The Role of Rewards and Recognition in Customer-oriented Citizenship Behaviors

The Role of Rewards and Recognition in Customer-oriented Citizenship Behaviors Scott A. Jeffrey Monmouth University Guillermo Wilches-Alzate University of Waterloo January 6, 2009 1

Introduction Customer satisfaction is a critical factor in the success of any business, even more so in service industries where employees play a big role in the customer experience. Past research has shown that when customers are happy, firms are more profitable. Among the most important determinants of the quality of a customer experience is the behavior and performance of service employees. In this study we explore how specific reward and recognition practices influence service employee performance with respect to their interactions with customers. We explore the customer-oriented behaviors (COB) of employees in a service industry that involves a high level of customer-employee interaction banking. Banking is fundamentally a service industry that faces the same issues as other service industries with regard to quality of employee performance in providing customer service. Even though there is significant technical knowledge required to perform banking transactions, front line employees (tellers) must also provide high levels of customer service. Therefore, managers in the banking industry need to find ways to motivate their employees to engage in quality customer service behaviors. One of the unique challenges in a bank branch is that service interactions vary greatly and unexpected and challenging situations frequently arise. Since all of these situations cannot be foreseen and all required behavior specified in advance, a traditional incentive program may be limited in its ability to create positive service interactions. This is, because most incentive plans are of a do this/get that nature, desired behaviors must be specified in advance. While some behaviors such as smile, greet the customer by name, and similar behaviors can be delineated, it is unlikely that all of the requirements of good service can be known in advance and incorporated into an incentive program. Given these limitations of a traditional incentive system, branch managers must determine other ways to encourage these positive service behaviors. One way to encourage this type of behavior is by making employees feel valued. When employees feel valued by their firm and by their manager, they are more likely to act in the best interest of the firm and the customer. One way of increasing this feeling of value is through reward and recognition. Recognition programs can reward employees for spontaneous behaviors that go above and beyond their normal contractual roles. To summarize, we believe that reward and recognition can increase the frequency of positive customer-oriented behaviors. However, we feel that this happens predominantly by increasing the positive feelings that employees have towards their organization and their branch management. To investigate this possibility, we conducted an empirical study to evaluate the extent to which recognition generates positive feelings among employees that manifest themselves in positive customer-oriented behaviors. Below, we define our constructs, the relationships, and our proposed model. 2

Measures Rewards and Recognition Based on a series of one-on-one personal interviews with branch personnel, we developed a set of 14 questions that reflect reward and recognition behavior in the branch. These 14 questions are shown as Exhibit A. As can be seen on the exhibit, most of the questions pertain to recognition by the firm or the manager. The questions about rewards pertain to specific reward programs in which the employee accumulates points toward obtaining a reward. An analysis of these questions found that 12 of these questions could be combined into three fundamentally distinct concepts. Manager Recognition: As can be seen from Exhibit A, these questions all relate directly to recognition and rewards that come directly from branch management. They relate to perceptions of the fairness and consistency of managers, as well as the type (form) of recognition and rewards provided by the managers. Non-manager Recognition: These questions directly related to recognition from customers and peers. They included questions regarding the type and frequency of direct and indirect recognition. Understanding of the System: This consisted of two questions regarding whether or not employees understood the types of behaviors that led to the receipt of rewards and recognition. Relationship Variables We used existing questionnaires to determine the quality of the relationship between the employee and the bank, as well as the relationship between the employee and the branch manager. These two constructs are defined as follows: Perceived Organizational Support (POS) This variable represents the extent to which an employee feels valued by his or her organization. The idea of perceived organizational support was developed based on early work on Social Exchange Theory (Blau 1964). Perceived organizational support has been shown to influence service quality, service related behaviors, and organizational citizenship behaviors (Wayne, Shore, Bommer, & Tetrick 2002). Leader Member Exchange (LMX). This concept was designed as a relationship based measure of leadership (Dansarau, Graen, and Haga 1975). High leader-member exchange relationships occurs when each party offers something valuable, and the exchanges are seen as reasonably fair and equitable (Graen & Sacandura 1987). Other researchers have found that employees responded more positively to supervisors who administer contingent rewards and/or punishment (Wayne et al., 2002). In other words, when managers are fair and consistent with their rewards and recognition, employees respond better to them. 3

