Wage inequality negatively impacts customer satisfaction and does not improve long-term firm performance
Researchers from University of Mannheim published a new paper in the Journal of Marketing that examines the effect of wage inequality on customer satisfaction and firm performance.
The study, forthcoming in the Journal of Marketing, is titled "Wage Inequality: Its Impact on Customer Satisfaction and Firm Performance" and is authored by Boas Bamberger, Christian Homburg, and Dominik M. Wielgos.
Irrespective of wage cuts and employee layoffs, the wages of top managers rose to record levels during the pandemic and wage inequality continues to grow worldwide. However, according to a 2015 OECD report, "wage inequality is harmful to long-term economic growth and undermines societal cohesion." This situation raises the question: Do firms have an incentive to raise wage inequality?
This new study addresses this question by examining the impact of wage inequality on customer satisfaction and firm performance. The researchers surveyed more than 100 top sales and marketing managers in public firms selling to businesses in three countries. They analyzed the responses and company financial data to understand how wage inequality impacts customer satisfaction and firm performance.
Results show that unequal wages between top managers and employees can boost the short-term profitability of a firm. As Bamberger explains, "In the long run, however, this benefit fades. What persists is that wage inequality motivates employees to opportunistically exploit customers and weakens a firm's customer-oriented culture, thereby harming customer satisfaction.
How does this happen? Suppose a firm has high wage inequality. Thus, the ultimate prize in a tournament setting, to gradually rise to top management, is a strong incentive for employees at all levels. But in the process, they may engage in opportunistic behaviors and also collaborate less with coworkers.
For example, to enhance her chances for promotion, an employee might show more effort by interacting with customers more frequently to better understand and fulfill their needs to boost sales. By contrast, she could also distort facts about products to close deals more quickly.
Non-customer-facing employees could also be affected. Take, for instance, an R&D employee. He could interact with customers more often to learn and adapt innovations to their needs to increase sales. Conversely, he could also design products to fail to force customers to buy a product over and over again.
"Through customer-directed effort or opportunism, employees may improve their chances of getting promoted to the next higher level. Our results show that wage inequality does raise customer-directed effort and opportunism," says Homburg.
At the same time, wage inequality might also weaken collaboration among coworkers. An employee who worries about advancing to the next higher level is less concerned about their coworkers. But less collaboration impairs the flows of information and knowledge about customers throughout the firm. This, in turn, can lead to worse coordination between departments. Ultimately, the firm becomes less responsive to the changing needs of customers. Thus, wage inequality weakens the customer-oriented culture of a firm.
The adverse impact wage inequality has on opportunism and customer-oriented culture extends to customer satisfaction and reduces the short-term profitability of a firm. At the same time, wage inequality also raises a firm's short-run profits through a direct path. Despite the harm through the customer path, the total impact of wage inequality on short-term profitability is slightly positive.
This slightly positive effect on short-term profitability holds in a different sample with more than 500 observations of U.S. firms selling to consumers. Wielgos explains that "When we analyzed how wage inequality plays out in the long run, the situation reverses. The harm that wage inequality causes to customer satisfaction leads to long-term performance decline. In sum, a firm sees no profitability lift from wage inequality in the long run."
Do firms have an incentive to raise wage inequality? In terms of bottom-line impact, the answer is: "Yes" in the short run and "No" in the long run. However, when looking at the customer impact, the answer is "No" because of the negative impact of wage inequality on customer satisfaction, which weakens firm profits.
What can managers learn? If the goal is short-term profitability, go with higher wage inequality, but keep an eye on customer satisfaction. If managers are interested in the long-term success of the firm, consider reducing wage inequality to help employees orient toward customers.
What can shareholders learn? Suppose that you care about the long-term profitability of your investment. In that case, make sure to reward top managers for achieving sustainable profitability and good customer relationships.
What can policymakers learn? Wage inequality is not in a firm's long-term interest. This argument can help to create a consensus with managers to restrain wage inequality. However, short-term-oriented managers might care little about the damage wage inequality does to society. It thus might be necessary to disincentivize them from raising wage inequality.