When Salespeople Manage Customer Relationships: Multidimensional Incentives and Private Information

74 Pages Posted: 2 Mar 2018 Last revised: 9 Jan 2019

See all articles by Minkyung Kim

Minkyung Kim

UNC Chapel Hill Kenan-Flagler Business School

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: January 4, 2019

Abstract

Incentivized salespeople are often responsible for CRM activities that focus not only on customer acquisition, but also maintenance activities that increase customer lifetime value. While incentives can induce effort on the incentivized tasks, a salesperson’s private information about customers may induce moral hazard by salespeople seeking to gain short-term compensation at the expense of the firm’s long run profitability. We investigate the dynamics in the effort--moral hazard tradeoff in response to multidimensional (acquisition and maintenance) performance incentives in the presence of private information. Using unique panel data on customer loan acquisition and repayments linked to salespeople from a microfinance bank, we detect evidence of salesperson private information. Acquisition incentives induce salesperson moral hazard leading to adverse customer selection, but maintenance incentives moderate it as salespeople recognize the negative effects of acquiring low quality customers on future payoffs. Critically, without the moderating effect of maintenance incentives, the adverse selection effect of acquisition incentives overwhelms the sales enhancing effort effects, clarifying the importance of multidimensional incentives in CRM-type settings. Reducing private information (through job transfers) hurts customer maintenance, but has greater impact on productivity by moderating adverse selection at acquisition. The paper also contributes to the recent literature on detecting and disentangling customer adverse selection and customer moral hazard (defaults) with a new identification strategy that exploits the time varying effects of salesperson incentives.

Keywords: Salesforce compensation, CRM, Private information, Adverse selection, Moral hazard

Suggested Citation

Kim, Minkyung and Sudhir, K. and Uetake, Kosuke and Canales, Rodrigo, When Salespeople Manage Customer Relationships: Multidimensional Incentives and Private Information (January 4, 2019). Cowles Foundation Discussion Paper No. 2122, Available at SSRN: https://ssrn.com/abstract=3132286 or http://dx.doi.org/10.2139/ssrn.3132286

Minkyung Kim

UNC Chapel Hill Kenan-Flagler Business School ( email )

300 Kenan Drive
Chapel Hill, NC 27599
United States

K. Sudhir (Contact Author)

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

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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