In his recent post, Fred posed a question on the topic of compensation linked to NPS and explored the pros and cons. Naturally, when I think about this topic I look at it from perhaps another angle - that of long vs. short term economics.
As I've suggested before, the CEO perspective on NPS can be boiled down to the problem of accounting standards favoring short term profit and loss considerations over longer term value creation. NPS provides, if coupled with the right financial analysis, an ability to make short term choices while taking into account those longer term financial gains and losses from customer loyalty.
If this seems arcane, put yourself in the position of management for a publically traded company facing the capital markets focus on immediate quarterly earnings and consider the incentives to cut short term costs out of your business (especially in a recession) at the expense of long term customer loyalty. Now imagine that you only have an average of 3 years in your position. You still want to take the bet on the future?
Compensation design does play into this. Let's say you decide to put 10% of your employees variable compensation into NPS. You are essentially making a choice to make payouts today for outcomes that may take months, if not years to occur depending on your business. If your short term financials diverge from your NPS - which could happen, given the latter is a leading indicator with a lag - you will pay today for the prospects of results tomorrow.
No big deal? Budget designers seek exactly the opposite. They would rather pay variable compensation out of short term upside for the company - so the bonus "pays for itself" out of earnings or savings. I recently heard a major corporate CEO make exactly this argument for keeping NPS out of compensation. And in a tight margin large company, putting a meaningful chunk of cost "out of synch" with the rest of the business is a tough call.
