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THE ACCOUNTING REVIEW American Accounting Association
Vol. 92, No. 3 DOI: 10.2308/accr-51554

May 2017
pp. 31–56
The Impact of Forward-Looking Metrics on Employee

Decision-Making: The Case of Customer Lifetime Value
Pablo Casas-Arce
Arizona State University
F. Asis Martı́nez-Jerez
University of Notre Dame
V. G. Narayanan
Harvard University
ABSTRACT: This paper analyzes the effects of forward-looking metrics on employee decision-making. We use data
from a bank that started providing branch managers with the customer lifetime value (CLV)—an estimate of the
future value of the customer relationship—of mortgage applicants. The data allow us to gauge the effects of enriching
the employees’ information set in an environment where explicit incentives and decision rights remained unchanged.
On average, customer value increased 5 percent after the metric’s introduction. The metric’s availability resulted in a
significant shift in attention toward more profitable client segments and some improvement in cross-selling. However,
the use of CLV did not negatively impact pricing or default risk, as the literature predicts. Finally, branch managers
with shorter tenure displayed a stronger response, consistent with information substituting for experience.
Keywords: forward-looking metrics; customer lifetime value (CLV); employee decision-making; cross-selling;
decision aids.
I. INTRODUCTION
T
he goal of a management accounting system is to provide information to facilitate managerial decision-making and
control. The accounting literature has extensively studied the control aspect of accounting information. For example,
prior research in contracting has focused on how the properties of performance measures influence their use in
managerial contracts. However, surprisingly little research focuses on how managers use new accounting information to
improve their effort choices when there is no change to their incentive contracts. In this paper, we analyze whether the
provision of a new forward-looking performance metric—customer lifetime value (CLV)—can influence managerial behavior
in a manner consistent with long-term value creation. Importantly, we study a situation where the introduction of the new
metric is not accompanied by any change in explicit incentives or decision rights.
It is well known that the use of profits as a metric of employee performance may induce a short-term orientation in
employee decision-making (Prendergast 1999). To overcome this orientation, firms use various approaches, such as stock-
based compensation or subjective performance evaluation systems. Although these alternate systems can improve employee
effort allocations, they have limitations, such as uncontrollability or arbitrariness (Ittner, Larcker, and Rajan 1997; Ittner,
We thank Dehesilla de Garcinarro, Bob Gibbons, Ranjani Krishnan, Ken Merchant, Krishna Palepu, Eddie Riedl, Ana Vázquez, José M. Vidal-Sanz, and
seminar participants at the 2011 AAA Annual Meeting, Arizona State University, Baruch College–CUNY, Boston University, 2013 Cherry Blossom
Conference at The George Washington University, Drexel University, 2011 European Association for Research in Industrial Economics (EARIE) Annual
Conference, 2012 Global Management Accounting Research Symposium (GMARS), Harvard Accounting and Management Brown Bag, 2011 Harvard
University IMO Conference, IESE Business School, 2010 Jornadas de Economı́a Industrial (JEI) Madrid, London School of Economics, McGill
University, 2011 Management Accounting Section Meeting, 2014 Miami International Accounting Conference, Southern Methodist University, Stanford
University, Universidad Autónoma de Barcelona, Universidad Carlos III, Universitat Pompeu Fabra, Université Paris Dauphine, University of Maryland,
University of Notre Dame, and University of Wisconsin–Madison for helpful comments. We are grateful to Eddy Cardinaels (editor) and two anonymous
referees for their constructive feedback. All errors are our own.
Editor’s note: Accepted by Eddy Cardinaels.
Submitted: March 2014
Accepted: June 2016
Published Online: August 2016
31
32 Casas-Arce, Martı́nez-Jerez, and Narayanan
Larcker, and Meyer 2003). Another way to overcome short-term bias is to use nonfinancial performance metrics, such as
customer satisfaction or forward-looking measures, that summarize the financial impact of a decision over a longer horizon,
such as customer lifetime value (CLV)—an estimate of the future value of the customer relationship. Research in the area of
forward-looking measures has predominantly focused on when and how these measures should be included in managerial
incentive contracts (Feltham and Xie 1994; Prendergast 1999; Moers 2006). The question of whether forward-looking metrics
can impact employee decision-making and improve future profits, even when they are not explicitly included in incentive
contracts, has not been explored.
We build an analytical model that predicts that CLV will improve revenue performance and contribute to a more profitable
product mix. The model further predicts that these changes will be more pronounced for novice employees, who have more
limited information than seasoned employees. We test these predictions using field and archival data from a mid-sized southern
European bank that had recently introduced a mortgage simulator as a decision aid for branch managers. The mortgage
simulator helped managers visualize the CLV of a mortgage applicant, and enabled managers to better gauge the trade-offs
between the value derived from the mortgage and the value of simultaneous and potential future sales of banking products.
Results indicate that following the introduction of CLV, the ex post realized value of the customers purchasing a mortgage
increased by 5 percent. This increase in value creation was mainly achieved via an increase in the share of mortgage sales in
attractive customer segments. Results also indicate an increase in cross-selling (the number of additional products sold with the
mortgage) of 4 percent—or just over one more product for every four customers buying a mortgage. Additionally, and contrary
to theoretical predictions (Klemperer 1987), we found that managers neither gave excessive price concessions to more
attractive customers nor relaxed their credit risk considerations once CLV became available. Finally, and consistent with CLV
acting as a substitute for experience, results show that the impact of this change in the information set was more noticeable in
the decisions of branch managers with shorter tenure.
We contribute to the accounting literature in the following ways. First, we show that forward-looking metrics can improve
decision-making, even without a change in the explicit incentive compensation system. Research in accounting has primarily
studied the usefulness of a performance metric based on its ability to improve incentive contracting. The use of the performance
metric to help the employee determine how best to allocate effort to improve decision-making (the planning function, or
attention-getting and problem-solving in Simon, Kozmetsky, Guetzkow, and Tyndall’s [1954] terminology) has been largely
ignored (Labro 2015; Shields 2015). Aside from scant experimental evidence (e.g., Fudge and Lodish 1977), most of the
research in this area is affected by the impossibility of separating the impact of changes in the information set from the effect of
simultaneous modifications in incentives. We contribute to this literature by documenting that changes in the information set
alone—without adjustments to decision rights or the incentive system—may change the behavior of decentralized decision-
makers.
Second, we contribute to the decision aids literature by showing how information processing varies with experience.
Consistent with the notion that formal information systems act as substitutes for experience, giving less experienced managers
access to knowledge that they would otherwise only acquire over time, we find that novice managers underperform seasoned
ones, but they catch up to their experienced peers in response to CLV availability.
Third, we introduce evidence about an important performance metric—CLV. In the marketing literature, CLV is linked to
the idea of the firm as a portfolio of customers (Gupta, Lehmann, and Stuart 2004). As a performance metric, CLV enables
firms to concentrate on acquiring customers that create more value or on increasing the value of existing customers through
loyalty or cross-selling (Blattberg and Deighton 1996). Most of the literature has focused on models to better estimate CLV
(Villanueva and Hanssens 2007), its link to the firm’s financial value (Gupta et al. 2004), or the relationship between
nonfinancial performance and the sustainability of customer relations (Ittner and Larcker 1998). However, there is very little
research on how managers use CLV in decision-making; a rare example is Ryals’ (2005) qualitative study. We complement this
literature by analyzing how CLV affects the sales decisions of customer-facing employees.
Our paper also contributes to the information economics literature on organization design by studying the role of centrally
provided information in coordinating decentralized decision-making. The rationale for decentralizing decision rights is to
enable local decision-makers to incorporate information that is available to them, but not to centralized units (Hayek 1945).
Some of this information is ‘‘soft’’ information, i.e., information acquired through customer interactions that is difficult to verify
and communicate. The information economics literature has examined how to ‘‘harden’’ this information so it can be transferred
to and used by other agents (Stein 2002; Liberti and Mian 2009; Campbell, Erkens, and Loumioti 2014). In contrast, our
research focuses on how the firm may help the local decision-maker use the hard information she captures. CLV increases the
value of local information for the local decision-maker by integrating the collective sales experience of decentralized agents. In
a sense, it processes the customer information captured by the local agent and helps her develop more attractive customer
relationships. In this way, CLV may enable the decentralization of decisions and increase the productivity of the firm
(Brynjolfsson and Hitt 2000; Bresnahan, Brynjolfsson, and Hitt 2002; Cremer, Garicano, and Prat 2007). In our site, we
The Accounting Review

