When Customers Push Back: The Dangers of Service Divestment and How to Avoid Them

[We’re pleased to welcome authors Christina M. Haenel of the University of Goettingen, Hauke A. Wetzel of Massey University, and Maik Hammerschmidt of the University of Goettingen. They recently published an article in Journal of Service Research entitled “The Perils of Service Contract Divestment: When and Why Customers Seek Revenge and How It Can Be Attenuated,” which is currently free to read for a limited time. Below, they reflect on this research:]

Divesting from unprofitable customers is a widely-established practice in many service industries. Service providers often demote (i.e., they cut back services) or terminate customer service contracts (i.e, they end service provision). The idea is that investing less in unprofitable customer relationships saves costs and enhances firm profitability.

Our recent study forthcoming in Journal of Service Research shows, however, that such practices may severely harm future business. In particular, service contract demotion and termination trigger customer revenge, including aggressive behaviors towards employees, negative word-of-mouth, and third-party complaining for negative publicity.

The good news for service providers who rely on divestment practices is that customer revenge depends on the divestment practice and the targeted customers. Customer revenge is much less likely if customers implicitly agree with the service provider’s initiative. Unsatisfied customers are less likely to become angry and take revenge when their contracts are terminated than when they are demoted. For satisfied customers it is the other way around. Thus, when service providers wish to divest from specific relationships, they should terminate unsatisfied customers’ contracts but they should demote satisfied customers’ contracts.
For many service providers our findings may come as a surprise as terminating service contracts is generally viewed as a last resort. Drawing an analogy to romantic relationships (that many of us may have experienced themselves) helps to understand the findings: It can be very relieving if an unhappy relationship is ended, whereas we prefer to get a second chance if we value a relationship.

Our study offers another counterintuitive finding. Offering financial compensation or an apology turn out to be double-edged swords that can serve to remedy customer revenge after experiencing service divestment—or reinforce it. It is best to offer financial compensation or apology only to “turn around” customers who implicitly disagree with the service provider’s divestment choice and are likely to take revenge (i.e., if satisfied customers’ relationships are terminated or if unsatisfied customers’ relationships are demoted). It does not make a difference whether financial compensation or an apology are offered. This is an interesting finding in itself as offering an apology is a much cheaper option.

Overall, we contend that for service divestment initiatives to minimize customer revenge, the customer’s perspective on the relationship should be accounted for. If the firm’s chosen divestment approach aligns with the customer’s take on the relationship, service providers may well adopt service divestment practices without fueling customer rage.

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Social Exchange and the Effects of Employee Stock Options

[We’re pleased to welcome authors Peter Cappelli of the University of Pennsylvania, Martin Conyon of Bentley University, David Almeda of Kronos Incorporated. They recently published an article in the ILR Review entitled “Social Exchange and the Effects of Employee Stock Options,” which is currently free to read for a limited time. Below, they describe the motivation for this research.

The interesting thing about our paper is that both the practice and the research on topics like compensation and rewards is centered on the idea that incentives are the key to motivation. We design rewards to make this happen.

What we investigate is a different motivation, and that is the sense of obligation we might feel to an organization for doing something good for you. In this case it is the granting of stock options to lower-level managers, which the company presents as a way to share in the success of the company’s performance. We can sort out that effect from the effect of incentives, and we find that this obligation has a much bigger effect on employee performance than the effect of an incentive to help the business so the employees will see a bigger payoff from stock options.

The point of this is that companies may be going about this all wrong. Doing nice things for employees can be a terrific way to get them to perform better.

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Do Customers Assign Different Meanings to Different Acts of Compensation?

[We’re pleased to welcome author Holger Roschk of the Alpen-Adria-Universität Klagenfurt, Klagenfurt, Austria. Roschk recently published an article in the Journal of Service Research entitled “Compensation Revisited: A Social Resource Theory Perspective on Offering a Monetary Resource after a Service Failure,” which is currently free to read for a limited time. Below, Roschk reflects on the inspiration for conducting this research:]

dollar-531639_960_720One of the many propositions by social resource theory comprises that people assign different meanings to the same action. Being a great fan of mafia movies, this idea intrigued me as it nicely reflects the popular “kiss of death” metaphor. While a kiss is usually considered as something positive, it can also — as portrayed in these very special movie situations mean that a person has fallen in disgrace.

Fascinated by this idea, we wanted to see if complainants assign different meanings to an act of service failure compensation. In service recovery research, social resource theory has been employed in promising ways such as explaining the situational desirability of recovery efforts. Accordingly, it seemed logical to take the next step and see if varying the properties of one and the same resource—in our case money—impacts recovery effectiveness.

