This research examines the nonlinear effects of compensation on customer satisfaction in order to determine the optimal compensation after a flawed service. As our core contribution, we argue that the nature of this nonlinear effect depends on the way customers handle a flawed service. Building on the Service-Dominant (S-D) logic, this research introduces two specific failure handling tactics—when customers reject versus accept a flawed value proposition—that affect the shape of the nonlinear function of compensation on satisfaction. Our key hypotheses are tested with two experiments that manipulate 11 compensation levels (0–200%) and the two failure handling tactics (rejection vs. acceptance). Consistent with our logic, both studies reveal an S-shaped curve progression for service rejection and a concave shape for service acceptance. For service rejection, the highest incremental effect of compensation on satisfaction lies in between 60% and 120%. For service acceptance, the highest return in satisfaction is obtained with the first dollars invested in partial compensation. As a major managerial takeaway, firms can use these findings to determine the compensation level that provides the best satisfaction return.
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