Volume 92, Number 3, 2017
The Impact of Forward-Looking Metrics on Employee Decision-Making: The Case of Customer Lifetime Value 33
observe that branch managers with access to CLV make decisions that are more consistent with the intended bank strategy
relative to those who do not have access to this tool.
Finally, our paper contributes to the literature in organizational economics, where some researchers caution that, in
competitive environments, the promise of a customer’s future value that CLV represents may lead to overinvestment in
customer acquisition and, thus, to value destruction (Villanueva, Bhardwaj, Balasubramanian, and Chen 2007). Our paper
shows that, contrary to theoretical predictions, employees need not destroy firm value by trying to please customers with a
‘‘race to the bottom’’ in pricing when they are informed of the lifetime value implications of their decisions.
II. INSTITUTIONAL BACKGROUND
The Bank and the Mortgage Market

Our study focuses on a mid-sized commercial bank based in a southern European country where the banking sector is
relatively concentrated (the five largest banks accounted for 45 percent of the total lending market during our period of study).
The national economy where the bank operates grew significantly during the 1990s and early 2000s, leading to higher home
ownership rates. Mortgages became progressively more important for banks’ lending portfolios, increasing from 12.4 percent
of total lending in 1970 to 50 percent by 2002. One reason why financial institutions focused on mortgages was their perceived
value as a loyalty-building product, as prepayment transactions in this market were rare and refinancing was almost
nonexistent. In the early 2000s, most of the mortgages sold in this market had extended terms (over 20 years) and adjustable
interest rates.
In 2002, our bank had over 300 branches. The typical branch was located in an urban area and had four employees (a
branch manager, two account managers, and a teller). The bank held total assets of more than €22 billion and total customer
funds of nearly €19 billion. It was known in the industry for its highly educated workforce (over 60 percent college graduates)
and sophisticated technology. Employee turnover, at 5 percent, was the lowest in the industry.
Incentive Compensation
Branch managers’ compensation included both a fixed and a variable component. The variable component, typically 20–
25 percent of base salary, was relatively high for the banking industry at the time. Variable compensation was calculated mostly
based on the financial performance of the branch; a minor proportion (about 25 percent) was linked to nonfinancial measures
such as customer satisfaction and managerial ability. Financial performance was measured by the branch’s residual income, or
the net income less a capital charge.1
Overall, in the words of the CEO, the bank’s compensation system was designed ‘‘to encourage branch managers to treat
the branch as their entrepreneurial venture.’’ The branch manager was responsible for value creation and enjoyed a high level of
discretion with regard to hiring decisions, customer credit approval, and product pricing. As one branch manager recalled, in
spite of the risk-adjusted suggested rate that the transactional system automatically provided, he could even decide to sell a
mortgage at a loss. At the branch, only the branch manager commercialized and approved mortgages.
The bank’s central office was responsible for providing managers with the tools to achieve their goals. The mortgage
simulator was one such tool.
The Mortgage Simulator

In April 2002, the bank introduced an Excel-based mortgage simulator for branch managers to use at the moment of sale to
estimate the prospective borrower’s CLV.2 The head of the retail network expressed the reasons behind this initiative: ‘‘We
wanted to put branch managers on a level playing field with the customers. I was convinced that the customers with the best
negotiating skills got the best prices, regardless of their attractiveness to the bank. The simulator enabled branch managers to
confront the trade-offs when they made an offer.’’
The simulator generated a suggested interest rate, along with a list of products for cross-selling based on the customer’s
segment and past behavior. It also analyzed the potential impact of mortgage characteristics, price adjustments, and additional
1
The structure of the variable compensation was the same for all branch managers. The key performance indicators included in the compensation
contract, as well as their weights in the bonus formula, were also common to all branch managers. The compensation system did not change during the
period of the study.
2
The simulator was installed in the branches overnight, and a memo was sent to branch managers with instructions for its use (no in-person training of
branch managers was required). Although managers accessed the mortgage simulator and the transactional system from the same computer, the two
applications were not fully integrated. As one manager recalled that ‘‘you had to use the simulator before the transactional system, but you could sell a
mortgage without using the output of the simulator.’’

