Tc Ncxt isciplinc

Applying 8chavioral conomics to rivc Growth and Protability

For more information on Gallup Consulting
or Gallups approach to applied behavioral
economics, please visit consulting.gallup.com
or contact Sarah Van Allen at 202.715.3152
or sarah_van_allen@gallup.com.
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Tc Ncxt isciplinc
Applied behavioral economics is the mathematical description of the role human nature plays in just about . . . everything.
Jim Clilton, C, Gallup
For ycars busincss lcadcrs havc strugglcd to com
prchcnd thc apparcnt irrationality ol cmploycc and
customcr bchavior and thc impact it has on busincss
pcrlormancc. To makc scnsc ol how cmployccs and
customcrs bchavc, lcadcrs must rst bcgin to undcr
stand human naturc and acccpt that human bcings
do not always act in rational ways. !n todays hypcr
compctitivc global busincss cnvironmcnt, thc sccrct to
driving highcr lcvcls ol growth and protability lics in
undcrstanding thc powcrlul rolc human naturc plays in
thc markctplacc and in thc workplacc.
Fortunatcly, thcrc is an cmcrging managcmcnt disci
plinc bascd on principlcs ol behavioral economics that
can hclp busincss lcadcrs and cxccutivcs makc scnsc
ol thc cconomic bchavior ol rcal pcoplc and scrvc as
a platlorm lor ccctivc managcmcnt solutions. Tis
is bccausc bchavioral cconomics complcmcnts tradi
tional cconomic thcory by lling in thc gaps lclt by thc
rcalitics ol human naturc. As a rcsult, it can providc
busincss lcadcrs with insights thcy othcrwisc would not
havc and solutions thcy ncvcr would havc considcrcd.
Gallup rcscarch rcvcalcd that a study group ol 10
companics that applicd thcsc principlcs outpcrlormcd
pccrs by 85 in salcs growth and morc than 25 in
gross margin during a rcccnt oncycar pcriod. Tc kcy
to achicving this kind ol nancial pcrlormancc is lor
lcadcrs to acccpt and work with human naturc rathcr
than against it. Tcy must abandon outmodcd vicws ol
human naturc by rccognizing that pcoplc simply arc
not thc rational maximizcrs ol cconomic gain assumcd
by classical cconomic thcory. !nstcad, cmployccs and
customcrs must bc sccn as pcoplc rst, and cmploy
ccs and customcrs sccond. Tat mcans thcy arc subjcct
to all thc inhcrcnt contradictions, aws, and cmotions
that comc with bcing human.
Gallup research revealed that a study
group of 10 companies that applied these
principles outperformed peers by 85% in
sales growth and more than 25% in gross
margin during a recent one-year period.
Quirks in the System
conomics has travclcd a long and not particularly
casy road to arrivc at thc cmcrging scicncc ol bchav
ioral cconomics. arly on and throughout much ol its
history, classical cconomics has cmbraccd thc rational
agcnt modcl that charactcrizcs Homo economicus, thc
gurativc spccics ol human, as a rational and dispas
sionatc maximizcr ol cconomic gain. Tis vicw holds
that pcoplc makc cconomic dccisions bascd on a cool
and rational cvaluation ol all ol thc availablc cvidcncc
thc bcncts ol a ccrtain coursc ol action wcighcd
against its costs bclorc arriving at a dccision. Tc
right dccision is thc onc that maximizcs an individuals
cconomic gain and minimizcs his or hcr costs.
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8ut thcrc arc quirks in thc systcm that wc nccd to
takc into account situations in which rcal pcoplcs
bchavior docs not conlorm to prcdictions ol classical
cconomics. Tcsc anomalics makc it all thc morc sur
prising that thc corc assumption ol thc rationalagcnt
modcl has not changcd much in thc past 250 ycars in
spitc ol a mountain ol cvidcncc illustrating its aws.
For cxamplc, pcoplc oltcn usc simplc, ccicnt rulcs ol
thumb callcd heuristics what Financial Times col
umnist John Authcrs calls mcntal shortcuts that hclp
|pcoplc| survivc in thc hurlyburly ol normal lilc to
makc dccisions, such as thc tcndcncy to ovcrcstimatc
thc likclihood ol an cvcnt bascd on how typical thc
cvcnt is. Tis oltcn occurs in situations whcrc pcoplc
must cstimatc probabilitics. For cxamplc, pcoplc will
routincly gucss that somconc who wcars twccd jackcts
and is dcscribcd as shy and bookish is morc likcly to
bc a classics prolcssor than a truck drivcr, cvcn though
thcrc arc substantially morc truck drivcrs than classics
prolcssors in thc world.
r thcrc is thc simulation heuristic thc tcndcncy to
cstimatc thc likclihood ol an cvcnt actually occurring
bascd on how casy it is to imaginc it happcning. For
cxamplc, you will bc much morc angry and lrustratcd il
you misscd a ight by vc minutcs than il you misscd
it by an hour bccausc it is casicr to imaginc a sccnario
in which you could havc madc thc ight.
