Nordstrom: Dissension in the Ranks?
(1) What problems does Nordstrom’s evaluation/compensation system have? Think about this question while considering the objectives of the company’s evaluation/compensation system, what measures it took, and what happened as a result. A. Nordstrom was renowned for its superior customer service that was the result of the exceptional customer service efforts (or “heroics”) put by their salespeople. So in order to retain their competitive advantage of superior customer service in the highly competitive retailing market, they designed a evaluation/compensation system that had the following objectives: (1) To support its high-service strategy, and (2) To motivate its sales employees. They tried to evaluate and compensate based on sales performance measured by SPH (Sales Per Hour) ratio, to motivate their employees to put efforts into providing better customer service/satisfaction and increase customer loyalty. However, the time the employees used for customer service/satisfaction or attend internal meetings (that did not account for any sales) negatively impacted their SPH ratio. So the employees were encouraged not to record those times in order to keep their sales performance high. This might have demotivated the employees who also developed dissatisfaction towards the company. Employees who could not tolerate left the company and employees who remained in the company were squeezed to work without pay for unrecorded hours. The problems that Nordstrom’s evaluation/compensation system has are: (1) SPH mechanism for performance evaluation/compensation (2) Poor differentiation of “Selling” and “Non-Selling” time (3) No evaluation/compensation of work time related to customer service/satisfaction (1) SPH mechanism for performance evaluation/compensation Nordstrom’s evaluation/compensation system was driven by sales per hour (SPH) mechanism in which the each sales employee were given a target SPH ratio based on their base hourly wage and store department and were compensated based on if the actual SPH ((sales – merchandise returned by customers) / # of hours worked) could meet the target SPH or not. If the actual SPH exceeded target SPH, the employee received 6.75% to 10% commission on net sales, depending on the department. In addition, they would also be assigned more working hours during peak sales hours and have a better chance of getting promoted to a department manager job. On the other hand, if the actual SPH missed the target SPH, the employee is not compensated and only received the amount based on the base hourly wage. On the 1/6
bitter side, they would be assigned less working hours (not during peak sales hours) or even terminated. So we see that the SPH mechanism is either rewarding or punishing. There is no in between compensation or chance to improve the performance. The good performers are given the opportunities to become better performers while the bad performers are deprived of opportunities to become good performers. In my opinion, if employees are having difficulties in meeting their target SPH then they should be given more working hours, not less. It is impossible to improve their SPH if they are working the off-peak shopping hours and working much less than employees with higher SPH. The SPH mechanism thus resulted into the following issues: (a) Employees were compelled to perform essentially expected functions, such as merchandise preparation, writing “thank you” notes, participation in mandatory meetings, etc. on “off the clock” time, because they were coerced by the existing performance evaluation system to keep their SPH ratio high. (b) Sales clerks felt persistent pressure to not record their hours while performing so-called “heroics”, which were essential for customer satisfaction, but detrimental for their personal paychecks, and working conditions in general. (c) The competitive sales forced Nordstrom employees into a cutthroat type of atmosphere discouraging...
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