TABLE 1
The Mortgage Simulator’s CLV Model
Product Value Calculation Comments
Mortgage NPV (financial margin þ fees charged to the Prepayment risk estimated to decline over the life
customer closing costs administrative costs of the mortgage.
bad debt expense; K-equity mortgage
business).
Homeowners’ insurance f(value of the house; expected life of the mortgage)
Life insurance f(value of the mortgage; age of the customer). Increases with age until the effect of shorter
remaining life expectancy dominates in older
customers.
Checking account income level age factor employment factor Higher-income clients and older clients keep larger
administrative costs. balances.
Self-employed clients are less valuable because
their income level is less certain.
Administrative costs are estimated for the average
customer per segment and fixed costs per
account.
Payroll account income level age factor administrative costs. Higher value than the employee checking account
because automatic payroll deposit leads to higher
balances and higher loyalty.
Credit card f(income level; risk level; gold/regular). Gold card generates twice the value of the regular
card, but the client must fulfill the income
requirements.
Pension funds f(personal income tax regulations; age). Value decreases with age.
Certificate of deposit f(income level; age). The use of the product increases with age. Older
customers are more loyal to the bank, but also
have a shorter time horizon.
Its use decreases with the financial sophistication of
the consumer, for which a good proxy is income
level.
Investment fund f(income level; age; family status). It is assumed that the customer will invest most of
his/her disposable income after consumption in
financial instruments.
Brokerage services NPV of brokerage fees. Fees are f(income level; Customers who own a brokerage account will own
age; family status). some investment funds.
The mortgage simulator generates a suggestion of the appropriate mortgage price (spread over the Euribor rate), a checklist of products for cross-selling,
and estimates of the customer’s lifetime value. The CLV is calculated by adding the expected value of the mortgage and the expected value of other
products the customer may buy. The estimated future volume of consumption of other products is a function of the customer segment and the products
held at the time the mortgage is signed. The horizon of these calculations is five years (despite the fact that actual churn is below 10 percent). Below is a
list of the different products considered in the estimation of CLV and a basic description of the calculations performed to estimate their contribution to
customer value.
product purchases on the customer’s estimated lifetime value. Thus, CLV was not the average value for the customer’s
segment—a metric that retail banks commonly use to estimate customer attractiveness—but an individualized estimate that
incorporated customer characteristics and actual purchase behavior (see Table 1) (Hogan et al. 2002). The bank did not store
data on simulations performed, or whether the output of the simulator was used in a specific transaction. Information on
accepted mortgage offers was observable only in the transactional system.
The simulator assisted in value creation in two important ways. First, it helped improve the estimation of customer value
by improving the algorithms and the inputs used to compute it. Before CLV provision, managers likely had some expectations
about existing customers’ value and potential products to cross-sell based on personal heuristics and subjective judgment. The
simulator provided a calibration of CLV and a systematic analytical tool that made inferences based on the collective
experience of branch managers at the bank. This method was superior to using idiosyncratic and selective individual
information, which was potentially subject to biases, such as availability, base rate fallacy, anchoring, etc. The simulator
identified the segment affiliation of the new customers, information that was previously unavailable. Furthermore, it increased

the accuracy of the segment information for existing customers by using all the information captured at the time of the
mortgage sale (e.g., income) to update the segment. One branch manager explained: ‘‘Cost accounting gave us a good idea of a
customer’s value, but we could not see it until the end of the month. The simulator gave us a value assessment instantaneously,
at the time of the mortgage sale.’’
Second, the simulator allowed managers to understand the value implications of focusing their efforts on different
segments, i.e., the problem-solving value of accounting (Simon et al. 1954). Before CLV provision, managers based their
commercial efforts, product offerings, and price adjustments on their subjective assessment of the impact that these actions
would have on long-term profitability. The simulator helped branch managers make consistent informed decisions. Finally,
CLV increased the attention of branch managers on the customer segment, consistent with the attention-getting value of
accounting (Simon et al. 1954).
Nonetheless, many aspects of the mortgage sale still relied on the manager’s judgment. For instance, branches ‘‘captured
many clients through word of mouth, something that the simulator did not factor in,’’ as well as ‘‘the simulator suggested
questions to ask but did not tell [a manager] how much more likely a customer would be to make a purchase if [she] gave him a
certain price concession.’’ Branch managers maintained the freedom to set the interest rate independent of the simulator’s
suggestion and to tailor the list of cross-selling products; they ‘‘had full pricing discretion, but the simulator gave [them] a
baseline reference.’’
III. MOTIVATION OF THE EMPIRICAL ANALYSIS

Accounting information has three distinct roles (Simon et al. 1954): attention-getting, problem-solving, and scorekeeping.
CLV information at the bank we study serves primarily the first two roles. Managers selling a mortgage had to decide which
customers merited more attention, how much effort (time) should be expended to sell additional products, and how large a
discount was justified to gain a mortgage sale. This section develops a model to gain some intuition about CLV information as a
tool for attention-getting and problem-solving.3 The model allows us to derive hypotheses that we test in the empirical section.
We also address the possibility that CLV information had an indirect effect on scorekeeping. Appendix A provides formal
proofs of the hypotheses.
A Simple Model of the Use of Customer Information

Consider a branch manager (decision-maker: DM) who must choose how much effort to exert when serving a customer.
We denote by am the effort toward the mortgage sale, which has a cost of c(am). We omit agency problems by assuming that the
manager captures the benefits of his or her actions (later, we discuss how incentives
n would
o alter our hypotheses). We let the
expected value obtained from the customer be V(am, h) ¼ p(am)v(h), where h 2 h; h is the type of customer that the seller

faces, p(am) represents the probability of selling the mortgage, which we assume is increasing in am, and v measures the value
4
obtained when selling the mortgage and acquiring the customer. h captures the fact that some customers are more likely to be
loyal to the bank or are more open to being cross-sold and, therefore, can potentially generate a higher CLV. The higher
proclivity to cross-buying reflects a customer’s wish to consolidate her finances in one bank and/or her potential for buying
more banking products. Because high-value customers purchase bigger, more profitable mortgages and acquire more products,
putting effort into attracting such customers yields higher expected values. We further assume that the DM’s problem is
concave and yields a unique solution.
We assume that the DM cannot observe the realization of h on his own (perhaps because it is costly to acquire the
information). He believes that h ¼ h with probability l, and h ¼ h with probability 1 l. As one manager put it, ‘‘[B]efore the

simulator you were a bit blindfolded, you relied on intuition.’’ However, when the simulator becomes available, the DM
perfectly observes the type of customer h. We denote by I the information available to the DM at the time of the mortgage sale,
and t is the time period, with t ¼ 0 prior to the simulator and t ¼ 1 when the CLV information becomes available. That is, I ¼ [
at t ¼ 0 and I ¼ h at t ¼ 1.
3
Our characterization of the branch manager’s decision is consistent with the literature on salesforce compensation that uses an agency theoretical
perspective in which the firm chooses a compensation plan to affect the salesperson’s behavior. This literature formulates the salesperson problem as
the optimal allocation of her or his selling time when the sales of a product depend on that allocation and on the uncertainty of the sales environment
(Basu, Lal, Srinivasan, and Staelin 1985). In our model, we take the compensation plan as a given and focus on the salesperson’s decision, assuming
that the manager captures the benefits of his or her actions.
4
The model can accommodate more general functional forms for V(am, h) , for instance, by allowing the probability of a mortgage sale to depend on h.
We only require complementarity between am and h, so that ]Vðam ; hÞ=]am . ]Vðam ; hÞ=]am —that is, the marginal return to effort is higher for h than
for h customers. This assumption is immediately satisfied in the simpler specification we use.

