Impact of Employee Performance on Customer Retention in Hospitality Industry

This research paper discusses the impact of employee performance on customer retention in the hospitality industry. It includes a literature review on employee performance and customer retention, their co-relation, and theories supporting the concepts. The paper also highlights the importance of performance management and customer loyalty initiatives in retaining customers.

Running Head: Business Research Methodology
Business Research Methodology

Business Research Methodology 1
Contents
Introduction.................................................................................................................................................1
Literature review.........................................................................................................................................1
Employee performance (independent variable)...........................................................................................1
Customer retention (dependent variable).....................................................................................................3
The co relation between employee performance and customer retention.....................................................5
Conclusion...................................................................................................................................................6
Appendices..................................................................................................................................................9

Business Research Methodology 2
Introduction
The purpose of this task is to provide a brief overview of the impact of employee performance on
the customer retention in the hospitality industry. In hospitality industry, it is very important for
an organization to satisfy the needs of their employees so that they can provide qualified services
to the customers in the external market. As this hospitality industry is completely based on the
activities initiated by the employees and how they welcome the customer so the independent
variable in the case is the performance of employees and the dependent variable is the customer
retention. Independent variable refers to the factor which affects the other factor and is not
dependent upon any other factor for their working. The independent variable is not dependent on
any other factor for their working. The independent variable is not dependent on any other
variable for making changes and variations in their activities. Thus, in this case employee
performance is independent variable on the rationale of with customer retention acts.
Also it should be noted that employee performance directly affects the customer retention
process of the company in the hospitality industry, as if the customer makes a second visit in the
same organization then it means that they are satisfied with the services provided by the
employees in the company and want to entail it again. But if the employee turnover in the
company is high then the customer would not get satisfied next time and will not use the services
again. So, this is the problem in the scenario of employee performance and customer retention.
Further, the task will discuss regarding the impact of employee performance on customer
retention in hospitality industry. The task explains a literature review on both the independent
and the dependent factors that are employee performance and the customer retention. Adequate
theories support the explanation about the concepts and co-relation with of both the aspects as
well. More details about the task are discussed below:
Literature review
Employee performance (independent variable)
Every organization is formed with a view to establish and attain reputation in the target market.
These organizational objectives can only be achieved with the help of men, machine, material

Business Research Methodology 3
and money. Among all these resources manpower is the most important resource which helps an
organization to work effectively. According to Akah, 2010 as machines are used by manpower to
produce goods for the company, and material and money are investment by the manpower to
increase the efficiencies of the companies in the external market. Every organization demands
the need of highly skilled and efficient manpower to grow their business in the international
market as well. Talking about the hospitality industry, it should be noted that the owners or the
board members of the company do not visit tourist places with the visitors and enlighten them
about the sight scene, but the guide travel with them and help them to gain pleasant experience.
Also in the company, employees are face of the organization that interact with the customers in
the environment, attract them and ask them to attain the services of the company (Han, & Hyun,
2015). So, it is very important for the managers to monitor the performance of the employees and
satisfy them so that they can further satisfy the needs of the clients in the organization. Further
different employees in the company perform different types of job but all of them are ultimately
connected to the production of the company and customer retention process. Thus it is important
that employees’ performance act shall be seriously understood and sincere efforts must be
inputted in this direction. If the management of the company will initiate to help the employees
to learn, then they will grow and grab the opportunities which will help the company to sustain in
the market.
As said by Shields, et al., 2015, the hospitality industry is a service industry; initially talking
about service industry, it is an industry which do not supply products in the market instead
services are provided by them to satisfy the requirements of the customers in the external
environment. So, it should be noted that the whole hospitality industry is dependent upon how
their employees work in the organization to retain the customers from the market. All depends
upon the discretion of the employees only how they greet and treat to the customers in the
environment, as all the visitors travel to have a pleasant experience. So, it is important for the
companies to provide pleasant experience to the customers while travelling with them for which
they need to satisfy the employees’ needs and motivate them to perform better in the market
(Appendices 2). Further in order to maintain the performance of employees, it is very important
for the companies present in hospitality services industry that they need to stimulate the
employees to perform better because people management will significantly impact the
performance of the employees (Eid, 2015). Performance management of an organization has

