Wednesday, August 11, 2010


Mike Dorf

Future archeologists who read the Aug. 9, 2010 issue of the New Yorker may think that the uproarious piece therein by David Sedaris (abstract here) was written in reaction to the curious case of Steven Slater, the JetBlue flight attendant who finally cracked after dealing with one too many surly passengers.   In his essay, Sedaris describes the unpleasantness of air travel these days as only he can, including some tidbits about the (apparently justified) contempt in which flight attendants hold most passengers.  Sedaris should get credit for prescience, for his essay was written many months ago.  I know because I heard him perform an earlier version of it live in April.

Sedaris speculates in his essay that the ill tempers one sees (and experiences) in modern air travel are not so much the product of stressful situations but the way we really are, merely exposed by those stresses.  Perhaps, but either way, it's worth asking about causes.  I'm going to take as a given that there is less civility in contemporary  interactions between customers and agents of large corporations these days than in the relatively recent past (as recently as, say, twenty years ago).  Think of the last time you were frustrated by an endless series of prompts on the customer service line of the phone company, cable company, or whatever.  Now think of the last time you yelled at the hapless customer service representative who continually repeated some nonsensical non-answer to your question when you finally got through to him or her.  Ashamed?  Me too. The mystery I want to address is why has customer service gotten so bad.

The culprit, I think, are the large rewards available to investors and managers for short-term performance.  Our capital markets have become very good at squeezing short-term profit out of productive enterprises, and that has been bad for both employees and customers.  A company that invests in excellent customer service or in making its employees feel valued (through pay, benefits and amenities) can reap long-term profits as a result: Loyal customers provide repeat business, while satisfied employees save on training costs, etc.  And some enlightened managers pursue this course.  (It's easier if you're running a closely held company.)  But if you're trying to show an increase in quarterly or even annual profits, slashing expenditures on employees and customer service will likely do the trick in the short run--and the long run is someone else's problem.

Now, this explanation isn't really necessary for the airline industry, which has been in bad shape for a long time.  With many airlines operating in the red, the need to cut costs is over-determined.  And some of the problems arise from tightened security measures.  But I think these factors merely exacerbate in the airline industry a situation that is bad in most sectors.

So far I have a mechanism--shortsightedness--but I still don't have an underlying cause.  How have the incentives changed in recent years to make corporate directors, managers and even shareholders more shortsighted?  The answer here, as in the financial crisis, was the explosion of compensation.  Gigantic annual bonuses paid to managers who showed large profits in boom years and then skedaddled when the bust came were a big part of what enabled institutions that should have known better to make terrible long-term bets on housing derivatives.  That same dynamic has been at work for some time in undermining customer service and employee satisfaction.

But now the bad news.  The solution with respect to managers gutting companies is apparent (which is not to say that it's going to be adopted): Tie compensation to long-term corporate performance differences between the firm for which managers work and the industry overall.  In short, the mismatch in incentives between managers and shareholders is an agency problem that should be addressed as such.  But solving that problem will not do much for customer/employee relations so long as the principals--the shareholders--are also focused on the short term.  And that seems to be the case, especially when one considers that with computer trading, stocks are now held for mere fractions of a second.

So it looks like we're in for a lot more "cropdusting" (a term explained in the Sedaris essay), if not worse.