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Why Managers Should Care About Employee Loyalty
by Timothy Keiningham and Lerzan Aksoy
The landmark Ipsos Loyalty Study, the largest study of loyalty ever conducted, found less than 30 percent of US employees say they are loyal to their company. Only about 25 percent of US employees think their employer has earned their loyalty.
The long-term success of any company depends heavily upon the quality and loyalty of its people. Few corporate executives would disagree with this idea conceptually. But it is also true that most treat the economic value of employees in enhancing customer relationships and company profits as "soft" numbers, unlike the "hard" numbers they use to manage their operations, such as the cost of labor.
The problem with this is that when the going gets tough, managers focus on the hard numbers. And the reality is that at some point every company will go through tough times. That is the nature of business cycles.
The result is that today we are overwhelmed with downsizings and restructurings. Layoffs make the front pages of our newspapers regularly. And while Wall Street often rewards layoffs by treating them as a sign that management is serious about getting a company's financial house in order, the reality is quite different. Most organizations that downsize fail to realize any long-term cost savings or efficiencies, which necessitates even more restructurings and layoffs.
Disloyalty is a Two-Way Street
Although the cost benefits tend to be mirages, the corresponding pain to customers and employees is all too real. Research using the American Customer Satisfaction Index found that those firms that engaged in substantial downsizing experienced large declines in customer satisfaction.
Unfortunately for those firms, the index has proven to be a good predictor of future earnings. The study's authors note that "the current trend toward downsizing in US firms may increase productivity in the short term, but the downsized firms' future financial performance will suffer if repeat business is dependent on labor-intensive customized service."
The impact on the organization's culture is also severe. Downsizings result in a rumor-filled paranoia. When Coca-Cola instituted a restructuring that resulted in the loss of thousands of jobs, the company became so awash in far-fetched stories that executives were forced to take the unusual step of intervening to quash them.
Worse still, employees that remain often find themselves jaded. It isn't hard to find employees who feel exactly like Dan after his company's layoffs in Mitchell Lee Marks' Charging Back Up the Hill:
"There is no loyalty here; no one is going the extra mile after this. Two years ago, we worked sixty-five-hour weeks. People were willing to do it, because it was a great place to work and we were doing something that mattered. . . . From here on in, it's just a job for me. I'll put in my forty hours and that's it."
Let's be clear. No CEO relishes the thought of layoffs. It means that their companies are floundering. Furthermore, history has shown us that the pain often outweighs any long-term financial gains.
If companies are going to grow their way out of difficult times (and excel in good times), they need two things: (1) for their customers to stick with them, and (2) to improve their productivity. But this only happens through an organization of committed, loyal employees.
Finding the Link between Employee Loyalty and Profitability
Benjamin Schneider, professor emeritus at the University of Maryland, has shown conclusively that the employee's loyalty-related attitudes precede a firm's financial and market performance. And there is a much greater payoff in working on improving the human factor than people think. Researchers at University of Pennsylvania found that spending 10 percent of a company's revenue on capital improvements increased productivity by 3.9 percent. But investing that same amount in developing the employee capital more than doubles that amount, to a whopping 8.5 percent.
It is one thing to believe that employee loyalty results in positive financial outcomes, it is quite another to quantify those outcomes. But if we are going to be able to resist our natural inclinations to focus exclusively on the short-term in difficult times, then we need to get very good at understanding what the real implications to the long-term health of our business is of employee loyalty.
The place to begin at your company is by asking, "How loyal are our employees really?" Doing this requires that you meaningfully solicit feedback from all employees (management included). And you have to be willing to ask tough questions. For example:
There will of course be other dimensions that are of concern for your particular organization or industry. The key is to identify those few, vital dimensions that are most essential for your success. Once you have identified these dimensions, you must measure them in a clear, objective, and rigorous manner.
Once you know where you stand vis-à-vis employee loyalty, next you need to tie this information to the performance drivers of your business. Typically, these come down to four things: productivity, employee turnover, customer loyalty, and revenue.
The ability to statistically link each of these measures to employee loyalty is relatively straightforward. The key is to aggregate employee data into groups that meaningfully link to turnover, customer loyalty, and revenue. For example, a retail chain might find store level analysis to be the most relevant unit, since customer loyalty and revenue are tracked at this level, and stores typically have semi-independent management.
The correlation between employee-loyalty-related attitudes and business outcomes is always meaningful from a practical, managerially relevant perspective, so it is worth the effort. In fact, a large-scale study conducted by researchers Harter, Schmidt, and Hayes presented compelling evidence that employee-loyalty-related attitudes were positively linked to each of these performance drivers. Furthermore, managers can learn a great deal by studying the performance of their most loyal business units, and how this is influenced by managers' own relationship styles.
Despite the ability to pull this information together to gain invaluable managerial insight, most companies do nothing (or next to nothing) in this regard. The number one problem in making the link isn't that this information doesn't exist. It is simply a lack of management will to pull the data contained in various departments together.
Why? We don't want to hear bad news. And without question, this kind of company internal examination always yields bad news. The reality is that employees are only as loyal to the company as they believe the company is loyal to them. This is true almost everywhere in the world! So in the end, building an organization of committed, loyalty employees ultimately comes down to demonstrating to employees that the company deserves their loyalty.
Many more articles in Creative Leadership in The CEO Refresher Archives