The Irf Quarterly Academic Review: Improving Practice & Application

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— Spring, 2020 —

THE IR F QUARTE R LY
AC ADE M IC R EVIEW
F O R I N C E N T I V E , R E WA R D & R E CO G N I T I O N P R O F E S S I O N A L S

Volume 3, Number 1

I M P R O V I N G P R A C T I C E & A P P L I C AT I O N
CONTENTS
From the IRF President, Stephanie Harris p2
From the Editor, Allan Schweyer p3
Working Paper Summary: Impact of Reward/Recognition and
Engagement Programs on Turnover Likelihood p4
Rewards Strategy: A Key Driver of Service–Profit Chain p9
Opting-in to Prosocial Incentives p13
Working Paper Summary: Corporate Purpose and
Financial Performance p17
Higher Purpose, Incentives, and Economic Performance p20
Books Reviewed and Recommended p24

A n O f f i c i a l P u b l i c a t i o n o f t h e I n c e n t i v e R e s e a r c h Fo u n d a t i o n
T h i s a n d a l l o t h e r I R F r e p o r t s a r e a v a i l a b l e a t T h e I R F. o r g
FROM THE IRF PRESIDENT
As the Incentive Research Foundation launches Vision 2025, it is
fitting to have an issue of The IRF Quarterly Academic Review that
focuses, in part, on the role mission, vision, and authenticity of
purpose play in motivating organizational performance. Here at
the IRF, our mission and purpose remain true to our founding:
advancing the science and awareness of motivation and non-
cash incentives in business and industry globally.

Through Vision 2025, we are focused on continuing to produce


high-quality research that is both relevant and impactful,
increasing the distribution of our research to ensure it is helping
to inform the success of ongoing programs but also educating
and inspiring the next generation of incentive champions, and finally, mirroring the increasingly
global nature of business and the incentives industry today. In addition to producing original
research and education programs, we will continue to publish the Quarterly, the world’s first
journal focused on academic research on incentives, recognition and motivation in the workplace.
I hope you enjoy this edition.

Sincerely,

Stephanie Harris
President, Incentive Research Foundation

2 Spring, 2020 – The IRF Quarterly Academic Review


Rewards Strategy: A Key Driver of Service –Profit Chain

Citation: 2019 by Pankaj M. Madhani, ICFAI Business School, India.


Compensation & Benefits Review 1–11 2020 SAGE Publications.

Availability: A full copy of this paper can be obtained on request from


Allan Schweyer at: allan.schweyer29@gmail.com

Introduction
In 1998, the Harvard Business Review published a groundbreaking paper
called The Employee-Customer-Profit Chain at Sears. Based on hard data from
Sears’ experiments in putting employees first, this article demonstrated
the causal links between employee satisfaction, customer loyalty, and profits. Indeed, the authors
extracted a simple formula from the data that proved capable of predicting Sears’ profits six
months out depending on employee satisfaction scores six months prior. The article played a key
role in launching the now more than two-decades-old movement toward improving employee
satisfaction and engagement for sustainable competitive advantage.

In this article, the author revisits the service-profit chain as well as employee-customer-profit chain
concepts to explore the impact of rewards strategy on employee satisfaction, leading to customer
satisfaction and then to profits. The author calls it the “service-profit chain” induced by a firm’s total
rewards strategy.

From the previous article in this issue, we learned that there is a causal relationship between better
employee satisfaction and improved engagement as well as reduced turnover (at least among
salespeople). Here, the author reviews a body of research to explain the links between employee
satisfaction, improved customer service, greater customer loyalty, and improved profits. He finds
that an effective reward strategy, involving the right balance of rewards (financial and nonfinancial,
tangible and intangible), leads to improvements in employee satisfaction, higher employee
engagement and, in turn, higher profits.

Key Findings
1. Improved internal service quality (the work environment, including rewards and
recognition, training and development, transparency, autonomy, good leadership,
the culture in general and other investments in employees) causes higher employee
productivity, satisfaction, and retention (loyalty).

2. Employee loyalty and satisfaction leads to improved customer service, which in turn,
drives customer loyalty.

3. Profits derive from customer loyalty. A 5% improvement in customer loyalty can result
in profit improvements of between 25% to 85%.