Service Delivery Measures As we stated earlier, we believe that superior customer service comes from employees going above and beyond their normal job duties. To measure the extent to which such behavior occurred, we used an existing measure of three types of what we will call citizenship behaviors. The first type of citizenship behavior is service behavior related to the level of conscientiousness of service employees in performing their roles, attending to customer needs, and displaying reliable and courteous behaviors. The second type of citizenship behavior we call loyalty behaviors. Here, boundary spanning employees (such as customer service representatives) promote the organization and its products to people outside of the organization. The third type is participation behaviors. Here, employees take initiative in an attempt to improve organizational effectiveness. The full set of questions for these three types of behaviors can be seen in Exhibit B. The Full Model Figure 1 shows the proposed model. We propose a direct relationship between employee perceptions of the rewards and recognition program and the frequency of the customer-oriented behavior. This is represented by the dashed line in the figure. Reward and Recognition in the figure includes all three types of reward and recognition components as shown in Exhibit A. Customer-Oriented Behaviors (COB) in the figure includes all three types of those behaviors as indicated in Exhibit B. We also include the relationship variables described above. That is, the ways that reward and recognition connect to customer-oriented behaviors are influenced by the extent to which the employee feels valued by the organization (POS) and by the branch manager (LMX). These relationships are depicted by solid lines in the figure. Perceived Organizational Support Rewards and Recognition 1 Customer Oriented Behaviors 2 Leader-Member Exchange Figure 1: Theoretical Model 1: Includes all 3 types of recognition: Manager, Non-Manager, and Understanding the System 2. Represents all three types of behavior: Service, Loyalty, and Participation 4

Model Testing We surveyed 3,508 branch level employees of a Canadian Charter Bank, asking them about the reward and recognition practices of managers, peers, clients, and the bank itself. The survey questions were developed based on one-on-one interviews with branch employees about what aspects of rewards and recognition mattered to them. Data were collected via an online survey advertised to employees through their rewards and recognition home page. In the survey, we also asked about the frequency of customer-oriented behaviors. These are things that the employees refer to as behavior above and beyond those required by their job descriptions and which are outside the formal reward system of the bank. We also asked relationship questions about perceived organizational support (how valued the employee feels by the organization) and leader-member exchange (how valued the employee feels by the manager). Results We first analyzed the 14 recognition questions shown in Exhibit A and found they could be collapsed into the three dimensions outlined above (manager recognition, non-manager recognition, and an understanding of the system). Next, we analyzed the 15 questions about customer-oriented service behaviors shown in Exhibit B. As in past research, we found that the questions accurately assessed three different types of customer-oriented behavior outlined earlier in the paper - service behaviors, loyalty behaviors, and participation behaviors. The primary analysis we conducted estimated the relationships shown in Figure 1. We first calibrated the direct relationship between Reward and Recognition and Customer Oriented Behaviors. Then we calibrated the impact the perceived organizational support and leadermanager exchange have on that relationship. The direct relationship between rewards and recognition and customer-oriented behaviors was evaluated with three separate regression models in which Service COB, Loyalty COB and Participation COB were the dependent variables. Results for these models are shown in the columns labeled Direct in Table 1. Note that no coefficients appear for LMX and POS as they were excluded from these regression models because we were estimating the dashed line in the Figure. Second, the LMX and POS explanatory variables are added to the original regression models to represent the relationship between rewards and recognition and customer-oriented behaviors. These results are shown in the columns labeled Indirect in Table 1. The parameters from the models allow us to determine whether the effect of recognition on behavior is direct or whether it works through changes in the feelings employees have toward the organization and the manager. The clearest result from our analysis is that relationship variables (POS and LMX) matter a great deal in driving citizenship behaviors. The table provides standardized regression coefficients 5