With this purpose in mind, we also had to deal with a couple of challenges. One of them was the above mentioned issue that people attach different meanings to the same action. It is not reported in the article, but it was quite interesting. Accidentally, in one of our tests we manipulated the compensation act in such a way that respondents seemed to assign a negative meaning, eventually leading to obstructive effects which was exactly the contrary of what we wanted to achieve.

People often talk about money in terms of “money is money—so why should one care about how it is given?” Finding that complainants actually do care about how they are compensated in a recovery situation is an interesting new perspective for practitioners and researchers alike. Practitioners in particular learn about an outcome relevant property allowing to facilitate recovery outcomes without additional monetary costs. Further, they learn about an interesting side effect. Specifically, we observed that handing over the money in a personal and tangible way can be used to increase monetary returns to the firm in the form of tipping and cross-buying.

With regards to the research community, we hope that future scholars also draw on social resource theory in order to broaden our understanding of service failure and recovery, especially as SRT comprises many more propositions not yet considered.

02JSR13_Covers.inddStay up-to-date with the latest research from the Journal of Service Research and sign up for email alerts today through the homepage!

Elephant or Donkey? How Board Political Ideology Impacts CEO Pay

6261650491_0cd6c701bb_zHow much does directors’ political ideologies impact CEO compensation? Perhaps more than you might think–according to a recent paper published in Administrative Science Quarterlyentitled “The Elephant (or Donkey) in the Boardroom: How Board Political Ideology Affects CEO Pay” from authors Abhinav Gupta and Adam J. Wowak, conservative and liberal boards differ in not only how much they pay CEOs, but how they adjust CEO compensation based upon company performance. The abstract for the paper:

We examine how directors’ political ideologies, specifically the board-level average of how conservative or liberal directors are, influence boards’ decisions about CEO compensation. Integrating research on corporate governance and political psychology, we theorize that conservative and liberal boards will differ in their prevailing beliefs about the appropriate amounts CEOs should be paid and, relatedly, the extent to which CEOs should be rewarded or penalized for recent firm performance. Using a donation-based index to measure the political ideologies of Current Issue Coverdirectors serving on S&P 1500 company boards, we test our ideas on a sample of over 4,000 CEOs from 1998 to 2013. Consistent with our predictions, we show that conservative boards pay CEOs more than liberal boards and that the relationship between recent firm performance and CEO pay is stronger for conservative boards than for liberal boards. We further demonstrate that these relationships are more pronounced when focusing specifically on the directors most heavily involved in designing CEO pay plans—members of compensation committees. By showing that board ideology manifests in CEO pay, we offer an initial demonstration of the potentially wide-ranging implications of political ideology for how corporations are governed.

You can read “The Elephant (or Donkey) in the Boardroom: How Board Political Ideology Affects CEO Pay” from Administrative Science Quarterly free for the next two weeks by clicking here. Want to stay up to date on all of the latest research published by Administrative Science QuarterlyClick here to sign up for e-alerts!

*Image attributed to DonkeyHotey (CC)

Happy Election Day from Management INK! Did you vote yet?

Call for Papers: Compensation & Benefits Review!

PenCompensation & Benefits Reivew is currently accepting submissions for manuscripts that discuss the design, implementation, evaluation and communication of compensation and benefits policies and programs. The journal supports human resources and compensation and benefits specialists and academic experts with up-to-date analyses and information on salary and wage trends, labor markets, pay plans, incentive compensation, legal compliance, retirement programs, and health care benefits. Do you have a manuscript that would fit well in Compensation & Benefits ReviewClick here to read more about the journal’s submission guidelines, and click here to submit your manuscript!

To highlight the kind of content Compensation & Benefits Review publishes, here’s the abstract from a recent paper published in the journal from author John G. Kilgour, entitled “Unemployment Insurance and the Great Recession”:

The Unemployment Insurance system of the United States is a federal-state Current Issue Coverpartnership. It responded well to the usual frictional unemployment and to the several recessions since its creation in 1935. The recent Great Recession beginning 2008, however, was its most severe test. Numerous extended-benefit programs were called upon to aid the large number of unemployed men and women who had exhausted their benefits. This article examines the performance of the Unemployment Insurance program during that test with emphasis on coverage, benefits, funding, the Unemployment Trust Fund and the several Extended Benefit programs. In addition to the entire United States system, it focuses on the experience of the five largest states: California, Florida, Illinois, New York and Texas as a sample of the whole.

You can read “Unemployment Insurance and the Great Recession” from Compensation & Benefits Review free for the next two weeks by clicking here. Want to stay current on all of the latest research published by Compensation & Benefits ReviewClick here to sign up for e-alerts!