Business Research Methodology 4
significant impact on the performance of the employees. As discussed above, the problem of
high employee turnover is leading dissatisfaction among the customers in the environment due to
which retaining of customers has become a difficult task. Further, it should also be noted that
satisfaction of employees leads to satisfaction of customers in the market so the organization
needs to find ways through which they can increase the satisfaction of employees in the
organization and retain them (Net Survey, 2017).
In the view of Mone, & London, 2014 talking about the performance of employees, it should be
noted that there are many ways through which their performance can be judged and rectified in
the market. Any person raises the standards of their performance in the market only when they
receive some additional benefit out of it. So, apart from the gross pay if the employees will get
paid for the work which they have done above their job process, then they will gain the sense to
work more so that they can earn better. Performance management is the way through the
organization can identify the requirements of the employees in the market and satisfy them so
that they can further satisfy the requirements of the customers efficiently and retain them in the
organization. According to Oki, 2014 performance management method evaluates the
performance of the employees and provides them monetary and non-monetary benefits
accordingly which motivates the employees to improve their performance. This method also
helps the organization in seeking the issues related to the job of the employees and solve to earn
customer satisfaction. The gap analysis is a part of the performance appraisal plan which helps
and organization to identify the gap in the growth of the organization and rectify them
(Appendices 1). Also the performance appraisal method provides clear objectives to the
employees in the organization on which they have to work. Further there are many aspects which
influence the performance behavior of employees in the organization like, workplace
environment, pay scale of employees, equality in the organization.
The theory of X and Y successfully measures the performance of the employees in the
organization. This theory was developed by Douglas McGrgor in the late 1960s. The theory
describes two different attitudes toward the workforce motivation. It was assumed that the
companies follow one of these approaches. The theory X approach says that the management of
the organization feels that the employee is lazy and avoids working for the betterment of the
organization. Due to which the managerial team becomes obliged to closely supervise the task

Business Research Methodology 5
performed by them and control their activities as well. The companies under this process follow
a hierarchical structure with narrow span of control at each level for the efficient and effective
employees. The theory X suggests that the employees have the capabilities to work and perform
better they will show a little interest in the activities of the organization (Cascio, 2018). The
managers who get influenced by the theory X says that, at the end there is one person who is to
be blamed for the incompetency of the company. The managers in this case show the pessimist
view for the employees as they believe that most of the employees in an uninterested way in the
organization and the higher authority need to regularly check their work order to improve their
performance in the organization. Under the theory Y, the managers assume that the employees of
their company are very ambitious and dedicated towards their company. The employees work
with great responsibility and they have a sense of self control and self-direction within them.
Under this case the managers show full trust on their employees believe that they do not need to
regular monitor their growth is they are self-insisted to grow and expand. The employers in this
case says that if the employees will get right conditions to work and strong motivation then it
will increase their satisfaction which will subsequently positively affect their performance as
well. The managers try to remove the barriers and provide pleasant environment to the
employees to work (Cascio, 2018). Thus, Theory Y is a positive side of growth of growth of the
employee performance in an organization.
Customer retention (dependent variable)
Customer retention is defined as the activities and actions that are taken by corporations in order
to improve the number of loyal customers who prefer to buy or use products or services of the
company. According to Roberts-Lombard (2011), the primary objective of customer retention
program focuses on assisting organisations in order to retain as many customers as possible. The
firms use customer loyalty and brand loyalty initiative to increase the number of loyal customers.
The practices or actions for customer retention starts right after the first contact a consumer has
with the corporation. The process of customer retention continues throughout the lifetime of the
relationship which exists between the customer and the organisation. Roberts-Lombard (2011)
stated that in this process, the corporations sell products to consumers who already have a
relationship with the firm which is an effective way of growing company’s revenues since the
enterprise does not have to educate, attract and convert new customers. In case of the hospitality