The objective of the DM, therefore, is to solve:

max E½Vðam ; hÞj I cðam Þ:
am
Because of the complementarity between am and h, we can show that the optimal effort atm ðIÞ satisfies a1m ðhÞ . a0m . a1m ðhÞ.

That is, effort is highest when the DM knows that the customer is of type h. When the DM is uncertain about the type, so that I
¼ [, he expects an average customer and, consequently, exerts average effort. Effort is lowest when he knows the customer to
be of a low-value type. Field interviews confirmed this intuition. As one manager explained: ‘‘We did not look down on any
client, but if the customer was a C [low value] and we knew there was no possibility of getting more business from him . . . we
might give him good service but not spend the whole morning with him.’’ Another manager noted: ‘‘The simulator helped us
make better-tailored offers and identify which customers to make offers to in the first place.’’ Thus, as a result of this effort
reallocation, when the DM observes h, the probability of selling a mortgage increases for profitable client segments and
decreases for those less profitable.
H1: The proportion of mortgages sold to the most attractive segments will increase after CLV is provided to branch
managers.
The previous paragraphs suggest that CLV helps branch managers by building a decision rule based on the statistical
inference made from past mortgage sales that is superior to the decision heuristics branch managers develop from their
experience (Dawes, Faust, and Meehl 1989; Grove and Meehl 1996). However, the value of the new decision rule is not
homogeneous for all DMs. It is reasonable to expect that, over time, branch managers develop knowledge from past experience
that leads to better decision heuristics (Libby 1995; Libby and Luft 1993). Novice managers often lack the procedural
knowledge of more experienced employees and, therefore, will profit more from a system that facilitates the use of expert
knowledge (Bonner and Walker 1994), such as the mapping of customer information to precise measures of lifetime value. As
a decision aid, CLV would hence be more valuable for novice managers, because it may substitute for the learning that occurs
through experience.5
To capture how the effects of CLV information differ across managers in a parsimonious way, we consider two types of
employees: seasoned employees, who observe the realization of h with probability q prior to CLV provision, and novice
employees, who do not. Therefore, q captures the effect of experience. Before CLV information is provided, novice employees
exert average effort with all types of customers, a0m . On the other hand, when facing a high-type customer, seasoned employees
exert high effort with probability q (when they observe h), and average effort (as novice employees) with probability 1 q. On
average, they put in more effort than novice employees when serving those customers, as qa1m ðhÞ þ ð1 qÞa0m . a0m . But the
opposite occurs when faced with a low-type customer, as qa1m ðhÞ þ ð1 qÞa0m , a0m . When CLV information becomes

available, both novice and seasoned employees start perfectly tailoring their effort to the type of customer they face, a1m ðhÞ, and
hence all achieve the same level of performance. As a result, our second hypothesis states:
H2: Shorter-tenure branch managers will, on average, perform worse than longer-tenure managers before the simulator.
After the simulator, they will respond more strongly to CLV information and converge with the value-creation levels
of their more experienced colleagues.
Our predictions are based on the assumption that branch managers respond to the new information content of the simulator
by using it to maximize branch performance, on which their variable compensation is based. Alternatively, CLV estimations
may also signal what kind of performance will be rewarded by top management, either through the bonus or the probability of
promotion. If managers infer a change in the bonus plan,6 then all branch managers—regardless of their tenure—should change
their behavior in a similar manner. If the simulator changes implicit incentives by signaling a change in the promotion criteria,
then junior employees (who have stronger career concerns) should respond more strongly to the information provided
(Holmstrom 1999). However, they should also perform better before the simulator was introduced because they would be more
5
We can reach a similar prediction of seasoned managers displaying less change (improvement) in their decision-making if their confidence in the value
of their experience leads them to disregard CLV. Several behavioral studies have documented that the reliance on decision aids decreases with the level
of confidence of the decision-maker (Arkes, Dawes, and Christensen 1986; Whitecotton 1996). If the higher confidence of more experienced managers
does reflect higher knowledge or skill, then the effects would be consistent with our H2. However, if the higher confidence of more experienced
decision-makers does not reflect actual skill (in fact, Arkes et al. [1986] and Ashton [1990] find that more confident subjects perform worse than less
confident ones), then we would expect to see seasoned managers show no performance advantage over novice managers prior to CLV provision and
perform worse than novice managers after CLV. The prediction would be different if branch managers regard the CLV system as a tool for
headquarters to appropriate their investment in building relationships with customers. In that case, the provision of CLV reduces the incentive for
relationship-building as managers cannot appropriate the rents generated. As a result, branch managers’ performance would deteriorate after CLV. The
deterioration would be more pronounced for seasoned managers who are more skilled in building customer relationships.
6
This is unlikely in our setting, though, as bonuses are linked to branch profitability rather than subjective factors.