Our emotional, cognitive, and
perceptual processes place limits on
how rationally we can view the world
around us. . . . These limits have a
profound effect on the decisions we
make and subsequently on the way
organizations need to think about how
their employees and customers make
decisions and ultimately behave.
thcr anomalics in human dccision making havc
bccn documcntcd, such as thc endowment eect rst
documcntcd by cconomist Richard Talcr whcrcby
pcoplc placc grcatcr valuc on objccts thcy own com
parcd with objccts thcy do not own. Tat is, pcoplc
tcnd to dcmand a highcr pricc to part with an objcct
thcy alrcady own than thcy would bc willing to pay
to buy it lrom somconc clsc. Anothcr is thc tcndcncy
lor human dccision makcrs to bc loss averse. Tat is,
pcoplc lccl morc pain lrom losscs than plcasurc lrom
gains ol cqual sizc. For cxamplc, individuals tcnd to
bc rcluctant to acccpt thc prospcct ol a 5050 chancc
ol gaining or losing moncy unlcss thc amount to bc
gaincd is at lcast twicc thc amount to potcntially
bc lost.
Litcrally dozcns ol thcsc hcuristics and biascs havc
bccn documcntcd in thc cognitivc and social psycho
logical litcraturc and bchavioral cconomics litcraturc
lar too many to dcscribc hcrc. 8ut thc upshot is that
our cmotional, cognitivc, and pcrccptual proccsscs placc
limits on how rationally wc can vicw thc world around
us and usc thc inlormation wc rcccivc lrom it. Tcsc
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limits havc a prolound ccct on thc dccisions wc makc
and subscqucntly on thc way organizations nccd to
think about how thcir cmployccs and customcrs makc
dccisions and ultimatcly bchavc.
What Is Behavioral Economics?
For thc past 30 ycars, bchavioral cconomics lcd by such
notablc scicntists as anicl Kahncman, Robcrt Shillcr,
Richard Talcr, Angus caton, Gcorgc Locwcnstcin, and
many othcrs has documcntcd many ol thc aws in
classical cconomic thcory by challcnging its loundational
prcmisc that individuals will always bchavc rationally
to achicvc thc bcst possiblc outcomc. !nstcad, bchavioral
cconomics cmphasizcs thc rolc ol psychology and thc
intcrplay among rational, pcrccptual, and cmotional pro
ccsscs in human dccision making and cconomic bchavior.
!n lact, somc havc suggcstcd that cconomic dccision mak
ing is up to 70 cmotional and 30 rational.
Behavioral economics challenges
the central premise of classical
economic theory that individuals
will always behave rationally to
achieve the best possible outcome.
Applying Behavioral Economics
At Gallup, our goal is to takc thc discovcrics madc
within thc acadcmic disciplinc ol bchavioral cconomics
and apply thcm to managcmcnt and busincss prob
lcms. Tat is, wc dcvclop tools and mcthods to mcasurc
and managc both thc rational and irrational clcmcnts
ol human naturc to drivc busincss succcss. Tus, lor
Gallup, applied behavioral economics is the mathe-
matical description of the role human nature plays in
just about . . . everything. Tis dcnition spans thc lull
spcctrum ol issucs lrom how customcrs and cmploy
ccs crcatc rcal growth lor organizations to how citizcns
and institutions build stablc and viablc socictics.
No mattcr which dcnition you prclcr, it is clcar that
bchavioral cconomics is now coming ol agc and cxcrting
an impact in a widc varicty ol sphcrcs, including pub
lic policy and hcalthcarc. For cxamplc, a rcccnt study ol
radiologists lound that attaching a paticnts photograph
to his or hcr mcdical lc clicitcd a morc pcrsonal, cmpa
thctic rcsponsc lrom thc radiologist, rcsulting in longcr,
morc thorough rcports containing summarics, additional
rccommcndations, and morc incidcntal ndings than
a typical rcport. Vithin thc public policy sphcrc, ncw
applications ol bchavioral cconomics principlcs can bc
lound in thc bama administrations cconomic plans
and scnior appointmcnts.
Now that many within acadcmics and govcrnmcnt havc
bcgun to rccognizc thc nccd lor a morc comprchcnsivc
(and wc would arguc, accuratc) pcrspcctivc on human
cconomic bchavior, it is timc lor busincss lcadcrs cspc
cially thosc chargcd with undcrstanding and managing
customcr and cmploycc cxpcricnccs to do thc samc.