Business Research Methodology 6
industry, organisations receive a number of benefits because of customer retention such as
increased sales, brand loyalty, easy market capitalisation and others. The marketing cost of
hospitality companies reduces due to effective customer retention since they advertise their
products or services to consumers who already have expressed interest in the firm’s services.
IBOJO (2015) mentioned that the engagement of customers with the brand assists organisations
in capitalising on their experiences with the firm. Customer retention also assists in sustaining a
company’s future growth since it assists organisations in maintaining a competitive advantage
over competitors due to consumer loyalty which also leads to adding new customers.
In recent years, corporations in hospitality sector focus on customer retention since many studies
have proven its effectiveness. Eid (2015) depicted that the consumer profitability tends to
increase for companies that have a high number of customer retained since the management
focuses on implementing appropriate strategies and firm’s resources towards effective customer
retention. In order to improve customer retention, organisations focus on setting customer
expectation to eliminate uncertainty regarding firm’s products or services. As per Eid (2015), the
hospitality companies have to become customer’s trusted advisor that builds trust and loyalty in
their relationship. Organisations are required to take a proactive approach to eliminate problems
before they occur which makes the consumer experience personal which resulted in strengthen
the bond between them. In the process of customer retention, employees play a crucial role. The
senior level management did not interact on a regular basis with consumers; they implement
policies which are required to be followed by employees in order to improve customer retention.
Han & Hyun (2015) provided that the employees who work face-to-face with consumers are able
to determine their level of satisfaction which assists in keeping them with the corporation and
preventing them from looking anywhere else. Employees who deal directly with customers
required to meet customer needs and fulfil their requirements in order to improve customer
retention rates. Employees influence the business environment positively by analysing the way in
which they deal with the consumers. As per Han & Hyun (2015), they perform the activities of
performance building and representing the products which lead to increasing customer retention
in a firm.

Business Research Methodology 7
In order to maintain consumer trust and commitment in firm’s products and services,
corporations are required to implement policies of relationship marketing. More specifically,
hospitality organisation can implement the “Commitment-Trust Theory” of relationship
marketing in order to improve customer retention. According to Hashim & Tan (2015), the
theory provides that there are two fundamental factors which contribute to customer retention,
trust and commitment. The theory provides that corporations should focus on fulfilling
consumers’ demands and honouring their commitments towards them. Instead of focusing on
short-term profits, the enterprises should implement the principles of trust and commitment
which sustains their future growth. Hashim & Tan (2015) provided that Trust is defined as the
confidence which both parties have a relationship that the other party won’t take any harmful
actions against the interest of a party. Commitment is referred as a long-term desire to maintain a
valued and fulfilling relationship. Wang, Wang & Liu (2016) stated that organisations focus on
maintaining the trust and commitment in their relationship with customers since it increases their
loyal towards the brand which contributes to customer retention. In the hospitality industry, the
mutual loyalty allows both parties to fulfil their needs since the consumers get services as per
their requirements and companies increase their profits due to customer retention.
In the hospitality industry, the implementation of Commitment-Trust theory is suitable since the
customers are looking for high-quality services for their preferred brands. Leeman & Reynolds
(2012) mentioned that the firms’ are required to focus on the requirements and demands of
customers in order to ensure that they provide them a positive experience. Customer satisfaction
is a key focus for companies in the hospitality industry since it resulted in increasing their
profitability and brand value. The customers prefer to recommend and select the services of a
hospitality company that provide effective services to its customers. Customer retention is a
dependent variable since it is affected by a number of factors which are not in control of the
enterprises. The factors which are in control of companies include employee performance,
effective customer-oriented policies and others. In the hospitality industry, employees play a
crucial role in providing high-quality services to customers. Employees deal with various
requirements and demands of customers, and they can provide high-quality services to them in
order to ensure that they are satisfied with the company. Therefore, the establishment of
commitment and trust between employees is critical to the success of an enterprise in the
hospitality industry since it leads to increasing customer retention. As per Sashi (2012), with the