motivated in the first place. Testing H2 will provide evidence on the relevance of the information content of CLV, relative to
this alternative theory.
As noted above, one of the sources of higher customer value is the likelihood of being cross-sold. To look at the effects on
cross-selling in more detail, we extend the model by allowing effort both on mortgage sale, am, and cross-selling, axs. The effort
toward cross-selling represents the additional effort the DM exerts to create value in the customer relationship through
additional sales. We denote the value obtained from the customer as V(am, axs, h) ¼ p(am)v(axs, h). We assume the DM chooses
both am and axs simultaneously, but the results would be unchanged if cross-selling effort took place after the sale of the
mortgage.
You can think of the cross-selling action as the choice of what products to offer the client. The simulator helped managers
increase cross-selling at all levels by suggesting products the customers might like. When the manager has better information
about the customers’ type, and the products they are likely to buy, he can tailor the offer to their specific preferences, increasing
customer profitability. This is consistent with managers’ praise for the value of the mortgage simulator: ‘‘The simulator gave
you clues. As a function of income and of the questions that it suggested, it helped you design the financial solution the
customer needed at any given time with the products the bank offered.’’ Thus, the following hypothesis:
H3: After CLV is provided to branch managers, the average number of products sold along with a mortgage will increase
for all customers.
The hypotheses we have developed so far have a counterpart in terms of the value created by the branch managers.
Measuring value creation provides an additional consistency test and helps us assess the relative importance of the effects
discussed earlier. Moreover, in the spirit of a variance analysis, we can decompose the change in average value after the
simulator into the effects of the change in segment composition of the mortgage portfolio (the between-segment effect from H1)
and the increase in value for the average customer holding the segment composition constant (the within-segment effect from
H3).
H4: After CLV is provided to branch managers, the average value per customer will increase.
Some scholars have used theoretical models to argue that salespeople receiving CLV may destroy firm value by providing
excessive discounts to clients they hope will be valuable in the future (Klemperer 1987; Villanueva et al. 2007). Our model can
be extended to accommodate a branch manager decision space ampler than discretion of effort on customer service, including
price discretion or tolerance for credit risk. Our model predictions with respect to price (or, equivalently, to credit risk) are
ambiguous, as a decrease in price would increase the probability of selling the mortgage, but would also decrease CLV.
However, our model predicts that, regardless of its effect on mortgage prices or customer credit risk, CLV introduction will not
lead to a decrease in customer value. Thus, based on the insights of our model, and in contrast to the predictions of previous
work, we include the following additional hypotheses:
H5: After CLV is provided to branch managers, the change in the average price of a mortgage sold will not decrease the
average value per customer.
H6: After CLV is provided to branch managers, the change in the average default risk of a mortgage sold will not decrease
the average value per customer.
In the next sections, we analyze whether the behavior of branch managers in our site changed in the aforementioned ways
post-CLV provision.
IV. SAMPLE AND DATA DESCRIPTION

To assess the effects of providing branch managers with CLV, we obtained data on the bank’s transactions for a two-year
window around the introduction of the mortgage simulator. The data contain information on all customers who purchased a
mortgage between April 2001 and April 2003.7 The window is close enough to the time of implementation to minimize the
impact of other changes in the economy, industry, or the bank itself; it is long enough to ensure that branch managers had
enough time to internalize the tool in their decision-making.
Because the bank did not exclude any branches from the simulator as a control, a major challenge of the empirical analysis
is to disentangle the changes caused by the simulator from other sources of change at this bank or in the market as a whole. To
partially address this concern, we collected data on the bank’s internet banking clients who purchased a mortgage and on the set
7
We excluded the subrogation market, in which mortgages were awarded to the developer of a set of units and automatically transmitted to the buyer
without branch input.

of clients who bought personal loans through the branches during this period. Neither of these sets constitutes a perfect control,
but each has its own advantages.
Internet mortgages make a good control group for most of our analyses. Internet customers received automatic offers from
the bank according to pre-established algorithms and decided to accept or decline the offer based on its perceived attractiveness.
Thus, any change in the bank’s strategy, its product offering, or a shift in the competitive environment that altered the relative
attractiveness of the bank’s mortgage offerings should be felt by this group of customers. In contrast with the branch channel,
the internet channel was not affected by changes in the sales effort of the customer-facing employees and was not included in
CLV implementation.
To test H3 (cross-selling), internet mortgages are a less powerful control. This is because during the early 2000s, customers
in this market were beginning to use the internet channel as the main (rather than complementary) channel of the banking
relationship. The resulting upward trend in the average number of products sold to internet customers is fundamentally different
from the normal trend of cross-selling to branch customers. In contrast, the set of customers who purchased personal loans
presents a relatively accurate picture of how the market landscape and the bank’s strategy impacted the average customer’s
consumption of financial products during the period of interest. Thus, personal loan customers could be especially useful when
testing H3. Personal loans are less relevant than mortgages as customer acquisition tools, and they comprise very different
lending products, making them potentially less informative as controls for the remaining hypotheses. However, we include both
control sets in all tests for robustness.
Table 2, Panel A shows the descriptive statistics for brick-and-mortar and internet clients who purchased a mortgage at
some point during the observation period, whereas Table 2, Panel B compares branch customers who purchased a mortgage to
personal loan clients. The socio-demographic characteristics of the branch managers can be found in Table 2, Panel C. Table 2,
Panel A shows that mortgages of internet customers pre-CLV have a similar size, around €95,000, to those of branch
customers, although the latter increase post-CLV.8 The internet mortgages generally have higher value-to-loan ratios than
branch mortgages (159 percent versus 151 percent), consistent with the bank requiring more collateral to mitigate the
possibility of fraud. In addition, internet mortgages have lower spreads (43 versus 53 basis points), reflecting the lower cost of
serving these customers. The table also shows that internet and branch mortgage customers have similar potential annual
profitability (slightly higher for branch customers post-CLV).9 Branch customers, however, show deeper relationships with the
bank. On average, they have been with the bank for longer than internet customers (17 versus 6.4 months),10 hold more
products (6.7 versus 5.9), have a larger balance of deposits (€6,505 versus €3,255), and a slightly larger loan (€106K versus
€96K), although the latter is mainly driven by the mortgage amount. In contrast, as shown in Table 2, Panel B, personal loan
customers have lower potential profitability than branch mortgage customers (€756 versus €970), but have longer histories with
the bank (51 versus 17 months) and hold more products (8.0 versus 6.7), although with generally lower balances.
These summary statistics suggest that in our analysis, the relevant comparison should be not so much the levels, but the
changes in the levels of attributes between the branch mortgages and the control samples pre- and post-CLV provision.
To complement the main sample data, we obtained from the bank’s risk management department the registry of mortgage
approval decisions. This set provides valuable, although often incomplete, information on the mortgage applications received
by the bank, the bank’s decision to approve or reject the application, and whether the approved application is finally accepted
by the customer and formalized in a mortgage contract. While the product data in this dataset are fairly complete, data
pertaining to the customer applying for the mortgage are less comprehensive. Detailed customer information is only available
for the subset of individuals who were already bank customers at the time of the application or who subsequently became
customers of the bank, even if they did not purchase the mortgage.
In order to provide additional controls, we also collected information on the mortgage market and the local economic
conditions in which the branches operated. The controls include the national average interest rates for mortgages, measures of
the size of the mortgage market (at the province level), and socioeconomic measures of the municipality, such as population,
unemployment rate, and banking intensity (see Appendix B for definitions and sources).
8
Table 2, Panel A shows a steep drop in mortgages sold through the internet channel (47 percent in number and 45 percent in euros). The drop in branch
mortgages was much smaller (16 and 5 percent, respectively). Those numbers may suggest a structural change in the mortgage market. However,
during the period of our study, the mortgage market grew 14.5 percent in number and 30 percent in euros (as per the sources in Appendix B). The
contrast between the market and the bank’s growth immediately raises the question of whether our bank was following a premeditated strategy of credit
rationing that favored more attractive segments. We dismissed this concern with a battery of tests using the risk management department described in
the next paragraphs. The tests are available from the authors upon request. The contrast between the internet and the branch mortgages’ growth may
also cast doubt on the effectiveness of the former to act as a control in our tests. To address this concern, we run different tests using multiple control
variables, and using personal loans as an alternative control sample.
9
The bank defined potential as the reasonable target profitability for a customer given her current product holdings and personal characteristics. Current
product holdings is the single most important determinant of potential.
10
This difference is mostly driven by the different composition of new and existing customers for internet and branch mortgages.

