When Salespeople Manage Customer Relationships: Multidimensional Incentives and Private Information

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