Business Research Methodology 8
popularity of social media and online services, it has become easier for customers to rate and
provide their feedback regarding a company’s services which encourage other customers to
select the services of the firm as well. Therefore, effective services of employees resulted in
increasing customer retention which provides corporations a positive brand image which
increases their profits.
The co relation between employee performance and customer retention
There is a significant co-relation between the independent variable (employee performance) and
the dependent variable (customer retention) in the hospitality industry. As discussed above, the
Commitment-Trust theory assists organisations in increasing their customer retention rate by
establishing mutual loyalty between customers and the firm. The theory provides the importance
of customer satisfaction in order to improve customer retention rates. The hospitality industry,
the satisfaction of customers, is directly influenced by the performance of employees. According
to Arnold, Fang & Palmatier (2011), effective performance resulted in fulfilling the requirements
and demands of customers which increase their satisfaction level. Therefore, it can be stated that
there is a substantial impact of employee performance on customer retention because there is a
co-relation between them.
As compared between the 4M of the hospitality industry, manpower is most important since
employees directly deal with customers in order to provide them high-quality services and fulfil
their demands. As per Yee, Yeung & Cheng (2010), in the hospitality industry, the employees
directly interact with customers; therefore, their performance has a direct influence on customer
retention. The customer retention rate increases if the performance of employees is effective. In
the hospitality industry, the customers are looking for high-quality services from companies in
order to ensure that they remain comfortable and relaxed during their vacation or business
meetings. Effective services from employees establish a positive relationship between company
and customers.
Different factors influence the performance of employees such as job dissatisfaction, work stress,
heavy workload, disputes and others. Yi, Nataraajan & Gong (2011) stated that the corporations
are requiring evaluating these factors and implementing appropriate theories to address these
issues. After addressing these factors, the employees are able to improve their performance

Business Research Methodology 9
which leads to higher customer satisfaction rates. As per the Commitment-Trust theory, it is
necessary that a level of trust is established between employee and customer which can be
achieved by their effective commitment. Therefore, companies in the hospitality industry should
focus on improving employee performance since it directly influences customer retention.
Conclusion
Thus, in the limelight of above mentioned events it should be noted that both the process
employee performance and customer retention are interlinked to each other but the employee
performance is the independent variable whereas customer retention is the dependent variable.
The employee performance is also affected through many aspects which are discussed in the
above mentioned task and the customer retention is directly linked with employee performance.
When the employee will attain satisfaction then they will perform efficiently and when the
employees will perform efficiently then the customers will gain satisfaction with services of the
organization. And if the customers will gain pleasant experience while traveling with the
company then they will make repetitive sales for the same organization and hence retention of
the customers of the company will be implemented. Thus, it should be noted that it is very
important for the organization to satisfy the customers in the organization then only the
dependent variable that is the customers will company will gain retention of customers in the
organization. Thus, the above mentioned task explains the literature review on employee
performance and customer satisfaction with specific theory and co relation between them. The
report justifies the requirements of the task.

Business Research Methodology 10
References
Akah, N. W. (2010). Employee Motivation and Performance: Ultimate Companion Limited.
Douala-Cameroon, Master’s Degree Dissertation, Mikkeli University of Applied Science.
Retrieved from https://books.google.co.in/books?
hl=en&lr=&id=mqKNCgAAQBAJ&oi=fnd&pg=PR8&dq=employee+performance+man
agement&ots=P5Wro7Ldzi&sig=w8XrHhIGIf4Qg2JYfVVIAQrD89A#v=onepage&q=e
mployee%20performance%20management&f=false
Arnold, T. J., Fang, E. E., & Palmatier, R. W. (2011). The effects of customer acquisition and
retention orientations on a firm’s radical and incremental innovation performance.
Journal of the Academy of Marketing Science, 39(2), 234-251. Retrieved from
https://s3.amazonaws.com/academia.edu.documents/39280381/18_Acquisition_and_Rete
ntion_Orientations.pdf?
AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1519367843&Signature=
2mAwSHQD8r0QTsUcmsC0tsA0TpI%3D&response-content-disposition=inline%3B
%20filename%3DThe_effects_of_customer_acquisition_and.pdf
Cascio, W. (2018). Managing human resources. New York City: McGraw-Hill Education.
Retrieved from
https://s3.amazonaws.com/academia.edu.documents/6473908/583915094.pdf?
AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1519357964&Signature=
ydUhd02do%2FJpc0FHbALjCPRP%2FBs%3D&response-content-disposition=inline
%3B%20filename%3DManaging_human_resources.pdf
Eid, R. (2015). Integrating Muslim customer perceived value, satisfaction, loyalty and retention
in the tourism industry: An empirical study. International Journal of Tourism Research,
17(3), 249-260. Retrieved from
https://s3.amazonaws.com/academia.edu.documents/38887930/3-_IJTR-MCPV.pdf?
AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1519367371&Signature=
UISSq%2FrbsFpdsF6PSFWyBzZdgiQ%3D&response-content-disposition=inline%3B
%20filename%3DIntegrating_Muslim_Customer_Perceived_Va.pdf

