Responding to incentives is one of the basic characteristics of a living being and particularly, human beings. Incentives, which are financial in nature, are one of the strongest forces and often shape a person’s behaviour within a controlled environment. Over a longer period of time these could deeply influence his or her core characters and value systems. Any firm or organisation is defined by the aggregate behaviour of its employees and managers. As a result, the firm’s incentive designs are expected to play a very significant role in defining a firm’s overall character and value systems.

A salesperson of any firm is entrusted with the job of selling products to its customers. In most cases the firm’s incentives are designed to ensure that the higher sales volumes are rewarded with higher incentives. Such incentives are awarded either on the same day, week, month, quarter or within the same financial year at the very latest. While higher incentives may attract the most talented salesperson, one may ask if the firm is achieving maximum satisfaction for its clients. Probably that is not guaranteed! Naturally, a question could arise on how can a firm build a stable long-term relationship with its clients and also keep the employees incentivised for the same? This is a golden balance which the most of the firms would try to strike.

One of the ways to resolve above the dilemma is to start from the customer angle. A firm may decide to define the target average lifespan of its customers (e.g. 5 years) based on its product offering, competitive landscape and overall management strategy. A firm’s incentive scheme for its salesperson is laid down to ensure that he/she achieves the targeted average lifespan for majority of its customers. This, in turn, would also enable the firm to extract the maximum customer value over multiple periods. But how can the firm devise a suitable incentive strategy to achieve the same? One of the simple management tactics which could be employed is described as below. There could be other ways to achieve similar objectives but the basic philosophy of such schemes would remain unchanged. Such tactics are most effective for certain specific industries (e.g. financial services, shipping, automotive, tourism etc.) where the customer selling experiences and product offerings are slightly involved and high valued in nature.

In any part of the customer life cycle when a sale is executed, sales person’s incentives should be accrued over the remaining customer life (as per company’s target customer life). So if the average lifespan for a specific set of customer for a specific set of product range/services is assumed to be 5 years and the net customer contribution in the first year is $1 for a specific salesperson, the incentive structure awards him/her for 20p and carries over the rest 80p for the next four years. Obviously, it would also mean that the returning customer is more profitable from the salesperson perspective as he/she accumulates the later contribution at a faster rate. As an example, if the same contribution of $1 occurs in the 4th year for the above customer, the carry over incentive would be a lower 50p with upfront incentive linked to 50p. Although the formula here is for equal splits across years, it can also be designed in a variety of ways. The more number of times a customer returns in the later stages of the life cycle, the better it is for the salesperson in any of such designs. Obviously, this cannot happen unless the customer is extremely satisfied with the sales experience. In cases where the customer lifespan exceeds the targeted average for the firm, the incentives can be chosen to be awarded in the same financial year without any deferral. Obviously, one has to ensure that if a customer is inactive beyond a certain period of time, the clock is reset and the customer life cycle starts again from time point zero when he/she returns after the gap. Nevertheless the set of long-surviving regular and active customers would continue to be a prized possession for any salesperson. The salesperson would be very careful in ensuring that these select set of customers keep returning all the time — these are his/her golden harvest. As a result, a salesperson’s behaviour becomes aligned to the firm’s targeted behaviour helping both of them to achieve a long term and stable future with the customers. By way of such long term relationship, the firm may be also able to achieve the maximum lifetime value of the customer and thereby, helping its own growth and stature. But, are there any challenges here?

Human behaviour is usually resistant to the deferred nature of any incentive. While the above plan is to have an incentive on an accrual basis till the customer reaches the end of average targeted life-span, it also incentivises the salesperson to take the customer beyond this period. The leadership of the firm should be able to convince their salespersons to take a longer term view on their own careers and also be able to take most of their customers beyond the average life span and thereby, benefitting the firm as well as himself/herself. This is a shared vision which would encourage employees to cultivate relationships with super satisfied customers over a longer term. This incentive scheme is one of the many tactics to encourage firm’s stability and longevity while also staying pragmatic for the immediate future. While the overall tactics like the one above is simple, it is directly linked to the core strategy of the firm.

In the last few years of deep global recession, we have seen the pitfalls of greed and short term objective driven behaviours wreaking havoc in the financial sectors. Consequently it also affected the world economies at large. The short term objective driven behaviour of the firms matched with the greed and lure of the customers in the US housing loan markets resulting only into a very transient benefit for both. The party ended almost as soon as it begun. Since then, it has brought enormous suffering even to societies who were very remotely connected to the problem. There is always a big learning from each of such debacles in human history. The faster an individual or a firm learns from such terrible events, the better is the survival via adaptation. Evidently, there may be no substitute to long term customer relationships. Firms should be able to continuously adapt and innovate incentivisation in order to nurture an appropriate behaviour and consequently, customer driven core values for its employees. In all, leadership, strategy, shared vision and intelligent incentivisation tactics always would remain as key differentiating factors for a successful firm in any highly competitive market.

-- The writer is a banker based in UAE. Views expressed are his own.