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Journal of Management Control

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01-09-2012 | Original Paper

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

Authors: Julia Heidemann, Marcus Kaiser, Mathias Klier, Florian Probst

Published in: Journal of Management Control | Issue 1/2012

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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.

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For instance in Germany, advisors are entitled to receive commission payments for all contracts they closed according to HGB, 2007 §§87, 87a, 87c. However, nothing is said about the assessment base (e.g., sales volume, profit, customer value) of the closed contract to calculate the commissions.

In case advisors sell products where the FSP itself is originator, the net present value of the expected cash flows may be used.

A corresponding progression could also be represented by other functions (e.g., root function). This would, however, not affect the general results of the model.

If the advisor can choose between a heterogeneous set of activities, which differ considerably regarding the ratio between realized assessment base to invested working capacity, α is close to 0. In this case, the advisor can—via a corresponding prioritization of the activities—reach a comparatively high share of \(B_{\neg clv}^{\max}\) with a small share of his or her working capacity. In contrast, α should be near 1 in case of a relatively homogeneous set of activities. In this case, the advisor can hardly profit from a corresponding prioritization of the activities, leading to a relatively constant ratio between realized assessment base and invested working capacity.

It can also be argued that the progression of the function is concave. This would, however, not affect the general results of the model.

Commissions which are always realized (i.e., also in case non-customer value-oriented activities are performed in the following periods) are not decision-relevant for the maximization and are therefore not taken into account here.

To determine a measure for the corporate value, the discounted cash flows-method (DCF) is applied (cf. Rappaport, 1998). In this context, the cash flows of the company are the commissions received diminished by the commissions paid to the advisor in a period.

In case advisors sell products where the FSP itself is originator, the net present value of the expected cash flows may be used.

To transfer this procedure to other companies, alternative approaches for the segmentation of customers can be used (cf. e.g., Homburg et al., 2006, pp. 34–41; Krafft and Albers, 2000; Krafft and Albers, 2002; Pauluhn, 1999).

Advisors have to record correct customer data. This is due to the obligation to document customer data required in the Insurance Mediation Directive (2002) and in the MiFID (2005).

The illustration for calculating the assessment base is an example only. For the simulation study, more differentiated assessment bases were determined based on each advisor’s time with the FSP and the average customer’s age within the corresponding customer portfolio.

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Title: Customer lifetime value-based sales force control in the financial services industry— an incentive-compatible remuneration model
Authors: Julia Heidemann
Marcus Kaiser
Mathias Klier
Florian Probst
Publication date: 01-09-2012
Publisher: Springer-Verlag
Published in: Journal of Management Control / Issue 1/2012
Print ISSN: 2191-4761
Electronic ISSN: 2191-477X
DOI: https://doi.org/10.1007/s00187-012-0152-0

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