementing the activities and behaviors necessary for an organization to function, and some past research has attempted to link such attitudes to organizational performance1. The results of these efforts have often been equivocal, both in terms of the nature of the relationship, i.e., whether the relationship is direct or indirect, and in terms of the causal direction of the relationship. In addition, many of the results are only moderately significant, suggesting the possibility that additional concepts are likely necessary to understand these relationships.

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Theoretical Background

In this section, we will provide a brief background on the organizational characteristics under study and their expected influence on employee attitudes and downstream market and financial outcomes. We will address four sets of organizational characteristics: organizational culture, organizational climate, human resource systems, and market characteristics. We will conclude this section with a brief review of the market and financial outcomes under study.

Organizational Culture

Organizational culture has been defined as the set of shared assumptions and beliefs about an organization and its function in the marketplace2 or “the ways of thinking, behaving, and believing that members of a social unit have in common”3. As such, culture has been commonly treated by organizational researchers as a set of cognitions shared by members of a social unit.

According to these previous researchers, an organization’s culture is thought to play a key role in strategy formulation, firm performance, and competitive advantage. Culture may also have indirect effects on performance in benefiting other aspects of an organization. For example, researchers4 have found that organizational culture is linked to service quality and employee performance, both of which have been identified as fundamental links in Harvard’s Service Profit Chain leading to subsequent consumer and financial success indicators.

The current study utilizes Cooke and Rousseau’s (1988) cultural model which identifies four different cultural types found in organizations: Cooperative, Competitive, Passive, and Aggressive. We will address each type in turn.

Cooperative Culture. Members of organizations with cooperative cultures are encouraged to set goals, take initiative, and work together to attain personal and organization objectives. Cooperative styles imply a high valuation on individuals and are expected to be associated with greater decision authority and greater confidence that the distributed authority will not be abused. Cooperative norms encourage behaviors such as goal attainment, enjoying one’s work, and maintaining one’s personal integrity and standards.

Competitive Culture. In organizations with competitive cultural norms, members are typically rewarded for taking charge and being in control. In such organizations, winning is often highly valued and members are rewarded for out-performing each other. Such an approach has been used effectively in designing sales force incentives and other compensation schemes. A competitive culture encourages decisiveness, rewards achievement, and creates an environment of high expectations. On the other hand, an overly competitive culture can inhibit effectiveness by reducing cooperation and promoting unrealistic standards of performance.

Passive Culture. In organizations where a passive culture dominates, conflicts are avoided and members feel as if they must agree with, gain the approval of, and be liked by others. Such organizations tend to be conservative, traditional, and bureaucratically controlled, where members are expected to follow the rules and make a good impression. This type of work environment can limit organizational effectiveness by minimizing constructive expression of ideas and opinions, suppressing innovation, and stifling flexibility.

Aggressive Culture. Aggressive norms minimize influence at lower levels by emphasizing adherence to directives and authority. Aggressive norms promote such behaviors as procrastination, inflexibly following rules and procedures, waiting for direction from superiors before acting, and could also cause service quality to become confused with winning power and pointing out the flaws of others.

Organizational Climate

Organizational climate reflects the way that organizations operationalize their culture in daily routines and behaviors5. Organizational climate represents workers perception of their objective work situation, including the characteristics of the organization they work for and the nature of their relationships with other people while doing their job.

Issues regarding communication, supervisory interactions, and job design are key drivers the climate within an organization. Communication within the organization is critical to disseminate information and create an environment where employees feel valued. In addition, employees’ perceptions of supervisory behavior have considerable impact on their work attitudes. Effective job design and empowerment enable employees to act on behalf of the customer, improve decision making, and increase autonomy, all of which should lead to greater job satisfaction.

Human Resource Systems

Key managerial systems identified in previous research include selection, development, performance management, and compensation systems6. In drawing prospective employees to fit the organization’s strategies, successful managers select hires based on those traits. Training and development further enhances the development of those skills and the acquisition of new, trainable skills. Human resource initiatives aimed at providing employees with the necessary skills and tools to deliver customer value cannot be viewed as costs, but rather must be regarded as investments with high and measurable returns. Previous theory also states that one of the primary keys to developing a strong organization lies in the way employees are compensated and rewarded. For example, when compensation systems are keyed to market driven indicators, appropriate behavior is reinforced.