Business Research Methodology 11
Han, H., & Hyun, S. S. (2015). Customer retention in the medical tourism industry: Impact of
quality, satisfaction, trust, and price reasonableness. Tourism Management, 46, 20-29.
Retrieved from
https://www.researchgate.net/profile/Heesup_Han2/publication/265128733_Customer_re
tention_in_the_medical_tourism_industry_Impact_of_quality_satisfaction_trust_and_pric
e_reasonableness/links/59f042470f7e9baeb26adf8b/Customer-retention-in-the-medical-
tourism-industry-Impact-of-quality-satisfaction-trust-and-price-reasonableness.pdf
Hashim, K. F., & Tan, F. B. (2015). The mediating role of trust and commitment on members’
continuous knowledge sharing intention: A commitment-trust theory perspective.
International Journal of Information Management, 35(2), 145-151. Retrieved from
https://pdfs.semanticscholar.org/ff8e/b1fb7680cbebaa3948b20be1c40de0ec3263.pdf
Hayes, B. (2013). What is Customer Loyalty? Part 2: A Customer Loyalty Measurement
Framework. Retrieved from https://analyticsweek.com/content/customer-loyalty-
measurement-framework/
IBOJO, B. O. (2015). Impact of Customer Satisfaction on Customer Retention: A Case Study of
a Reputable Bank in Oyo, Oyo State. Nigeria. International Journal of Managerial
Studies and Research, 3(2), 42-53. Retrieved from
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.672.6082&rep=rep1&type=pdf
Leeman, D., & Reynolds, D. (2012). Trust and outsourcing: Do perceptions of trust influence the
retention of outsourcing providers in the hospitality industry?. International Journal of
Hospitality Management, 31(2), 601-608. Retrieved from
http://isiarticles.com/bundles/Article/pre/pdf/656.pdf
Mone, E. M., & London, M. (2014). Employee engagement through effective performance
management: A practical guide for managers. Abingdon-on-Thames: Routledge.
Retrieved from https://books.google.co.in/books?
hl=en&lr=&id=unwBAwAAQBAJ&oi=fnd&pg=PP1&dq=employee+performance+man
agement+process&ots=HeROTpa6bm&sig=r-
OrgDKNKEHo36J0wdhhIE2f4TM#v=onepage&q=employee%20performance
%20management%20process&f=false