Tc risc ol applicd bchavioral cconomics as a managc
mcnt platlorm is ol paramount importancc to busincss
lcadcrs bccausc it compcls us to rcthink thc traditional
rational/lunctional modcls ol human dccision mak
ing that guidc many busincss dccisions. Unlortunatcly,
many busincss lcadcrs (and cvcn many cconomists)
havc bccn slow to cmbracc thcsc prolound changcs
in pcrspcctivc, clinging instcad to outmodcd vicws ol
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bchavior that rcgard human bcings as dispassionatc
brokcrs ol objcctivc inlormation.
At Gallup, our goal is to take the
discoveries made within the academic
discipline of behavioral economics
and apply them to management
and business problems.
Evolving Our Institutions of Data
riving highcr lcvcls ol growth and protability in
todays busincss cnvironmcnt rcquircs not only that
organizations dcvclop a mastcry ol applicd bchavioral
cconomics, but also that thcy put thc right pcrlor
mancc mctrics in placc. Not surprisingly, thcrc has bccn
an cvolution in what constitutcs thc right institu
tions ol data to managc our busincsscs. Until rcccntly,
capitalism has bccn guidcd by ncoclassical cconomics.
Tis institution ol data stock pricc, carnings pcr
sharc, prot, and growth is what busincss lcadcrs all
traincd upon to stccr thcir organizations, divisions, and
dcpartmcnts and to somc cxtcnt, it scrvcd global
busincss lcadcrs quitc wcll. Although thcsc kinds ol
nancial mcasurcs continuc to bc mainstay indicators
ol organizational pcrlormancc, dcvclopmcnts in thc
global cconomy and thc nancial markcts sincc thc
bcginning ol 2008 havc undcrscorcd thc limitations ol
ncoclassical cconomic thcory. !t is bccoming clcar that
ncoclassical cconomics in isolation ol dcvclopmcnts
in othcr clds such as nctworks and complcx intcrac
tions, psychology, and cconomctrics may havc lcd us
down thc wrong path.
Vith this in mind, wc contcnd that rclying solcly on
traditional nancial mctrics as indicators ol organi
zational hcalth is problcmatic lor two rcasons. First,
ncoclassical cconomics suggcsts that salcs, prot, and
thc likc arc lcading indicators ol how wcll an organi
zation is doing and will do. Howcvcr, thcy arc, in lact,
trailing indicators by thc timc thc salc is madc and
thc prot shows up on thc incomc statcmcnt, it is lar
too latc to do anything about it. Tcsc indicators sim
ply cannot addrcss thc issuc ol what causcd a givcn
lcvcl ol pcrlormancc in thc rst placc. Sccond, any
incrcmcntal bcncts ol accounting or othcr nancial
ccicncics havc largcly alrcady bccn rcalizcd. Furthcr
substantial gains in pcrlormancc bascd on attcntion to
ncoclassical cconomic mctrics arc rclativcly unlikcly,
and additional cnhanccmcnts ocr littlc in thc way ol
compctitivc advantagc lor most rms.
Tc ncxt wavc ol mctrics to cmcrgc wcrc ticd to proccss
improvcmcnt and quality managcmcnt Six Sigma,
lcan manulacturing, and Total Quality Managcmcnt,
lor cxamplc. Tcy workcd wcll to improvc output qual
ity and wring inccicncics and costs out ol busincss
proccsscs, making organizations morc ccicnt, ccc
tivc, productivc, and protablc. Although mastcring
this sccond disciplinc also continucs to bc a prcrcqui
sitc to driving highcr lcvcls ol nancial pcrlormancc
in todays cconomic cnvironmcnt, thc samc conccrns
that apply to using nancial mctrics as indicators ol
organizational hcalth also apply to thosc that locus on
proccss improvcmcnt and quality managcmcnt.
Likc nancial mctrics, much ol thc bcnct ol locusing on
proccss and quality mctrics now tcnds to bc maxcd out and
thc big gains hardcr to nd. Vhilc quality is ncccssary and
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dcclining quality is likcly to bc a lcading indicator ol luturc
dcclincs in company pcrlormancc, improvcmcnts in qual
ity arc no longcr likcly to providc a signicant compctitivc
advantagc lor most companics. Likcwisc, lor many organi
zations, incrcmcntal improvcmcnts in opcrational ccicncy
may continuc to providc somc costrcduction bcncts, but
in our vicw thcy, too, will yicld littlc in thc way ol additional
compctitivc advantagc.
For many organizations, incremental
improvements in operational efciency
may continue to provide some cost-
reduction benets, but in our view
they, too, will yield little in the way of
additional competitive advantage.