4. Once the employee-profit chain is operating and maintained, it becomes a virtuous


cycle where additional and ongoing investments in employees improve execution
and customer service, even more, leading to bigger profits.

www.TheIRF.org 9
5. A firm’s total reward strategy is an instrumental and necessary component of internal
service quality. Rewards drive satisfaction, which drives better customer service, which
drives profits (see Figure 1).

6. Despite enormous investments in engagement initiatives and total rewards, the vast
majority of American workers feel neither engaged or appreciated at work.

7. An effective total rewards strategy involves a careful, complex, and ongoing design. It
not only drives employee satisfaction but it also signals the firm’s values and priorities.
The consequences of getting it wrong match the rewards of getting it right.

8. Total rewards strategies should include tangible cash and non-cash rewards, and
intangible rewards, such as recognition. The strategy must create an ongoing balance
to appeal to employees’ intrinsic and extrinsic motivational needs, and it must appeal
to changing employee preferences, on an individual-by-individual basis.

9. Recognition alone has been shown to improve performance by 24% among


salespeople.
Figure 1: A Total Reward Strategy: A Key Driver of Service–Profit Chain

10 Spring, 2020 – The IRF Quarterly Academic Review


Actionable Takeaways
• Look after your employees first, above customers and other stakeholders. The profit
chain and the virtuous cycle start with employees who create satisfied and loyal
customers.

• Investments in employees do not end with an effective rewards strategy, but effective
rewards and recognition are an essential ingredient. In designing an effective total
rewards strategy, use cash rewards in combination with non-financial tangible and
intangible rewards. Research has shown that non-financial rewards (tangible and non-
tangible) generate better returns, more often, than cash. This is true of salespeople
and the general employee population.

“It has been argued that money will motivate some of the people all the time and, perhaps, all of the
people some of the time. But it cannot be solely relied on to motivate all of the people all the time; hence,
money has to be reinforced by nonfinancial rewards, especially those that provide intrinsic motivation.”

Question & Answer with the Author


Q: It has been more than 20 years since the Sears case study showed the importance of investing
in employee satisfaction and engagement. A few years later, The War for Talent became an
international bestseller. Firms have poured billions of dollars into employee engagement programs
and billions more into reward programs. Still, as you say, 80% of employees do not feel appreciated
and almost as many are disengaged. Why do you think this is?

A: Major causes of employee disengagement are:

1. Lack of effective rewards and recognition system

2. Lack of inspired leadership and value system within the organization

3. Unfair and ineffective communication policies

4. A huge gap between expectations and realities

5. Fewer opportunities for knowledge sharing

6. Limited scope for learning and development

7. Lack of trust and unsupportive organizational environment

8. Insecurity, instability, perceived inequality, interpersonal issues,


stress/anxiety, and working conditions

www.TheIRF.org 11
Here are some action plans to engage your employees effectively:

1. Identify preferences for motivational incentives (financial or non-financial)

2. Ensure that employees feel heard and valued for their inputs and also appreciated
for their achievements

3. Take the initiative to inspire employees and provide timely feedback

4. Empower your employees and do not micromanage

5. Create a healthy organizational culture and encourage creativity

6. Build trust and ensure that employees feel positive at work

7. Allocate roles and responsibilities based on their strengths and encourage job rotation

8. Deal with people differently as people are different, each with unique egos,
emotions, and feelings.

Q: You emphasize the importance of building and executing an “effective rewards strategy” and
part of that lies in understanding the preferences of each individual employee. How does this
scale? How does a large firm build a rewards strategy that treats every employee differently?

A: An effective reward and recognition strategy should match each employee’s preferences and needs
because employees differ in terms of risk preferences, career stage, skill differences, rewards preferences,
and other factors. Managers should remember that the value of a reward and recognition plan is
often idiosyncratic to each employee. Not all employees value the same rewards, and not all people
value one reward to the same extent. Thus, managers should carefully match rewards and recognition
to the specific personal needs of the employee. The effectiveness of a rewards and recognition plan
depends on management’s ability to match these plans with employees’ characteristics, situations, and
preferences. Thus, companies are introducing new data mining and HR analytics solutions to better
understand employee’s preferences and accordingly customize rewards and recognition plans.

Questions?
Please send any additional questions to the researcher:

Dr. Pankaj M. Madhani


Associate Dean & Professor of Management
ICFAI Business School - pmadhani@hawk.iit.edu

Bio

12 Spring, 2020 – The IRF Quarterly Academic Review

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