IDEAS home Printed from https://ideas.repec.org/a/spr/metrik/v23y2012i1p27-51.html

Customer lifetime value-based sales force control in the financial services industry— an incentive-compatible remuneration model

Author

Listed:
  • Julia Heidemann
  • Marcus Kaiser
  • Mathias Klier

  • Florian Probst

Abstract

In the financial services industry, a shift from product- to customer-oriented business models can be observed since several years. To ensure that independent sales representatives act in accordance with the long-term oriented business objectives, financial services providers need appropriate control systems. In this context, science as well as practice agree to a large extent that sales force control of self-employed and thus independent sales representatives has to be primarily based on monetary incentives. However, only few approaches and corresponding analyses can be found which address the integration of customer lifetime value-oriented components into the remuneration of independent sales representatives. Therefore, the objective of this article is to develop a remuneration model focusing on the financial services industry that rewards a customer lifetime value-oriented and corporate value-enhancing behavior. For this purpose, an incentive-compatible remuneration model that is based on commissions is proposed. It accounts for both the calculus of the independent sales representatives, i.e., the (short-term) maximization of the income, and of the financial services provider, i.e., the (long-term) maximization of the corporate value. General results are derived by using a simulation study, since—due to the interdependencies between the two calculi—the analysis and interpretation of algebraic solutions is only possible to a very limited extend. In addition to the development of the incentive-compatible remuneration model, we are able to provide general recommendations regarding the design of a customer lifetime value-oriented remuneration. It becomes apparent that based on the suggested incentive-compatible remuneration model both the company as well as the sales representatives can be better off. The practical application and the collection of the parameters that are needed for the operationalization of the proposed model are illustrated by using the example of a German financial services provider. Copyright Springer Verlag 2012