The Next Discipline
Vc bclicvc that thc ncxt big institution ol data will bc
lound in dcvcloping ncw scts ol lcadcrship initiativcs
and mctrics around bchavioral cconomics, bccausc thc
gains to bc lound arc much largcr than in any othcr arca
and bccausc this potcntial is largcly untappcd. Mastcry
ol this third disciplinc applied behavioral econom-
ics holds thc promisc ol rcalizing brcakthrough
improvcmcnts in cmploycc productivity, customcr rctcn
tion, and rcal growth and protability. 8ut prcciscly how
should insights lrom bchavioral cconomics bc applicd
in busincss: Mctrics bascd on thc application ol bchav
ioral cconomics principlcs undcrstanding how to
cmotionally cngagc your cmployccs and your customcrs
providc truc lcading indicators ol luturc nancial pcr
lormancc, indicators that havc dcmonstratcd dircct and
powcrlul linkagcs to nancial pcrlormancc outcomcs.
Tcsc lcading indicators, in turn, can hclp managcrs and
cxccutivcs takc corrcctivc action bclorc dcclincs in nan
cial pcrlormancc occur.
cploying thc right kind ol mctrics is a ncccssary rst
stcp. Tc ncxt stcp is to build a human capital managc
mcnt stratcgy around thc cccts ol human naturc on
pcrlormancc. Tis is achicvcd by idcntilying thc innatc
talcnts ol currcnt and prospcctivc cmployccs and posi
tioning thcm in thc rolcs that maximizc thcir grcatcst
strcngths (thc ability to consistcntly providc ncarpcr
lcct pcrlormancc in a spccic task). Tis stratcgy allows
your organization to build a solid cmotional inlrastruc
turc bascd on thc human naturc ol your cmployccs to
cnablc consistcnt and sustaincd high pcrlormancc.
Applied Behavioral Economics and the
Emotional Economy
ur work with organizations around thc globc has
lcd us to thc conclusion that cvcry company has an
cnormous but largcly untappcd potcntial lor
brcakthrough improvcmcnts in cmploycc productivity,
customcr rctcntion, and rcal growth and protability
by undcrstanding and lcvcraging how human naturc
drivcs busincss pcrlormancc. Tis unrcalizcd potcntial
rcprcscnts an intcrnal cconomy with its own uniquc sct
ol rulcs and dynamics an emotional economy
that can bc mcasurcd and managcd to improvc busincss
pcrlormancc. Most importantly, thc cmotional cconomy
drivcs thc ncoclassical cconomy.
8clorc organizations can harncss thc powcr ol applicd
bchavioral cconomics, thcy must build an institutional
capability ol undcrstanding how thc cmotional cconomy
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works in thcir organization and in thc largcr markct
placc. Ncxt, thcy must align thcir busincss proccsscs and
kcy pcrlormancc mctrics with this capability to lully
lcvcragc thc insights aordcd by a bchavioral cconom
ics pcrspcctivc. Finally, thcy must dcploy thcsc insights
ccctivcly to managc and optimizc thcir cmploycc and
Figure 1
customcr rclationships. Gallup has dcvclopcd a modcl
(scc Figurc 1) that dcscribcs thc clcmcnts ol thc cmo
tional cconomy and how thcy rclatc to an organizations
wcllbcing. Tc linkcd path rclatcs thc individual con
tribution ol cvcry cmploycc to this ultimatc goal.
!l wc wcrc to summarizc thc kcy obscrvations lrom our
work with organizations around thc world, it would
look likc this:
1. Customcr bchavior is inucnccd morc by
cmotion than rcason, and thcsc cmotional
dimcnsions can bc mcasurcd and managcd.
2. mployccs havc a trcmcndous impact on
customcrs cmotional cngagcmcnt, lor good or ill.
3. mploycc bchavior is inucnccd morc by
cmotion than rcason, and thcsc cmotional
dimcnsions can bc mcasurcd and managcd.
4. Tcrc is vast variation in both cmploycc
and customcr cngagcmcnt lrom location to
location and tcam to tcam within thc samc
organization.
5. Tc ability to cngagc cmployccs dcpcnds on
idcntilying thc uniquc strcngths thcy bring
to thcir rolcs, sclccting and positioning thcm
lor succcss by cnsuring thcir strcngths t thcir
rolcs, and providing thcm with an cngaging
workplacc and managcr.
Customer Behavior Is Inuenced More by
Emotion Than Reason
8usincss lcadcrs, rcscarchcrs, acadcmics, and managc
mcnt consultants alikc havc cxprcsscd conccrn that whilc
customcr satislaction may bc a ncccssary loundation lor
building strong customcr rclationships, by itscll it is a
rclativcly poor prcdictor ol luturc customcr bchavior and
organizational nancial pcrlormancc. ur data support
this conccrn. Rcsults lrom a largc numbcr ol casc studics
suggcst that customcrs who arc cxtrcmcly satiscd thosc
who providc thc highcst rating ol ovcrall satislaction with
an organizations products or scrviccs lall into two dis
tinct groups: thosc who arc cmotionally satiscd and thosc
who arc rationally satiscd. motionally satiscd custom
crs havc a strong cmotional attachmcnt to thc organization
whilc rationally satiscd customcrs do not. ur rcscarch
rcvcals that cmotionally satiscd customcrs dclivcr signi
cantly cnhanccd valuc to an organization, lor cxamplc, by
buying morc products, spcnding morc lor thosc products,
rcturning morc oltcn, and staying longcr with thc busincss.
