Why Managers Should Care About Employee Loyalty

Happy employees make for happy customers. This maxim is so ubiquitous as to be cliché. Intuitively, we believe this to be true. And viscerally, we want this to be true because it appeals to our sense of fair play, which craves an underlying truth that good intentions and good-faith efforts ought to have positive outcomes.

While it might seem that this should be the cornerstone for good business practice, it is hardly the case that companies place employee satisfaction at the top of their strategic objectives list. Still, few managers would argue that this is not important since most believe that any success hinges in part on their employees’ level of loyalty. Typically, though, they have a narrow definition of this essential quality.

Renowned film producer Samuel Goldwyn once remarked, “I’ll take fifty percent efficiency to get one hundred percent loyalty.” We all know what he meant by this; “I am willing to sacrifice the quality of my business operations to be surrounded by people who will follow me without question.” 

The problem with this desire for blind loyalty lies in the fact that fifty percent efficiency may very well be the price. Obedience is a poor substitute for genuine loyalty. Real loyalty develops when we feel that we’re in this together, and do the things necessary to ensure that the relationship endures (and in the case of employee loyalty that the company succeeds). That is not the job of “Yes” men.

For managers to gain the kind of loyalty from employees that they need to be successful long-term, they first have to prove that they deserve this kind of loyalty. Unfortunately, based upon our research with thousands of people from all over the world, managers have a long way to go.

In the study, we also discovered that less than 30 percent of U.S. employees say that they actually feel strongly loyal to their company. Worse still, only about 25 percent of U.S. employees strongly agree that their employer has earned their loyalty. As these results clearly show, employees will only give as good as they think they are getting. And, they don’t think that what they are getting deserves strong loyalty.

Soft Numbers

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.

As a result, a problem arises when the going gets tough; managers focus on the hard numbers. And, the reality is that every company will go through tough times at some point. That is the nature of business cycles.

Therefore, we are overwhelmed with downsizings and restructurings today. Layoffs make the front pages of our newspapers regularly. While Wall Street often rewards layoffs by treating them as a sign that management recognizes the need to get 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, 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 65-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 40 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. However, 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.

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. 

In addition, researchers at the University of Pennsylvania found that spending ten 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 of employee loyalty are to the long-term health of our business.

You can begin at your company 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:

  • How do our managers’ relationship styles impact the organization’s service climate and employee loyalty?
  • Does the company provide the necessary tools and training for employees to perform their jobs well?
  • Does the organization reward and encourage an employee’s commitment to serve customers?
  • Does the company demonstrate that it deserves the loyalty of its employees?

 

There will, of course, be other dimensions that concern your particular organization or industry. It is very important to identify those few, vital dimensions that are most essential for your business success. And, once you have identified them, you must measure each one in a clear, objective and rigorous manner.

Once you know where you stand vis-à-vis employee loyalty, 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 link each of these measures statistically 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 the managers’ own relationship styles influence it.

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 it is loyal to them. This is true almost everywhere in the world! So in the end, building an organization of committed, loyal employees ultimately comes down to demonstrating to employees that the company deserves their loyalty. 

 

Timothy Keiningham is Global Chief Strategy Officer and Executive Vice President for Ipsos Loyalty. Lerzan Aksoy is Associate Professor of Marketing at Fordham University. Luke Williams is a senior project manager at Ipsos Loyalty, a survey-based market research group. They are coauthors of the book Why Loyalty Matters (BenBella Books, 2009).

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