Multidimensional Sales Incentives in CRM Settings: Customer Adverse Selection and Moral Hazard
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.
Kim, Minkyung; Sudhir, K.; Uetake, Kosuke; and Canales, Rodrigo, "Multidimensional Sales Incentives in CRM Settings: Customer Adverse Selection and Moral Hazard" (2017). Cowles Foundation Discussion Papers. 199.