TABLE 2
Descriptive Statistics
Panel A: Branch and Internet Mortgages

Brick-and-Mortar Channel Internet Channel p-value Branch-Internet
p-value p-value
All Pre-CLV Post-CLV Pre-Post All Pre-CLV Post-CLV Pre-Post All Pre-CLV Post-CLV
Number of Clients 15,503 8,428 7,075 2,343 1,530 813
Average Mortgage Characteristics
Capital (€) 101,712 95,779 108,780 (0.000) 96,729 95,505 99,031 (0.041) (0.000) (0.082) (0.000)
Mortgage length 23.5 23.1 24.1 (0.000) 22.3 22.0 22.8 (0.001) (0.000) (0.000) (0.000)
(years)
Value to loan ratio 151.5 151.6 151.4 (0.852) 159.1 158.7 159.7 (0.565) (0.000) (0.000) (0.000)
Spread (%) 0.53 0.52 0.53 (0.031) 0.43 0.43 0.43 (0.460) (0.000) (0.000) (0.000)
Average Client Characteristics
Number of products 6.65 6.53 6.79 (0.000) 5.86 5.79 5.99 (0.002) (0.000) (0.000) (0.000)
Tenure at the bank 17.4 15.8 19.3 (0.000) 6.4 5.5 8.2 (0.000) (0.000) (0.000) (0.000)
(months)
Age 35.6 35.5 35.6 (0.284) 34.6 34.5 35.0 (0.099) (0.000) (0.000) (0.034)
Potential 970 926 999 (0.000) 962 947 974 (0.061) (0.450) (0.163) (0.050)
profitability (€)
Loans 105,860 99,439 112,906 (0.000) 96,181 94,481 99,002 (0.011) (0.000) (0.000) (0.000)
Deposits 6,506 5,723 7,439 (0.000) 3,255 2,725 4,251 (0.000) (0.000) (0.000) (0.000)
Branch Characteristics
Number of branches 351 337 329 — — — —
Number of 44.2 25.0 21.5 (0.049) — — — —
mortgages
Average mortgage 102,780 96,810 108,790 (0.000) — — — —
size (€)
This panel contains the basic descriptive statistics of the sample and the internet mortgages control group. The sample is formed with all the mortgages
sold between April 2001 and April 2003. Internet mortgages are all those sold through the internet channel in the same period. Both sets contain
mortgages sold before and after the provision of CLV information. The table presents the mean of several variables related to mortgage, client, and
branch characteristics.
Panel B: Branch Mortgages and Personal Loans

Brick-and-Mortar
Brick-and-Mortar Channel Mortgages Channel Personal Loans p-value Mortgages-Loansa
p-value p-value
Number of Clients 15,503 8,428 7,075 14,220 7,524 6,696
Average Mortgage/Loan Characteristics
Capital (€) 101,712 95,779 108,780 (0.000) 10,393 10,115 10,705 (0.000) NA NA NA
Mortgage length 23.5 23.1 24.1 (0.000) 4.2 4.3 4.1 (0.002) NA NA NA
(years)
Value to loan ratio 151.5 151.6 151.4 (0.852) — — — —
Spread (%) 0.53 0.52 0.53 (0.031) 0.77 0.62 0.94 (0.000) NA NA NA
Average Client Characteristics
Number of products 6.65 6.53 6.79 (0.000) 8.02 8.06 7.97 (0.029) (0.000) (0.000) (0.000)
Tenure at the bank 17.4 15.8 19.3 (0.000) 51.4 48.3 54.9 (0.000) (0.000) (0.000) (0.000)
(months)
Age 35.6 35.5 35.6 (0.284) 39.9 39.7 40.1 (0.016) (0.000) (0.000) (0.000)
Potential 970 926 999 (0.000) 756 742 766 (0.004) (0.000) (0.000) (0.000)
profitability (€)
(continued on next page)

TABLE 2 (continued)
Brick-and-Mortar
Brick-and-Mortar Channel Mortgages Channel Personal Loans p-value Mortgages-Loansa
p-value p-value
Loans 105,860 99,439 112,906 (0.000) 56,851 55,395 58,357 (0.001) (0.000) (0.000) (0.000)
Deposits 6,506 5,723 7,439 (0.000) 6,119 5,455 6,865 (0.000) (0.033) (0.274) (0.033)
Branch Characteristics
Number of branches 351 337 329 354 335 338
Number of 44.2 25.0 21.5 (0.049) 40.2 22.5 19.8 (0.033)
mortgages/loans
Average contract 102,780 96,810 108,790 (0.000) 10,224 10,000 10,555 (0.038)
size (€)
a
p-values for the differences in mortgage/loan characteristics are not meaningful because of the different nature of these credit products.
This panel contains the basic descriptive statistics of the sample and the personal loans control group. The sample is formed with all the mortgages sold
between April 2001 and April 2003. The personal loans control group is formed by a random sample of car and consumer financing loans sold through the
branches in the same period. Both sets contain contracts sold before and after the provision of CLV information. The table presents the mean of several
variables related to mortgage, loan, client, and branch characteristics.
Panel C: Branch Managers’ Characteristics

