How Does an Organization’s Compensation System Affect Ethical Sales Behavior and Customer Lifetime Value?

[We’re pleased to welcome Pankaj M. Madhani of ICFAI Business School (IBS) in India. Dr. Madhani is the author of “Compensation, Ethical Sales Behavior and Customer Lifetime Value” which appeared in the most recent issue of Compensation and Benefits Review.]

An ethical climate of the organization can be reinforced by implementing an CBR_42_1_72ppiRGB_powerpointeffective sales compensation plan. A salesperson’s ethical behavior plays a critical role in forming, maintaining and sustaining long-term customer relationships. Ethical sales behavior increases customer satisfaction, trust, loyalty and eventually enhances customer lifetime value (CLV). The CLV approach quantifies the potential monetary value of customers over their lifetime and builds linkages between ethical sales behavior and the financial performance of the organization. An ethical sales practice is one of the drivers influencing and enhancing CLV. The purpose of effective sales compensation is to recognize the role fulfilled by salespeople to maximize CLV as a result of ethical sales behavior.

The frameworks developed in this research illustrates how the compensation practices of an organization influence ethical sales efforts and also shows that what a salesperson does influences customer acquisition, customer retention and customer expansion in the form of cross-selling/up-selling, which in turn affects customers’ CLV or their profitability to the organization. This research also provides a methodology for CLV calculation as well as its key dimensions. The research identifies various drivers of unethical sales behavior, looks at the optimal design for the sales compensation plan and develops various models for enhancing ethical behavior of salespeople and ultimately CLV.

You can read “Compensation, Ethical Sales Behavior and Customer Lifetime Value” for free by clicking here. Want to know about all the latest research from Compensation and Benefits Review? Click here to sign up for e-alerts!

857da02a30227a2416653fe028aa8c16Pankaj M. Madhani earned bachelor’s degrees in chemical engineering and law, a master’s degree in business administration from Northern Illinois University, a master’s degree in computer science from Illinois Institute of Technology in Chicago, and a PhD in strategic management from CEPT University. He has more than 27 years of corporate and academic experience in India and the United States. During his tenure in the corporate sector, he was recognized with the Outstanding Young Managers Award. He is now working as an associate professor at ICFAI Business School (IBS) where he received the Best Teacher Award from the IBS Alumni Federation. He is also the recipient of the Best Mentor Award. His main research interests include sales force compensation, corporate governance, and business strategy.

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