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Should the Customer Have a Say in Employee Pay?

Customer Pay Mercedes-Benz USA says absolutely yes. Consultant Joseph Michelli, author of a new book about the luxury brand’s customer experience transformation, offers five tips
to move your compensation structure in that direction.

Today’s consumers expect (no, demand) an extraordinary service experience. Providing it is no longer optional. With a hypercompetitive global economy spawning endless options for consumers—who, not incidentally, come to the table pre-armed with reams of Internet research—players who can’t continuously up the “delight” ante might as well hang it up now. All leaders know this intheory…but how many are willing to bet their paychecks on their ability to knock the customer’s socks off?

Well, few are willing, perhaps—but according to consultant Joseph Michelli, who worked with Mercedes-Benz USA on its journey to transforming its customer experience, more and more companies are moving in that direction.

Customer-driven compensation makes people uncomfortable,” admits Michelli, best-selling author of Driven to Delight: Delivering World-Class Customer Experience the Mercedes-Benz Way (McGraw-Hill; December 2015; ISBN: 978-0-07-180630-5; $27.00). “We’re used to thinking in terms of financial performance; it feels normal to have your income tied to sales or to overall profitability. To have it tied to what the customer thinks about how well you served him or her—well, that’s scary because it feels arbitrary, or unpredictable.”

Yet, this is a trend whose time has come. Indeed, in healthcare, the U.S. government has gotten in on the act. With its Value-Based Purchasing initiative (part of the Affordable Care Act), the Centers for Medicare & Medicaid Services (CMS) already links a percentage of reimbursement to how well a healthcare organization scores on a standardized patient survey. Many private insurance companies are following the same “pay-for-service-performance” formula.

Bold leaders in other industries are following suit in their own organizations. As Michelli’s book describes, Steve Cannon, president and CEO of MBUSA, worked with his dealer partners to make customer-centric changes to their compensation structures.

Essentially, MBUSA renegotiated to shift a portion of the dealer’s guaranteed margin and instead make it contingent on the dealer’s performance in key elements of MBUSA’s customer experience initiative. In the words of Harry Hynekamp, general manager, customer experience, “…a sizable portion of the dealer margin structure was anchored to performance on customer experience standards, training that affects customer experience delivery, and use of the latest technologies and standards for customer care.”

The bottom line? On April 15, 2014, Mercedes-Benz USA paid out $44 million in leadership bonuses to the top-performing 70 percent of dealerships in customer experience.

“This is what accountability looks like when creating a customer-centric culture,” notes Michelli. “Yes, people need a strong, compelling vision to buy into the change, but the ‘money’ piece is what solidifies their commitment. The idea is to create true partnerships with your employees, to share risks and rewards in a very concrete way—and it’s hard to get more concrete than the numbers on your bonus check.”

Whether yours is an employer/employee, franchisor/franchisee, or distributor/dealer business model, Michelli says the following tips will help you integrate the customer experience into your own compensation structure:

Get buy-in for the new customer experience performance measurement system. There are three crucial keys, says Michelli: 1) Be ready to demonstrate the relevance of the items being measured to the well-being of the business, 2) Ensure that those who are being measured can create positive changes in the metrics, and 3) Make sure rewards and consequences associated with desired performance levels are fair.

Niles Barlow, then general manager, strategic retail development at MBUSA, is quoted as saying, “We really capitalized on having a very high functioning dealer board. We used the word ‘co-creation’ a lot. We co-created much of the aligned compensation and performance package. It’s a lot about vision, openness, transparency, and an understanding that dealers want to make money first and sell cars second, whereas Mercedes-Benz USA wants to sell cars first and make money second. That may seem like a small nuance, but dealer profitability is absolutely key, and we needed to design that into the dealer margin.”

Don’t expect the change to be smooth and easy. Effective negotiations are complex and often fraught with conflict. There will be fear. Pushback will occur. Extra effort and patience are absolutely necessary. In general, change is hard for everyone, notes Michelli. It implies that there must be something you are not doing well enough and suggests that your life is going to be disrupted. These are things no one wants to face.