which allow us to easily compare the magnitude of the effects. For all three of the models, the coefficients for the LMX and POS variables are larger than the understand the system, manager recognition, and non-manager recognition variables. For example, for the Service COB model, the LMX coefficient is.17 and the POS coefficient is.16 while the other variables coefficients are all.10 or lower. The impact of both perceived organizational support (POS) and leader-member exchange (LMX) were significant and positive across all three types of customeroriented behaviors. The practical implication of this is that a firm should work assiduously on improving generative feelings among employees that they are valued by the organization and the manager. We will further discuss practical implications later in the paper. Table 1 - Analysis of the effects of rewards and recognition behavior on customer-oriented citizenship behaviors Dependent Variable Service COB Loyalty COB Participation COB Independent Indirect Indirect Indirect Variable Direct (Mediated) Direct (Mediated) Direct (Mediated) Understand the System.15***.10***.19*** (02).08***.11***.03 Manger Recognition.16***.02.33***.06*.26***.06** Non-Manager Recognition.03* (.01).04** (.01).02 (.01).03** (.01).10***.11*** (.01) LMX.17***.18***.(02).24*** (.03) POS.16***.32***.23*** (.03) r 2.10***.14***.18***.28***.15***.21*** r 2 Change.04***.10***.06*** F 102.7*** 91.9*** 219.4*** 235.1*** 176.3*** 153.8*** * p <.05, ** p <.01, *** p <.001. Standard Errors in parentheses LMX = Leader-member exchange. POS = Perceived organizational support. In the following section, we discuss each category of recognition and how it is affected by the three rewards and recognition categories. Manager Recognition We can observe the impact of manager recognition on the row of the table labeled Manager Recognition. In all cases, we find a significant effect of management behaviors on employee service behaviors. For the three direct models, manager recognition had the largest coefficient, indicating the strongest impact, of the three reward and recognition variables. These results strongly reinforce the importance of a local manager in motivating employees to perform well. 6

Next we consider the indirect models which include the POS and LMX variables. When the POS and LMX variables are added to the models, the size of the manager recognition coefficients goes down. For the Service COB model, manager recognition becomes insignificant. However it continues to be significant, with a value of.06, for both the Loyalty COB and Participation COB models. When we examined the degree to which this could be explained by our relationship variables, we found that all of the customer-oriented behavior changes were explained by the addition of variables representing how valued the employees felt (i.e., POS and LMX). Positive evaluations of manager rewards and recognition behavior also had significantly positive effects on the loyalty behaviors of employees, those behaviors relating to the promotion of the organization to outsiders (as indicated by the parameters appearing in the center of the table for Loyalty COB). To a large extent, this relationship was also explained by adding the POS and LMX variables to the model. This means that all of the effect of manager recognition on loyalty behaviors was caused by the changes in employee attitudes towards the manager and the firm. While loyalty and participation behaviors are important to a firm, service behavior is most closely linked to customer satisfaction, customer retention, and profitability. The effect of manager recognition here was significant but smaller than for the other two (as indicated by the parameters for the Service COB model on the left of the table). As in the case of the other two types of customer-oriented citizenship behaviors, the relationship was better explained by including the effects of recognition behavior on the employee s attitude towards the firm (POS) and the manager (LMX). Understanding the System In this section, we outline the effect of understanding the system on behavior. These results appear in the Understanding the System row of the table. As can be seen from the table, the behaviors that lead to rewards and recognition have positive effects on the provision of all types of customer-oriented citizenship behaviors. The largest effect was on loyalty COB behaviors (.19 versus.15 and.11 for the other two models). When an employee has a clear understanding of what it takes to earn rewards and recognition, they will feel more supported by the organization and therefore display more loyalty. This explanation can be seen by the drop in the coefficient from.19 to.08 when perceived organizational support and leader-member exchange are entered into the model. This shows that most of the effect of understanding works through positive feelings regarding the organization and the manager. This is an important result at it confirms the importance of making employees feel valued. While it was a small effect, understanding the system was also correlated with participation behaviors (see the Participation COB model). This effect was fully explained by changes in the relationship variables we measured. We feel strongly that when employees understand the right types of behavior to engage in (e.g., helping others and making suggestions for improvement), then they feel supported by their manager and organization. 7