Standard
Mean Deviation
Number of Branch Managers 294
Age 41.03 6.41
Tenure (years) 4.87 3.34
Marital Status:
Married 86.7%
Single 4.7%
Separated 3.9%
Divorced 4.7%
Sex:
Male 83.5%
Female 16.5%
Highest Level of Education Achieved:
High school 35.2%
Vocational school 4.5%
Associate’s degree (3 yrs. college) 21.8%
Bachelor’s degree 32.7%
Post-graduate degree 5.9%
This panel contains the basic descriptive statistics of the branch managers at our research site. The group includes the branch managers that were in office
between April 2001 and April 2003.
V. RESULTS
Impact of CLV Availability on the Targeting of Customers for Mortgage Sales (H1; H2)
In this section, we analyze whether CLV influenced managers to focus their effort on customers with higher ex ante
potential value. The increase observed in the potential profitability of mortgage customers (Table 2, Panel A) supports this idea.
However, the bank’s calculation of potential profitability is heavily influenced by the products held (for example, a customer
with a larger mortgage has a higher potential profitability than an otherwise equal customer with a smaller mortgage or none at
all). Thus, it is impossible to tell whether the increase in potential profitability is caused by selling to customers with higher ex
ante attractiveness or by selling more profitable combinations of products to customers with similar ex ante attractiveness. An
ex ante measure of attractiveness is needed to test the targeting hypothesis.
Ideally, we would analyze the impact of CLV by studying all the simulations produced by managers. Unfortunately, the
bank’s system did not store the CLVs that managers viewed during the mortgage sale process as they input different scenarios

FIGURE 1
Average Customer Value per Segment Pre- and Post-CLV Availability (€)
This chart compares the value of customers who purchased a mortgage before and after the availability of CLV. The average customer values are
compared for each segment and for the set of all mortgage customers. The segments are listed in order of decreasing attractiveness from A to D. The value
of a customer (CLV) is the sum of the discounted monthly profitability calculated by the bank over the 48-month period starting the sixth month after the
sale of the mortgage. The discount rate used is 3 percent (inflation rate) because profitability calculations include adjustments for risk. Profitability
numbers are Winsorized at the top and bottom 1 percent.
(e.g., mortgage characteristics, products sold) or the CLV predicted at the negotiation’s outcome. A reasonable ex ante indicator
of CLV is the customer segment, with more attractive segments generating a higher CLV. The bank segments its customers as a
function of income, wealth, age, and other socio-demographic factors (e.g., occupation, family status) believed to influence the
consumption of financial products. At an aggregate level, it distinguishes four main segments. In ascending order of
attractiveness, these groups are D, C, B, and A. Figure 1 shows that the ex post realization of customer value is consistent with
this ranking of ex ante attractiveness. Because we do know the segment each customer belonged to at the time of the mortgage
sale, we use segment identification to perform the analyses in this section.
By using the simulator, branch managers obtain an instant assessment of the segment classification for new customers and
an updated assessment for existing ones. The main purpose of the simulator is to facilitate branch managers’ understanding of
the profit implications of mortgage characteristics, customers’ segment membership, and financial consumption behavior
(Banker, Potter, and Srinivasan 2000).
Per H1, we would expect the weight of more attractive segments in the distribution of mortgage sales to increase post-CLV
introduction. Table 3 compares the weight of each of the four main segments in the portfolios of mortgages sold pre- and post-
CLV introduction. In the mortgages sold to branch customers post-CLV, we see an increase in the share of customers in
Segment A (from 26 percent to 34 percent) and a decrease in customers in other segments (especially Segment C). The Chi-
square test clearly rejects the possibility that both sets of mortgages were extracted from the same population. This evidence is
consistent with CLV influencing branch managers’ commercial efforts to pursue more attractive customers. If the observed
results were due to a bank-wide strategy shift or a change in customers’ appreciation of the bank’s products, then we would
observe the same segment evolution in our control sets of internet mortgages and personal loans. However, the trend in the
mortgages sold by the branches contrasts with the relative stability in segment composition of the internet mortgages, where the
weight of Segment A drops by 2 percent post-CLV, and that of the personal loans, where the weight of Segment A increases by
only 3.9 percent. Thus, the proportion of branch mortgages sold to Segment A increases by a significant 10 percent relative to
the internet sample or 3.8 percent relative to the personal loans. This seems to rule out a shift in the overall composition of the
bank’s customers or a change in the bank’s strategy as the cause of the observed trends.11
11
CLV is potentially more useful for branch managers when they are dealing with new clients, as they presumably have better information about the
profitability of customers they already serve. Results (available from the authors upon request) suggest that this is indeed the case. However, the
difference in the CLV effect on the proportion of branch mortgages sold to Segment A is not large and it is statistically insignificant (11.1 percent for
new customers versus 7.5 percent for existing customers with a p-value of 0.453). Including a full set of interactions with a dummy for new client in the
regressions of Table 4, we find that the managers’ reallocation of attention to more profitable customers after CLV was consistently stronger for new
customers, although not statistically significant.

