The Effect of Competition on the Contracting Use of Customer Satisfaction: Evidence from the American Customer Satisfaction Index (ACSI)

Abstract

This paper empirically examines the effect of competition on the use of customer satisfaction in CEO compensation contracts. Specifically, using American Customer Satisfaction Index (ACSI) scores of firms, we investigate whether customer satisfaction is more closely associated with CEO cash compensation when industry competition increases. Consistent with our prediction, we find that ACSI scores are more closely associated with CEO annual bonus when industry competition becomes greater. Furthermore, we find stronger results when we use industry-adjusted ACSI scores, suggesting that relative customer satisfaction measures are more likely to be used in CEO compensation contracts when industry competition becomes greater. Overall, our results are consistent with competition increasing the usefulness of customer satisfaction measures in compensation contracts.

Keywords: Nonfinancial performance measures, customer satisfaction, competition, CEO compensation

JEL Classification: M41, M52, J33, L11