“When money is involved, even more effort has to be exerted to keep all parties constructively moving forward, manage overt conflict, and quell passive resistance,” he says. “Executives and employees become frustrated, the directions of the change initiatives are challenged, and meetings become contentious. In the end, though, when effective leaders present a compelling vision, craft solutions that are win/wins, and achieve a tipping point for buy-in, negotiated agreements are successful.”

Be prepared to GIVE in order to GET. To “get” the shift of a sizable portion of the dealers’ fixed margin into the variable customer performance-based column, Mercedes-Benz offered to “give” an all-new leadership bonus (the aforementioned bonus that would go to the aforementioned top 70 percent of “customer pleasers”). Funding for this new bonus came from the stash of so-called “breakage money”—tens of millions of dollars originally earmarked for dealers as a percentage of their variable margins but not paid out to those who did not meet the quarterly performance criteria. (In the past MBUSA had retained this unused money.)

“This gave dealers another reason to elevate their game and delight customers,” explains Michelli. “It also showed MBUSA leaders were willing to make their own sacrifices for the good of the customers.”

Share proven best practices with customer-facing partners so they can affect performance and reap the rewards. Mercedes-Benz USA team members developed Best Practice Guides to improve dealer performance on the sales and service Customer Experience Indexes (CEIs) (and ultimately on the J.D. Power SSI and CSI studies). For example, on the sales side, a best practice is “Completion of Negotiation in Less than 15 Minutes.” The guide cites J.D. Power Sales Satisfaction Index results to show that overall customer satisfaction drops dramatically as negotiation time increases.

Ellen Braaf, then MBUSA product manager, after-sales service programs, after-sales business development, notes: “We used to say to dealers, ‘You need to improve the customer experience,’ but we didn’t do a great job of telling them how to do it or what was in it for them. Now, based on the data from the CEI, we can cull the best practices that lead to significant increases [on our internal performance tool the CEI]. We can show how greeting a customer within two minutes can improve your result on metrics like the CEI or a J.D. Power survey by 130 points.

“Because we have the margin behind us, dealers can see that if they make small changes, or in some cases big changes, across multiple areas of the customer experience, the benefits for customers and for the financial well-being of the dealerships are significant,” she adds.

Offer training to make sure employees “get it.” However, if you’re a franchisor or distributor, it may be advisable to have your franchisee or dealer partner foot some of the cost—if not up front, at least eventually. In addition to tools like the Best Practice Guides, MBUSA leaders offered additional in-store consulting to approximately 120 of the more than 370 Mercedes-Benz dealers. In those cases, Mercedes-Benz USA staff originally provided that coaching to the dealerships at no expense. However, as the in-store coaching program has evolved, that arrangement has changed.

Ellen Braaf notes, “We’ve contracted with J.D. Power and Associates to provide customer experience assistance to dealerships that are not making the leadership bonus and not performing satisfactorily on customer experience targets as evidenced by the CEI. We have now shifted the cost of the services to the dealerships. We realized that we couldn’t subsidize enhanced tools to help some dealers perform well enough to earn the leadership bonus and in the process knock out other dealers.”

The good news, says Michelli, is that when partners and employees grasp the true gravity of the customer experience—and when they’re given the tools and the incentives to actually effect a change—they are almost always willing to do their part.

“Many companies are great at setting customer experience goals, but not so great at creating a line of sight between those goals and individual performance,” he says. “They often don’t align incentives directly to performance and/or they don’t coach or train to develop the right skills. And they don’t take action on individuals who are chronic underperformers—even in the face of coaching and training. This creates an accountability gap that negates even the best corporate intentions.

“Linking pay to the customer experience closes that gap, and quickly,” he adds. “It forces everyone—leaders, partners, and employees alike—to really think about the issues and how to solve them. You’ll see change start to happen. And in the end, the customer delight you create will become its own reward and keep the momentum going.”

About the Book:
Driven to Delight: Delivering World-Class Customer Experience the Mercedes-Benz Way(McGraw-Hill; December 2015; ISBN: 978-0-07-180630-5; $27.00) is available at bookstores nationwide and from major online booksellers.

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