Rationally satiscd customcrs, on thc othcr hand, bchavc
no dicrcntly than customcrs who arc dissatiscd.
Tis pattcrn is not limitcd to customcr satislaction
rcsponscs, in lact, wc scc thc samc pattcrn lor customcr
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advocacy. Findings lrom a largc numbcr ol casc stud
ics suggcst that customcrs who dcscribc thcmsclvcs
as strong advocatcs lor an organizations products or
scrviccs thosc who providc thc highcst likclihood
to rccommcnd ratings also lall into two distinct
groups: thosc who arc cmotional (cvcn passionatc)
advocatcs and thosc who arc mcrcly rational advocatcs.
Emotionally satised customers deliver
signicantly enhanced value to an
organization . . . by buying more
products, spending more for those
products, returning more often, and
staying longer with the business.
motional advocatcs havc a strong cmotional attach
mcnt to thc organization whilc rational advocatcs do
not. ur rcscarch rcvcals that cmotional advocatcs
likc thcir cmotionally satiscd countcrparts dclivcr
signicantly cnhanccd valuc to an organization, buy
signicantly morc products, spcnd signicantly morc
lor thosc products, and givc a grcatcr sharc ol thcir total
spcnding to thc busincss. Rational advocatcs, on thc
othcr hand, bchavc no dicrcntly than customcrs who
would not rccommcnd thc organization to othcrs.
So il thcsc two traditional standby mctrics lail to dclivcr
as advcrtiscd, how can wc accuratcly gaugc customcr
scntimcnt: Taking a cuc lrom bchavioral cconomics,
scicntists at Gallup dcvclopcd a mcthod to mcasurc
rcliably and accuratcly thc cmotional conncctions
bctwccn customcrs and thc organizations that scrvc
thcm. ur rcscarch also sought to dcmonstratc thc link
agcs bctwccn this mcasurc ol customer engagement and
crucial busincss pcrlormancc mctrics, including cus
tomcr rctcntion, crossscll, sharc ol wallct, lrcqucncy ol
purchasc, protability, and rclationship growth.
Tc rcsulting work suggcsts that thcrc arc lour kcy
dimcnsions, as illustratcd in Figurc 2, to a customcrs
cmotional attachmcnt to an organization (along with
thc morc rational loundational clcmcnts typically asso
ciatcd with customcr satislaction). ach dimcnsion
rcprcscnts a spccic sct ol activitics that mcct custom
crs cmotional nccds.
Tc rst dimcnsion ol cmotional attachmcnt is
Condence. !s this organization trustworthy: Can its
cmployccs bc trustcd do what thcy say thcy will do
day in and day out: Condcncc is thc loundation on
which highcr lcvcls ol cmotional attachmcnt arc built.
8ut condcncc alonc is not cnough to build long
tcrm, sustainablc, and cmotionally conncctcd customcr
rclationships. 8cyond condcncc lics Integrity, thc
csscntial dimcnsion ol lair play. ocs this organization
trcat mc thc way ! dcscrvc to bc trcatcd: !l somc
thing gocs awry, can ! count on this organization to x
it quickly: Tc ncxt cmotional rcquircmcnt is Pride, a
scnsc ol positivc association and idcntication with thc
organization. Customcrs lccl pridc not bccausc ol what
thcir association with an organization says to othcrs,
but morc importantly, bccausc ol what it says to thcm
about thcmsclvcs. Tc ultimatc cxprcssion ol a strong
cmotional attachmcnt is Passion. Passionatc custom
crs dcscribc thcir rclationship with thc organization as
irrcplaccablc and a pcrlcct t. Passionatc customcrs arc
customcrs lor lilc and arc worth thcir wcight in gold.
As illustratcd in Figurc 3, our rcscarch rcvcalcd that
across organizations ol dicrcnt typcs, customcrs who
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arc lully cngagcd thosc customcrs who havc a strong
cmotional conncction to thc organization rcprcscnt
an avcragc 23 premium in tcrms ol sharc ol wal
lct, protability, rcvcnuc, and rclationship growth ovcr
thc avcragc customcr. !n stark contrast, activcly discn
gagcd customcrs thosc customcrs whosc cmotional
conncction to thc organization is wcak or abscnt
rcprcscnt a 13 discount. At a local busincss unit lcvcl
(a storc, branch, salcs tcam, or othcr local unit), thosc
whosc lcvcls ol customcr cngagcmcnt placc thcm in
thc top 25 ol comparablc units within an organiza
tion tcnd to outpcrlorm all othcr units on mcasurcs ol
prot contribution, salcs, and growth by a lactor ol two
to onc. Clcarly, cngaging customcrs on an cmotional
lcvcl has a signicant nancial bcnct.
