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Report Links Employee Attitudes to Profitability

January 28, 2005
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Satisfied and engaged employees--even those who do not deal directly with customers--bolster a company’s bottom line, according to a recent study from Northwestern University.

The report, "Linking Organizational Characteristics to Employee Attitudes and Behavior," draws a link--albeit an indirect one--between employee satisfaction and improved financial performance.

Nearly 100 U.S. media companies representing 5,000 employees participated in the study, which was produced by the university’s Forum for People Performance Management & Measurement. It is based on employees who do not have a direct connection with customers but whose attitudes still affect the bottom line.

James Oakley, author of the study and assistant professor of marketing at Purdue University’s Krannert School of Management, says that the largest chunk of every company’s employee base does not deal directly with customers. "The linkage is through employees’ impact on customers. There is a relationship between attitude and profitability, but not a direct link. It’s an indirect relationship."

That relationship is bridged by satisfied customers. There is a direct link between employee satisfaction and customer satisfaction, and subsequently between customer satisfaction and improved financial performance. As Oakley explains, a satisfied customer is less expensive to serve. "They don’t call and complain and you don’t have to serve the account in that fashion. You don’t have to acquire them again. (They) are more likely to return, and sales and marketing efforts for new customers no longer apply."

Employee retention is another way to curb costs. "An employee’s intention to stay is highly correlated with satisfaction. Employees who are not satisfied are more likely to be looking elsewhere for another job," Oakley says.

The study defines engaged employees as those who are motivated and inspired and who feel a sense of personal involvement in their work, as well as support from their organization. Satisfaction and engagement aren’t the same thing, but satisfaction drives engagement. And the only direct driver of satisfaction is communication that streams both up and down the organization’s hierarchy, Oakley says.

"The organizations that are exemplary in the study are the ones that have a system set up that allows for information to flow from the frontline employees to senior management, so the employees understand what’s going on and feel like they are being listened to," Oakley says. He cites Pixar Animation Studios, Nordstrom, Starbucks and the Ritz-Carlton Hotel Co. as examples of companies that understand this concept, although they were not participants in the study.

Sue Stephenson, senior vice president of human resources at Ritz-Carlton, agrees that each hotel’s employees create satisfied customers. Satisfaction creates customer loyalty, which ultimately leads to the financial success of the hotel.

"Loyal customers share great stories about our business. Word-of-mouth is a valuable way of marketing our business," Stephenson says.

She also concurs with the study’s findings that employees affect the financial success of the hotel regardless of their contact of lack of contact with guests.

"The employee washing dishes or cleaning silver never interacts with the customers in the restaurant, but they understand the role, which is that the cleanest dishes and shiniest silver will help create a great culinary experience in a restaurant," she says.

Ritz-Carlton reinforces the connection to customers with a beginning-of-shift pep rally of sorts at which hotel management restates the company’s mission and shares exceptional customer service stories with employees. Each employee carries a "credo card," which is a promise of excellence both to the employee and the customer.

Stephenson also agrees with the study’s finding that an empowered employee is a satisfied employee. At Ritz-Carlton, that empowerment includes authorization for each employee to expend up to $2,000 to "delight a guest" who has a customer service issue.

"For example, if a departing guest says, ‘I didn’t make that call,’ an employee can correct it off the check," she says. "For the customer, it means they don’t have to wait. For an employee, it means they know we trust them."

As with all things in workforce management, the question of dollar-and-cents results of such engagement arises. Oakley says the survey can’t supply that answer.

"One key drawback is there is no investment to measure, so (the survey) can’t give a return on investment," he says.

His next study will examine the effect of various human resources practices on employee engagement. This study found that although the human resources function does not drive employee satisfaction or engagement, it has effects on other areas. Another study will explore what those areas are, he says.

For her part, Stephenson says Ritz-Carlton recognizes that compensation and rewards do affect engagement. The hotel group lowered its turnover rate from 51 percent in 1991 to 23.3 percent in 2004.

"If a company is not paying competitively and not providing competitive benefits, it can be a de-motivator," she says. "You must do the right thing."

--Gerelyn Terzo

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