Multidimensional Sales Incentives in CRM Settings: Customer Adverse Selection and Moral Hazard

40 Pages Posted: 2 Mar 2017 Last revised: 5 Apr 2017

Minkyung Kim

Yale School of Management

K. Sudhir

Yale School of Management; Yale University-Department of Economics; Yale University - Cowles Foundation

Kosuke Uetake

Yale School of Management

Rodrigo Canales

Yale School of Management

Date Written: December 1, 2016

Abstract

In many firms, incentivized salespeople with private information about their customers are responsible for customer relationship management (CRM). Private information can help the firm by increasing sales efficiency, but it can also hurt the firm if salespeople use it to maximize own compensation at the expense of the firm. Specifically, we consider two negative outcomes due to private information — ex-ante customer adverse selection at the time of acquisition and ex-post customer moral hazard after acquisition. This paper investigates potential positive and negative responses of a salesforce to managerial levers — multidimensional incentives for acquisition and retention performance and job transfers that affect the level of private information.

Salespeople are responsible for managing customer relationships and compensated through multidimensional performance incentives for customer acquisition and maintenance at many firms. This paper investigates how a salesperson’s private information on customers affect their response to multiple dimensions of incentives. Using unique matched panel data that links individual salesperson performance metrics with customer level loans and repayments from a microfinance bank, we find that sales people indeed possess private information that is not available to the firm. Salespeople use the private information to engage in adverse selection of customers in response to acquisition incentives. Customer maintenance incentives serve a dual purpose; they not only reduce loan defaults, but also moderate adverse selection in customer acquisition. Transfers that eliminate private information reduces the adverse selection effects of acquisition incentives, but increase loan defaults — customer moral hazard. Despite the potential negative adverse selection effects due to private information, the effort increasing effect of each of the three dimensions of sales management we investigate — acquisition incentive, maintenance incentive and transfers all have a net positive effect on firm value. Methodologically, the paper introduces an identification strategy to separate customer adverse selection and customer moral hazard (loan repayment), by leveraging the multidimensional incentives of an intermediary (salesperson) responsible for both customer selection and repayment with private information about customers.

Suggested Citation

Kim, Minkyung and Sudhir, K. and Uetake, Kosuke and Canales, Rodrigo, Multidimensional Sales Incentives in CRM Settings: Customer Adverse Selection and Moral Hazard (December 1, 2016). Cowles Foundation Discussion Paper No. 2085. Available at SSRN: https://ssrn.com/abstract=2926064 or http://dx.doi.org/10.2139/ssrn.2926064

Minkyung Kim

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

K. Sudhir

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-3289 (Phone)
203-432-3003 (Fax)

Yale University-Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Kosuke Uetake (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Rodrigo Canales

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
(203) 432-6054 (Phone)
(203) 432-9994 (Fax)

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