Non-Manager Recognition In this section, we discuss the smaller but still meaningful effect of recognition from peers and customers in driving higher levels of customer-oriented citizenship behavior. These results appear in the Non-Manager Recognition row of the table. The role of non-manager (i.e., peer and customer) recognition is largely limited to its effect on participation behaviors as indicated by the coefficient of.11 in the right-most column. Nonmanager recognition did not contribute to an increase in the frequency of loyalty behaviors. This makes intuitive sense, since customers and peers are providing this form of recognition, but loyalty behaviors benefit the firm directly while participation behaviors benefit peers and customers. The effect on service behaviors is very small as indicated by the coefficients of.03 and.04 for the Service COB models. It is important to note that the addition of our relationship variables had no effect on the impact between reward and recognition perceptions and behavior. This is as it should be, since nonmanager recognition should not be expected to affect how the employee feels about their manager or their company. This lack of effect was confirmed in other analyses. Implications The most important drivers of employees conducting customer-oriented behaviors are the POS and LMX variables. For all three categories of customer-oriented behaviors, the effect of employee perceptions of organizational support and perceptions of feeling valued by the manager were the highest. We believe this reinforces the importance of local management in a service organization. Manager s recognition and reward behaviors increase both perceived organizational support and leader-member exchange, which in turn increase service behaviors. We expect that these effects will be particularly strong in a large organization such as the one we studied. As the organization size grows, it becomes more likely that the manager will become the face of the company. This demonstrates the importance of selection and promotion of branch managers that are good at employee recognition. It also reinforces the importance of continually training managers on how to recognize and reward employees. In fact, the bank we studied could use our questions as a template for training management. This paper has shown how reward and recognition behavior by firm managers can increase the occurrence of customer service behaviors above and beyond those that can be contracted. These are the behaviors one wants from employees but can t demand they perform or can fire them for not providing. We feel that it is important to emphasize that this set of behaviors is extra-role, in the sense that many customer-oriented behaviors cannot be specified in advance and therefore are not enforceable in a contract. The effect of manager recognition is almost entirely indirect, working through changes in perceived organizational support and leader-member exchange. Our study also showed that other sources of recognition (peers and customers) have an important but more direct effect on the provision of these behaviors. Finally, we have confirmed the 8

importance of making certain that employees understand the types of behaviors that lead to rewards and recognition from the firm. The understanding of the reward system of a company has both a direct and indirect effect on customer-oriented citizenship behaviors. Since service is now becoming a much larger part of the economy, it is critical that practitioners understand how to drive positive service behaviors. Our study clearly shows that managers must be trained to be fair, consistent, and timely (elements shown in Exhibit A to comprise manager recognition) with their recognition of employees. It is also necessary to be certain that employees have a clear understanding of the types of behaviors that are rewarded and recognized. Finally, managers should actively encourage peer-to-peer recognition, as this also leads to better service. 9

Exhibit A: Reward and Recognition Questions Question Low End of Scale High End of Scale Manager Recognition When I perform above and beyond, I am rewarded by unit Not frequently enough Much too frequently management How frequently is recognition provided without a tangible reward Not frequently enough Much too frequently (e.g. points)? When I receive recognition from unit management, it is usually in a form I Strongly Dislike I Strongly Like that: My manager recognizes good behavior in a timely manner. Never/Almost Never All of the Time Recognition by my work unit management is given fairly and consistently Strongly Disagree Strongly Agree Points are awarded in a fair and consistent manner. Strongly Disagree Strongly Agree Recognition is given in a fair and consistent manner. Strongly Disagree Strongly Agree Non-Manager recognition When I perform above and beyond, I am recognized directly by my peers. Not frequently enough Much too frequently When I perform above and beyond, I am recognized by my peers via a Not frequently enough Much too frequently request to unit management. When I perform above and beyond, I am recognized by my customers Not frequently enough Much too frequently (note: this can be direct or via a discussion with unit management). Understanding the System I understand the types of behavior that lead to receiving recognition Strongly Disagree Strongly Agree I understand the types of behavior that lead to receiving rewards (e.g. points) Strongly Disagree Strongly Agree 10

Service Oriented Behaviors Exhibit B Customer Oriented Citizenship Behavior Questions The employees of this work unit follow customer service guidelines with extreme care The employees of this work unit conscientiously follow guidelines for customer promotions The employees of this work unit follow up in a timely manner to customer requests and problems The employees of this work unit perform duties with few mistakes The employees of this work unit regardless of circumstances, are courteous and respectful to customers Loyalty Behaviors The employees of this work unit tell outsiders this is a good place to work The employees of this work unit say good things about the organization to others The employees of this work unit generate favorable goodwill for organization The employees of this work unit encourage friends and family to use organization products and services The employees of this work unit actively promote organization products and services Participation Behaviors The employees of this work unit encourage co-workers to contribute ideas and suggestions for service improvement The employees of this work unit contribute ideas for customer promotions and communications The employees of this work unit make constructive suggestions for service improvement The employees of this work unit present to others creative solutions to customer problems The employees of this work unit take home training materials 11