How Does a Management-to-Worker Wage Gap Impact Employee Performance?

The wage gap between the highest and lowest levels of an organization can serve as incentive for employees to work toward promotion, but does this motivation last in the long term? A new paper published in Journal of Managemententitled “Minding the Gap: Antecedents and Consequences of Top Management-to-Worker Pay Dispersion” from authors Brian L. Connelly, Katalin Takacs Haynes, Laszlo Tihanyi, Daniel L. Gamache, and Cynthia E. Devers delves into the performance implications of pay dispersion in an organization.

The abstract for the paper:

Management researchers have long been concerned with the antecedents and consequences of managerial compensation. More recently, scholarly and popular attention has turned to the gap in pay between workers at the highest and lowest levels of the organization, or “pay dispersion.” This study investigates the performance implications of pay dispersion on a longitudinal (10-year) sample of Current Issue Coverpublicly traded firms from multiple industries. We combine explanations based on tournament theory and equity theory to develop a model wherein pay dispersion has opposing effects on a firm’s short-term performance and their trend in performance over time. We also show that ownership is a key antecedent of pay dispersion. Specifically, transient institutional investors (who have short time horizons and equity stakes in a wide variety of firms) positively influence pay dispersion whereas dedicated institutional investors (who have longer investment time horizons and equity stakes in fewer firms) negatively influence pay dispersion. We discuss the wide-ranging implications of these findings for scholars, managers, and policy makers alike.

You can read “Minding the Gap: Antecedents and Consequences of Top Management-to-Worker Pay Dispersion” from Journal of Management free for the next two weeks by clicking here. Want to keep current on all of the latest research from Journal of ManagementClick here to sign up for e-alerts!

Recipe for Success: Optimizing Sales Compensation with Pay Level and Pay Mix

5033710308_88f7457e6d_z[We’re pleased to welcome Pankaj M. Madhani of ICFAI Business School (IBS). Pankaj recently published an article in Compensation & Benefits Review entitled “Sales Compensation Strategy: An Optimal Design of Pay Level and Pay Mix”.]

Compensation strategy decision regarding pay level (total earnings generated) and pay mix (relative proportion of fixed pay and variable pay) are both vital in sales compensation plan. This research explains major attributes of pay level and pays mix design of sales organization and identifies various factors influencing it. Pay level is influenced by characteristics of the sales organization, the job market conditions for CBR_42_1_72ppiRGB_powerpointsalespeople, the content of sales job, the quality of sales employees and management style and philosophy. It is also affected by various other factors such as geographical location or cluster, trade unions, statutory requirements, standard of living as well as general economic conditions. Similarly, pay mix plans vary significantly depending on the sales organization’s environment, the competitiveness of the market in which it does business, environmental munificence, environmental turbulence and uncertainty, nature of products and services, current/desired sales structure, product life cycle, organization life cycle, culture, career life cycle, degree of unionization and nature of the work performed.

Hence, determining the most effective sales force pay level and pay mix is an art; scientifically developed algorithms for formulating an optimal pay level and pay mix does not exist. This research provides analytical frameworks and models for calculating optimal pay level and pay mix. An effective compensation plan through optimal design of pay level and pay mix successfully balances the needs of salespeople, sales organization and customers simultaneously to maximize value of the organization. Finally, research concludes with an illustration to provide methodology for calculating optimal value of pay level and pay mix in a sales organization.

You can read Sales Compensation Strategy: An Optimal Design of Pay Level and Pay Mix” from Compensation & Benefits Review free for the next two weeks by clicking here. Want to know all about the latest research from Compensation & Benefits Review? Click here to sign up for e-alerts!

*Cash register image credited to Yannick Bammert (CC)

 

Pankaj MadhaniPankaj M. Madhani earned bachelor’s degrees in chemical engineering and law, a master’s degree in business administration from Northern Illinois University, a master’s degree in computer science from Illinois Institute of Technology in Chicago, and a PhD in strategic management from CEPT University.

He has more than 28 years of corporate and academic experience in India and the United States. During his tenure in the corporate sector, he was recognized with the Outstanding Young Managers Award. He is now working as professor at ICFAI Business School (IBS) where he received the Best Teacher Award from the IBS Alumni Federation. He is also the recipient of the Best Mentor Award. He has published various management books and more than 250 book chapters and research articles in several refereed academic and practitioner journals such as World at Work Journal and The European Business Review. He is a frequent contributor to Compensation & Benefits Review and has published 16 articles on sales compensation. His main research interests include salesforce compensation, corporate governance, and business strategy. He is also editor of The IUP Journal of Corporate Governance.