Figure 3
Customcr ngagcmcnt rivcs Financial Pcrlormancc
PcrCustomcr Contribution
!ndcxcd Pcrlormancc (Avcragc - 100)
Fully ngagcd
ngagcd
Not ngagcd
Activcly iscngagcd
100
99
123
107
87
Employees Have a Tremendous Impact on
Customers Emotional Engagement
n thc salcs oor, at a hotcl lront dcsk, or cvcn in a
hospital room, thc intcraction bctwccn an cmploycc
and a customcr what wc call thc cmploycccustomcr
cncountcr is a critical dctcrminant ol thc nancial
hcalth ol thc cntcrprisc. Tc dicrcncc bctwccn crcat
ing an cxpcricncc that draws customcrs back and onc
that scnds thcm away lrom your organization lorcvcr
has largc cccts on thc productivity and protability ol
thc organization.
Figure 2
Customcr ngagcmcnt Hicrarchy
Cant imaginc a world without
Pcrlcct company lor pcoplc likc mc
Trcats mc with rcspcct
Fccl proud to bc a customcr
Fair rcsolution ol any problcms
Always trcats mc lairly
Always dclivcrs on promisc
Namc ! can always trust
vcrall Satislaction
Likclihood to Rccommcnd
Likclihood to Continuc
Your company is irrcplaccablc to mc.
! lccl passionatc about you.
Your company is prcstigious. !t
is part ol who ! am.
Vhcn wc havc a problcm,
you always trcat mc lairly.
! can salcly assumc that you
will always kccp your promiscs.
Covvvicn: :oo G~iiuv, !xc. Aii vicn:s vvsvvvvb. G~iiuv

, G~iiuv Coxsui:ixc

, Q
+:
, ~xb C
++
~vv :v~bv:~vxs ov G~iiuv, !xc.
Employee Behavior Is Inuenced More by
Emotion Than Reason
Just as cngagcd customcrs arc among an organiza
tions most protablc patrons and passionatc advocatcs,
cngagcd cmployccs arc an organizations most produc
tivc and ccicnt workcrs. ngagcd cmployccs want
thcir organization to succccd bccausc thcy lccl con
ncctcd cmotionally, socially, and cvcn spiritually to its
mission, vision, and purposc. Tcy arc involvcd in and
cnthusiastic about what is happcning in thcir local
work cnvironmcnt.
Among thc many variablcs that dicrcntiatc cngagcd
and discngagcd workplaccs is thc quality ol thc local
workplacc managcr and his or hcr ability to succcsslully
mcct a corc sct ol cmployccs cmotional rcquircmcnts,
as shown in Figurc 4. Tcsc rcquircmcnts includc
dclivcring on thc most basic needs in thc workplacc
clcar cxpcctations and thc matcrials rcquircd to do
thc job. ncc cmployccs arc armcd with clcar cxpccta
tions and propcr cquipmcnt, thcy nccd to lccl that thcy
arc making an individual contribution to thc orga
nization and that thosc contributions arc rccognizcd
and valucd. mployccs pcrlorm bcst in activitics thcy
inhcrcntly cnjoy and lor which thcy havc a wclldcvcl
opcd prcdisposition. !ts also crucial that cmployccs lccl
thcy bclong to somcthing biggcr than thcmsclvcs and
dcvclop a strong scnsc ol teamwork. Finally, cmployccs
who havc thc opportunity to discuss thcir progrcss and
who havc opportunitics lor pcrsonal and prolcssional
growth build a dccpcr cmotional commitmcnt to thc
organization. A psychologically committcd cmploycc
in an cngaging work cnvironmcnt is primcd lor inno
vation and productivity.
Figure 4
mploycc ngagcmcnt Hicrarchy
Financial utcomcs
How can
wc grow:
o ! bclong:
Vhat do ! givc:
Vhat do ! gct:
Growth
Tcamwork
!ndividual
Contribution
8asic
Nccds
100
0
Tcams ol cmotionally cngagcd cmployccs dclivcr sig
nicantly bcttcr growth (productivity, protability,
and customcr) and costrcduction (turnovcr, abscn
tccism, thclt, and salcty) outcomcs than discngagcd
work tcams. Similarly, organizations that cngagc thcir
cmployccs grow thcir carnings morc than 2 timcs
lastcr than organizations that do not.