Suggested Citation

  • Julia Heidemann & Marcus Kaiser & Mathias Klier & Florian Probst, 2012. "Customer lifetime value-based sales force control in the financial services industry— an incentive-compatible remuneration model," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 23(1), pages 27-51, September.
    • Handle: RePEc:spr:metrik:v:23:y:2012:i:1:p:27-51
    DOI: 10.1007/s00187-012-0152-0
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s00187-012-0152-0
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s00187-012-0152-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Wolfgang Ulaga, 2001. "Customer Value in Business Markets: An Agenda for Inquiry," Post-Print hal-00485122, HAL.
    2. Jensen, Michael C. & Meckling, William H., 2008. "Theory of the firm: managerial behavior, agency costs and ownership structure," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 48(2), April.
    3. Amiya K. Basu & Rajiv Lal & V. Srinivasan & Richard Staelin, 1985. "Salesforce Compensation Plans: An Agency Theoretic Perspective," Marketing Science, INFORMS, vol. 4(4), pages 267-291.
    4. Sunil Gupta & Valarie Zeithaml, 2006. "Customer Metrics and Their Impact on Financial Performance," Marketing Science, INFORMS, vol. 25(6), pages 718-739, 11-12.
    5. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-139, May.
    6. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
    7. Michael Spence, 1976. "Symposium: The Economics of Information: Informational Aspects of Market Structure: An Introduction," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 591-597.
    8. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    9. Bayón, Tomás & Gutsche, Jens & Bauer, Hans, 2002. "Customer Equity Marketing:: Touching the Intangible," European Management Journal, Elsevier, vol. 20(3), pages 213-222, June.
    10. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69(3), pages 213-213.
    11. Albers, Sönke, 1993. "Optimales Verhältnis zwischen Festgehalt und erfolgsabhängiger Entlohnung bei Verkaufsaußendienstmitarbeitern," Manuskripte aus den Instituten für Betriebswirtschaftslehre der Universität Kiel 336, Christian-Albrechts-Universität zu Kiel, Institut für Betriebswirtschaftslehre.
    12. Coughlan, Anne T & Narasimhan, Chakravarthi, 1992. "An Empirical Analysis of Sales-Force Compensation Plans," The Journal of Business, University of Chicago Press, vol. 65(1), pages 93-121, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bernard Paulré, 2001. "Enjeux et dilemmes de l'économie cognitive," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00135486, HAL.
    2. Giorgio Coricelli & Luigi Luini, 1999. "Double Moral Hazard: an Experiment on Warranties," CEEL Working Papers 9901, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
    3. René Garcia, 1986. "La théorie économique de l’information : exposé synthétique de la littérature," L'Actualité Economique, Société Canadienne de Science Economique, vol. 62(1), pages 88-109.
    4. Holmstrom, Bengt R. & Tirole, Jean, 1989. "The theory of the firm," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 2, pages 61-133, Elsevier.
    5. J. Barkley Rosser, 2003. "A Nobel Prize for Asymmetric Information: The economic contributions of George Akerlof, Michael Spence and Joseph Stiglitz," Review of Political Economy, Taylor & Francis Journals, vol. 15(1), pages 3-21.
    6. Edward M. Iacobucci & Ralph A. Winter, 2005. "Asset Securitization and Asymmetric Information," The Journal of Legal Studies, University of Chicago Press, vol. 34(1), pages 161-206, January.
    7. Hau Lee & Seungjin Whang, 1999. "Decentralized Multi-Echelon Supply Chains: Incentives and Information," Management Science, INFORMS, vol. 45(5), pages 633-640, May.
    8. Georges Dionne & Scott Harrington, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    9. Enzo Scannella & Salvatore Polizzi, 2021. "How to measure bank credit risk disclosure? Testing a new methodological approach based on the content analysis framework," Journal of Banking Regulation, Palgrave Macmillan, vol. 22(1), pages 73-95, March.
    10. Nobel Prize Committee, 2016. "Oliver Hart and Bengt Holmström: Contract Theory," Nobel Prize in Economics documents 2016-1, Nobel Prize Committee.
    11. Franziska Rischkowsky & Thomas Döring, 2008. "Consumer Policy in a Market Economy Considerations from the Perspective of the Economics of Information, the New Institutional Economics as well as Behavioural Economics," Journal of Consumer Policy, Springer, vol. 31(3), pages 285-313, September.
    12. Bruce Ian Carlin & Simon Gervais, 2012. "Legal Protection in Retail Financial Markets," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 1(1), pages 68-108.
    13. Stiglitz, Joseph E., . "Informacja i zmiana paradygmatu w ekonomii," Gospodarka Narodowa-The Polish Journal of Economics, Szkoła Główna Handlowa w Warszawie / SGH Warsaw School of Economics, vol. 2004(3).
    14. Sanjiva Prasad & Christopher J. Green & Victor Murinde, 2005. "Company Financial Structure: A Survey and Implications for Developing Economies," Chapters, in: Christopher J. Green & Colin Kirkpatrick & Victor Murinde (ed.), Finance and Development, chapter 12, Edward Elgar Publishing.
    15. Olivier Meier & Aurélie Sannajust, 0. "The smart contract revolution: a solution for the holdup problem?," Small Business Economics, Springer, vol. 0, pages 1-16.
    16. Vegas, E & Ganimian, A. J., 2013. "Theory and Evidence on Teacher Policies in Developed and Developing Countries," Working Paper 104291, Harvard University OpenScholar.
    17. Wu, Zhenyu & Chua, Jess H. & Chrisman, James J., 2007. "Effects of family ownership and management on small business equity financing," Journal of Business Venturing, Elsevier, vol. 22(6), pages 875-895, November.
    18. Gardner, L. A. & M. F. Grace, "undated". "Efficiency Comparisons between Mutual and Stock Life Insurance Companies," Working Papers 012, Risk and Insurance Archive.
    19. Wang, Sen & Bogle, Tim & van Kooten, G. Cornelis, 2012. "Forestry and the New Institutional Economics," Working Papers 130818, University of Victoria, Resource Economics and Policy.
    20. Gao, Huasheng & Li, Kai, 2015. "A comparison of CEO pay–performance sensitivity in privately-held and public firms," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 370-388.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:metrik:v:23:y:2012:i:1:p:27-51. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.