Business Research Methodology 12
Net Survey. (2017). The link between employee engagement, profitability and growth. Retrieved
from https://www.netsurvey.se/en/employee-engagement/link-employee-engagement-
profitability-growth/
Oki, E. U. (2014). The Impact of Employee Retention on Customer Satisfaction in the Nigerian
Service Organizations (A Study of Some Selected Hotels in JOS, Plateau State).
International Journal of managerial studies and research, 2(9), 140-154. Retrieved from
https://www.arcjournals.org/pdfs/ijmsr/v2-i9/16.pdf
Roberts-Lombard, M. (2011). Customer retention through customer relationship management:
The exploration of two-way communication and conflict handling. African journal of
business management, 5(9), 3487. Retrieved from
http://www.academicjournals.org/article/article1380897998_Lombard.pdf
Sashi, C. M. (2012). Customer engagement, buyer-seller relationships, and social media.
Management decision, 50(2), 253-272. Retrieved from
https://www.researchgate.net/profile/Cm_Sashi/publication/235292856_Customer_engag
ement_buyer-seller_relationships_and_social_media/links/
5553b13108aeaaff3bf19c25.pdf
Shields, J., Brown, M., Kaine, S., Dolle-Samuel, C., North-Samardzic, A., McLean, P., ... &
Plimmer, G. (2015). Managing Employee Performance & Reward: Concepts, Practices,
Strategies. England: Cambridge University Press. Retrieved from
https://books.google.co.in/books?
hl=en&lr=&id=mqKNCgAAQBAJ&oi=fnd&pg=PR8&dq=employee+performance+man
agement&ots=P5Wro7Ldzi&sig=w8XrHhIGIf4Qg2JYfVVIAQrD89A#v=onepage&q=e
mployee%20performance%20management&f=false
Wang, W. T., Wang, Y. S., & Liu, E. R. (2016). The stickiness intention of group-buying
websites: The integration of the commitment–trust theory and e-commerce success
model. Information & Management, 53(5), 625-642. Retrieved from
https://pdfs.semanticscholar.org/a2b6/bcf835e3e476246fdfd978ca6d530cf59deb.pdf

Business Research Methodology 13
Yee, R. W., Yeung, A. C., & Cheng, T. E. (2010). An empirical study of employee loyalty,
service quality and firm performance in the service industry. International Journal of
Production Economics, 124(1), 109-120. Retrieved from
http://download.xuebalib.com/xuebalib.com.21878.pdf
Yi, Y., Nataraajan, R., & Gong, T. (2011). Customer participation and citizenship behavioral
influences on employee performance, satisfaction, commitment, and turnover intention.
Journal of Business Research, 64(1), 87-95. Retrieved from
https://s3.amazonaws.com/academia.edu.documents/39810187/Customer_participation_a
nd_citizenship_b20151108-24242-1tipfq3.pdf?
AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1519368022&Signature=
%2BNGsPg6vdasllBVigtbZgIcIkjk%3D&response-content-disposition=inline%3B
%20filename%3DCustomer_participation_and_citizenship_b.pdf

Business Research Methodology 14
Appendices
Appendices1: Benefits of Performance Management
Performance management is a very important part of human resource management. The focus of
it is on development aspects of individual and organisation performance. The approach of
performance management is positive. In present highly competitive environment, a high degree
of skill and commitment is needed to understand the environment and perform accordingly.
Everybody is benefited by actions of performance management. It is bit difficult to summarise
the benefits of it in detail. It is possible to get all employees to reconcile personal goals with
organizational goals. One can increase productivity and profitability for any organization and
that leads to progress of the organisation. It can be applied by organisations or a single
department or section inside an organisation as well as an individual person. The process is a
natural, self-inspired performance process and appropriately named the selfpropelled
performance process (SPPP)
Appendices 2: Globally, the retention of skilled employees has been a serious concern to
management. The desired critical measures for retention of employees have therefore become
strategic to sustainable competition among organizations in a globalizing economy such as
Nigeria. This development has dramatically changed human resource practice in the area of
attracting skilled employees into organizations, and most importantly is the strategy for retaining
them. Employee retention connotes the means, plan or set of decision-making behavior put in
place by organizations to retain their competent workforce for performance. There have been
many human resource strategies provided to retain employees for the advantage of the
organizations. These strategies are aimed at avoiding employee turnover. Organizations rely on
the expertise, knowledge, skills, and capital resource and capacity development of their
employees in order to compete favorably and indeed gain competitive advantage in the
international market. However, recent studies have shown that retention of highly skilled
employees has become a difficult task for managers, as this category of employees is being
attracted by more than one organization at a time with various kinds of incentives.

Business Research Methodology 15
Figure 1: Importance of Customer Loyalty
(Source: Hayes, 2013)

Business Research Methodology 16
Figure 2: Impact of Customer Experience on Profits
(Source: Kulbyte, 2018)
Figure 3: Companies with Engaged employees have higher Growth in Service Industry

Business Research Methodology 17
(Source: Net Survey, 2017)