Market Characteristics

It stands to reason that certain market characteristics may influence employee attitudes, as well as customer and financial outcomes. In particular, an organization’s size (in terms of number of employees), the size of the market in which the organization operates, and the competitive environment, are all factors that can potentially impact the concepts under study.

Market Outcomes

Higher levels of customer satisfaction have been found to lead to higher levels of customer retention and loyalty7, and products and services that provide high satisfaction have a higher proportion of repeat business and higher gross margins, in addition to reduced acquisition costs and increased long term revenues. It is for these reasons that studying customer satisfaction as an outcome measure of an organization’s internal activities is justified.

In addition to customer satisfaction, another customer response that is of distinct interest is frequency of purchase and use in the product category. It is typically hypothesized that those customers who use more of your product or service are more likely to continue to do so in the future. Improvements in customer usage should then result in improved financial performance.

Financial Outcomes

Efforts to improve the organization and its products or services entail costs that are not reflected in revenue improvements or increases in customer retention. Therefore, to truly understand the financial ramifications of an organization’s market-based efforts, these costs must be accounted for. Such costs can be accounted for directly or by utilizing a financial measure that accounts for both revenue and cost, such as profitability.

Summary

This current Forum for People Performance study is an attempt to add to the compelling evidence of these previous studies by specifically inquiring about a number of organizations’ employee attitudes and linking them with their organizational culture and climate, human resource systems, market characteristics, and their market and financial performance.

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Methodology

There are two broad approaches to organizational studies – one can sample organizations across industries or within industries. There are some problems with mixing organizations across industries, including the difficulty in constructing items to measure the same concept in different contexts. In addition, while the heterogeneity obtained by sampling organizations from a variety of industries provides valued generality, it also creates unwanted noise in the data that may obscure the effects one is searching for. Thus, for this research we selected the within industry approach to maximize item interpretability across organizations, as well as to avoid some of the undesired effects of organizational heterogeneity.

All of the organizations selected for study are involved in the U.S. media industry. In seeking to obtain as representative a sample of organizations as possible, one hundred organizations were selected from the media universe in the United States in a stratified random sampling procedure. The universe, representing approximately 1,500 organizations, was divided into six strata based on market size, region of the country, and organizational size. The stratification increases confidence that this sample of organizations generalizes to the industry level, and the homogeneous sample provides a viable context for understanding the nature of the conceptual relationships under study.

All research instruments, with the exception of financial performance data, were survey based. All analysis conducted on the data involved OLS regression performed in multiple stages. All data was aggregated to the organizational level for analysis.

For a complete copy of the study, click here.

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1 Heskett, J. L., Jones, T.O., Loveman, G.W., Sasser, W.E. and Schlesinger, L.A. (1994), “Putting the Service-Profit Chain to Work,” Harvard Business Review, 72 (2), 164-174.

Delaney, J.T. and Huselid, M.A. (1996), “The Impact of Human Resource Management Practices on Perceptions of Organizational Performance,” Academy of Management Journal, 39 (4), 949-969.

Schneider, B., Henges, P.J., Smith, D.B. and Salvaggio, A.N. (2003), “Which Comes First: Employee Attitudes or Organizational Financial and Market Performance?,” Journal of Applied Psychology, 88 (5), 836-851.

2 Barney, J.B. (1986), “Organizational Culture: Can It Be a Source of Sustained Competitive Advantage?,” Academy of Management Review, 11(3), 656-665.

3 Cooke, R.A. and Rousseau, D.M. (1988), “Behavioral Norms and Expectations: A Quantitative Approach to the Assessment of Organizational Culture,” Group & Organization Studies, 13 (3), 245-273.

4 Klein, A.S., Masi, R.J., and Weidner, C.K. (1995), “Organization Culture, Distribution and Amount of Control, and Perceptions of Quality: An Empirical Study of Linkages,” Group & Organization Management, 20 (2), 122-148.

5 Deshpandé, R. and Webster, F.E. (1989), “Organizational Culture and Marketing: Defining the Research Agenda,” Journal of Marketing, 53 (1), 3-15.

6 Huselid, M.A. (1995), “The Impact of Human Resource Management Practices on Turnover, Productivity, and Corporate Financial Performance,” Academy of Management Journal, 38 (3), 635-672.

7 Reichheld, F.F. (1996), The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value, Boston, MA: Harvard Business School Press.

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