!n thc board room and at thc lcadcrship lcvcl, prin
ciplcs ol bchavioral cconomics play out in a varicty ol
dccisionmaking situations, with substantial implica
tions lor organizational pcrlormancc. From thc biasing
cccts ol sunk costs, to thc tcndcncy to bc swaycd by
how a dccision is initially positioncd or framed, to thc
tcndcncy to bc rcsistant to changing thc status quo,
cxccutivc dccisionmaking proccsscs arc cxtrcmcly
vulncrablc to thc ill cccts ol cognitivc and pcrccp
tual biascs and hcuristics. Fortunatcly, many ol thcsc
ill cccts can bc ovcrcomc or at lcast rcduccd
with appropriatc training, awarcncss, and disciplinc.
8ut bclorc thcy can bc ovcrcomc, cxccutivcs must bc
madc awarc ol thcm and thc situations in which thcy
arc likcly to arisc.
+o Covvvicn: :oo G~iiuv, !xc. Aii vicn:s vvsvvvvb. G~iiuv

, G~iiuv Coxsui:ixc

, Q
+:
, ~xb C
++
~vv :v~bv:~vxs ov G~iiuv, !xc.
There Is Vast Variation Within the
Organization
Considcr thc lollowing: An apparcl rctailcr claims to
bc an industry lcadcr in customcr satislaction, citing
an indcpcndcnt study ol customcrs in thc catcgory.
A rctail bank announccs that it has won an award lor
bcing onc ol thc countrys bcst placcs to work lor thc
lth ycar in a row. Vhilc cach ol thcsc claims may bc
lcgitimatc, candid convcrsations with customcrs who
shop in thc storcs dicrcnt locations or visit dicr
cnt bank branchcs will incvitably rcvcal a largc rangc
in thc quality ol thc customcrcmploycc cncountcr
at thosc organizations. Vithin thc samc rctailcr, onc
storc location may dclivcr cxccptional scrvicc whilc
anothcr strugglcs to drag customcrs through thc door.
Vithin thc bank, somc branchcs may bc cxccptional
placcs to work whilc othcrs arc opprcssivc. !n lact, thc
variability within an organization casily dwarls thc dil
lcrcnccs bctwccn compctitors. Substantial variability in
customcr and cmploycc cngagcmcnt rcprcscnts a sig
nicant thrcat to thc sustainability ol thc cntcrprisc
and drags down nancial pcrlormancc.
Local performance variation is
a scourge to organizations that
aspire to high performance.
Tc cxistcncc ol a broad rangc ol pcrlormancc variabil
ity within an organization suggcsts that thc only way
to managc that variability and improvc local pcrlor
mancc is to providc pcrlormancc lccdback at thc lcvcl
whcrc it originatcs. !n practicc, this mcans at thc storc,
bank branch, local occ, or salcs tcam thc local
lcvcl whcrc cmployccs spcnd most ol thcir timc, whcrc
customcr intcractions occur, and whcrc thc customcr
cxpcricncc is crcatcd. 8ccausc most managcrs sphcrcs
ol inucncc arc circumscribcd and local, thc mctrics
thcy rcly on to managc must also bc locuscd locally.
Local mcasurcmcnt and lccdback also pcrmit thc idcn
tication ol tcams and locations that cxccl at managing
thcir own local cmotional cconomics. Tcsc optimizcd
locations can providc critical guidancc to thc rcst ol
thc organization on how to managc thcsc clcmcnts ol
thc cmotional cconomy that arc important and dil
cult to rcplicatc. Noncthclcss, local pcrlormancc
variation is a scourgc to organizations that aspirc to
high pcrlormancc.
Identifying Strengths, Selection, Fit to Role,
and Great Managers
From a bchavioral cconomics pcrspcctivc, high pcrlor
mancc organizations rccognizc thc nccd to undcrstand
and acccpt human naturc at thc individual lcvcl, pcr
son by pcrson, and to lcvcragc it to drivc pcrlormancc.
Human naturc dictatcs that cvcry individual has a
uniquc sct ol charactcristics, strcngths, and wcakncsscs.
Tcsc strcngths lcad to consistcnt, ncarpcrlcct pcr
lormancc in a spccic activity, and, importantly, thcy
can bc asscsscd. 8ut bccausc cvcryonc is dicrcnt, not
cvcryonc can bc succcsslul in cvcry rolc. Tcrclorc, it
is csscntial lor organizations to optimizc cach ncw and
cxisting cmployccs potcntial (and thcir tcams likcli
hood ol succcss) by working with human naturc, rathcr
than against it, as much as possiblc. Knowing your
cmployccs most naturally powcrlul strcngths hclps you
undcrstand how bcst to position thcm lor succcss.
Covvvicn: :oo G~iiuv, !xc. Aii vicn:s vvsvvvvb. G~iiuv

, G~iiuv Coxsui:ixc

, Q
+:
, ~xb C
++
~vv :v~bv:~vxs ov G~iiuv, !xc. ++
For ncw cmployccs, this mcans dcploying a disciplincd
sclcction proccss to match prospcctivc cmployccs
strcngths to thc dcmands ol thcir rolcs. Tis will
incrcasc thcir likclihood ol succcss and thcir ability to
pcrlorm at thc lcvcl ol cxccllcncc. For cxisting cmploy
ccs, a managcrs goal should bc to usc cach pcrsons
uniquc strcngths to maximum ccct, rathcr than trying
to changc thc things that arc dicult or cvcn impos
siblc to changc. mployccs whosc supcrvisor locuscs
on thcir strcngths during pcrlormancc rcvicws arc
morc than 2 timcs as likcly to bc cngagcd as thosc
whosc supcrvisors locus on thcir wcakncsscs. Gallup
has rcscarchcd this topic lor morc than 35 ycars, study
ing morc than 6 million pcoplc in thc proccss, and wc
havc lound that individuals and organizations havc
much morc potcntial lor growth in arcas ol grcat
strcngth than in arcas ol wcakncss. 8y individualizing
your organizations approach to sclccting and manag
ing cmployccs and working with human naturc rathcr
than against it, youll unlock thcir maximum potcntial
and your maximum protability.
Optimize: Employee and Customer
Engagement Interact to Drive Performance
Convcntional vicws ol thc rclationships among
cmploycc attitudcs, customcr rcquircmcnts, and nan
cial pcrlormancc havc cmphasizcd thcir scqucntial
naturc. You can think ol thcsc variablcs as succcssivc
links in a chain, in which cach variablc accts thc ncxt
to drivc somc ultimatc outcomc. Tis pcrspcctivc sug
gcsts that cngagcd cmployccs crcatc cngagcd customcrs
who lostcr organizational succcss by dclivcring positivc
nancial outcomcs. Tough this pcrspcctivc has somc
validity, wc bclicvc it lails to convcy thc truc multi
dimcnsional naturc ol thc intcrdcpcndcncics among
cmploycc and customcr cngagcmcnt and ovcrall orga
nizational nancial pcrlormancc.
mploycc cngagcmcnt docs havc a dircct and mca
surablc rclationship to and impact on customcr
cngagcmcnt. 8ut thc ways in which cmploycc and
customcr cngagcmcnt intcract to cnhancc an organiza
tions nancial vigor arc morc complcx than a simplc
lincar chain ol lactors. Tis is bccausc thc combincd
impact ol cngaging an organizations cmployccs and
customcrs simultancously is substantially grcatcr
than thc cccts ol cngaging cmployccs or custom
crs scparatcly. mploycc cngagcmcnt and customcr
cngagcmcnt intcract to drivc cvcn highcr lcvcls ol
nancial pcrlormancc. Tis Performance Optimization
modcl (Figurc 5) suggcsts that gains in tcamlcvcl
nancial pcrlormancc can bc drivcn cxponcntially by
simultancously optimizing both cmploycc and cus
tomcr cngagcmcnt. !n lact, optimizcd tcams within
an organization thosc that arc in thc top 50 ol
tcams on both cmploycc and customcr cngagcmcnt
gcncratc a 240 boost in nancial pcrlormancc
comparcd with tcams that lail to cngagc thcir cmploy
ccs and thcir customcrs. Furthcrmorc, optimizcd tcams
also signicantly outpcrlorm thosc that scorcd high on
onc but not thc othcr ol thcsc mctrics.
+: Covvvicn: :oo G~iiuv, !xc. Aii vicn:s vvsvvvvb. G~iiuv

, G~iiuv Coxsui:ixc

, Q
+:
, ~xb C
++
~vv :v~bv:~vxs ov G~iiuv, !xc.
Figure 5
Pcrlormancc
ptimization Quadrants
ptimizcd
1.0
70
boost
70
boost
240
boost
Q
12
mploycc ngagcmcnt
C

1
1

C
u
s
t
o
m
c
r

n
g
a
g
c
m
c
n
t

Conclusion
Gallups applicd bchavioral cconomics approach starts
by acccpting our human naturc and capitalizing on it
to sclcct and position cmployccs, managc and moti
vatc thcm, accclcratc thcir dcvclopmcnt, and unlcash
innovation and productivity, all to ultimatcly cngagc
thc cmotions ol your most valuablc assct your
customcrs. Contrary to popular wisdom, our cmo
tional traits arc in lact quitc prcdictablc, and it is
this longignorcd aspcct ol cmploycccustomcr rcla
tions that holds thc kcy to supcrior pcrlormancc and
longtcrm growth.
Contact Us
For more information about Gallup Consulting or
Gallups approach to applied behavioral economics,
please visit consulting.gallup.com or contact Sarah
Van Allen at 202.715.3152 or sarah_van_allen@
gallup.com.