TABLE 3
Segment Composition of Mortgage and Personal Loan Customers
Chi-square Test of Homogeneity
Pre- versus
Segment Segment Segment Segment Post-CLV
A B C D Total (p-value)
All Branches 29.63% 50.05% 18.49% 1.83% 15,503
Pre-CLV 26.13% 50.81% 20.80% 2.27% 8,428 151.78
Post-CLV 33.81% 49.16% 15.73% 1.30% 7,075 (0.000)
Change Pre-Post 7.68% 1.65% 5.07% 0.97%
All Internet 32.52% 50.23% 16.35% 0.90% 2,343
Pre-CLV 33.33% 48.69% 16.73% 1.24% 1,530 9.25
Post-CLV 31.00% 53.14% 15.62% 0.25% 813 (0.026)
Change Pre-Post 2.33% 4.45% 1.11% 0.99%
All Personal Loans 23.12% 35.91% 29.78% 11.19% 14,220
Pre-CLV 21.29% 35.77% 31.31% 11.63% 7,524 38.6
Post-CLV 25.18% 36.07% 28.06% 10.69% 6,696 (0.000)
Change Pre-Post 3.89% 0.30% 3.25% 0.94%
Change Branches Change Internet 10.02% 6.09% 3.96% 0.03%
(p-value) (0.000) (0.008) (0.020) (0.939)
Change Branches Change Pnal Loans 3.79% 1.95% 1.82% 0.03%
(p-value) (0.000) (0.087) (0.065) (0.959)
This table analyzes the segment composition of customers who bought a mortgage or a personal loan between April 2001 and April 2003. We provide the
proportion of clients belonging to a given segment in the portfolio of mortgages and personal loans sold during that period. Segments are defined using
criteria that combine income, wealth, age, and other socio-demographic factors such as occupation and family status. The segments are listed in order of
decreasing attractiveness from A to D. The mortgage sample is divided between branch and internet customers. We also distinguish between mortgages
sold before and after CLV introduction. The table reports the change in the fraction of customers of each segment pre- and post-CLV. Change Difference
computes the difference between the before and after change for branch and internet customers and for branch mortgage and personal loan customers. The
table also provides the total number of mortgages and personal loans sold. The Chi-square test of homogeneity compares the distribution of segments pre-
and post-CLV provision (the null hypothesis being that pre- and post-CLV observations come from the same distribution).
In Table 4, we provide multivariate evidence corroborating this shift in segment composition in an ordered logit
framework. The first two models establish the baseline of the segment composition for the branch mortgages without any
control set. The odds that a given mortgage is sold to a customer in a higher segment (e.g., Segment A versus Segments B, C, or
D) increases by a significant 45 percent after the provision of CLV. If we include controls for the mortgage market and for
economic conditions, then the odds of the customer belonging to a higher segment are still significantly (13 percent) higher
after the provision of CLV. Models 3 to 8 compare the changes in the odds of the customer belonging to a given segment pre-
and post-CLV availability using internet mortgages as a control, while Models 9 to 14 use personal loan customers as the
control group. The interaction between CLV availability and branch mortgages shows that after CLV provision, the odds of a
branch mortgage buyer belonging to a higher segment increased 1.5 times more than the odds of internet mortgage buyers and
1.1 times more than the odds of personal loan buyers.12 Note that the odds ratios for the interaction variable are always
statistically significant except for Model 9, which has a p-value of 10.6 percent.
Models 6–8 and 12–14 in Table 4 show that the trend toward selling to more attractive segments after CLV provision is
more pronounced for novice branch managers (the experience dummy variable is defined based on tenure at the time of the
mortgage sale). Although we cannot rule out the presence of career concerns and implicit incentives, the odds ratio on the
seasoned branch manager indicator shows that prior to CLV provision, a seasoned manager was more likely to sell a mortgage
to a high-segment customer than a novice manager, and this disparity reduces after CLV is provided. This is consistent with
12
The interpretation of the odds ratio on the interaction variables is complex. To build the intuition, we use the numbers in Model 3. The logit coefficients
(which are the natural logarithms of the odds ratios reported in Table 5) for Post-CLV and Post-CLV Branch Mortgages are 0.013 and 0.388,
respectively. Suppose we have two equations measuring the likelihood of segment classification, one for internet mortgages and another for branch
mortgages. The coefficient on the Post-CLV indicator would be 0.013 for the internet mortgage equation and 0.375 (0.013 þ 0.388) for the branch
mortgage equation. These coefficients correspond to odds ratios of 0.987 and 1.455, respectively, and have a straightforward interpretation: the odds of
a given customer belonging to a higher segment increased 1.455 times (decreased 0.987 times) after CLV was provided. The odds ratio of the
interaction variable 1.474 reported in Column 3 of Table 4 is simply the ratio of these two odds ratios (1.455/0.987).

TABLE 4
Impact of CLV Information on the Segment Composition of Mortgage Customers: Ordered Logit
Panel A: Impact of CLV Information on Segment Composition

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7
Post-CLV 1.454*** 1.133*** 0.987 0.986 0.771 0.987 0.986

(0.044) (0.047) (0.078) (0.081) (0.072) (0.078) (0.081)
Branch Mortgages 0.712*** 3.560 3.851 0.713*** 0.420***

(0.038) (4.267) (4.596) (0.040) (0.029)
Post-CLV Branch Mortgages 1.474*** 1.448*** 1.433*** 1.559*** 1.552***
(0.125) (0.128) (0.127) (0.142) (0.147)
Seasoned Branch Manager 0.951 1.179***
(0.041) (0.053)
Post-CLV Seasoned Branch Manager 0.911 0.835***
(0.058) (0.054)
Mortgage Interest Rates 0.000***
(0.001)
Mortgage Market Size (Number) 1.000***
(0.000)
Mortgage Market Size (Euros) 1.000***
(0.000)
Banking Intensity 1.000
(0.001)
Population 1.102***
(0.013)
Unemployment Rate 0.848***
(0.014)
Time Trend 1.021***
(0.004)
Control set None None Internet mortgages Internet mortgages Internet mortgages Internet mortgages Internet mortgages
Region fixed effects No No No Yes Yes No Yes
Observations 15,503 15,474 17,846 17,846 17,846 16,790 16,790
Pseudo R2 0.004 0.029 0.004 0.037 0.038 0.005 0.038
The Impact of Forward-Looking Metrics on Employee Decision-Making: The Case of Customer Lifetime Value
43
TABLE 4 (continued)
44
Panel B: Impact of CLV Information on Segment Composition

Model 8 Model 9 Model 10 Model 11 Model 12 Model 13 Model 14
Post-CLV 0.779*** 1.072* 1.109*** 1.054 1.070* 1.110*** 1.058
(0.074) (0.042) (0.044) (0.066) (0.042) (0.044) (0.067)
Branch Mortgages 0.455*** 1.958*** 1.943*** 1.942*** 1.965*** 1.859*** 1.858***
(0.033) (0.059) (0.060) (0.060) (0.068) (0.066) (0.065)
Post-CLV Branch Mortgages 1.540*** 1.074 1.095** 1.097** 1.121** 1.148*** 1.151***
(0.146) (0.048) (0.049) (0.049) (0.060) (0.061) (0.062)
Seasoned Branch Manager 1.166*** 0.951 1.061 1.061
(0.052) (0.035) (0.040) (0.040)
Post-CLV Seasoned Branch Manager 0.834*** 0.932 0.897* 0.895**
(0.054) (0.052) (0.050) (0.050)
Mortgage Interest Rates 0.007** 0.000*** 0.006 0.006** 0.000*** 0.004
(0.015) (0.000) (0.031) (0.013) (0.000) (0.021)
Mortgage Market Size (Number) 1.000*** 1.000 1.000 1.000*** 1.000 1.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Mortgage Market Size (Euros) 1.000*** 1.000 1.000 1.000** 1.000 1.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Banking Intensity 1.003*** 1.003*** 1.003*** 1.003*** 1.003*** 1.003***
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Population 1.112*** 1.151*** 1.151*** 1.114*** 1.154*** 1.154***
(0.009) (0.012) (0.012) (0.009) (0.012) (0.012)
Unemployment Rate 0.932*** 0.922*** 0.922*** 0.933*** 0.921*** 0.921***
(0.010) (0.015) (0.015) (0.010) (0.016) (0.016)
Time Trend 1.020*** 1.008 1.007
(0.004) (0.008) (0.008)
Control set Internet mortgages Personal loans Personal loans Personal loans Personal loans Personal loans Personal loans
Region fixed effects Yes No Yes Yes No Yes Yes
Observations 16,790 29,667 29,667 29,667 28,625 28,625 28,625
Pseudo R2 0.038 0.033 0.043 0.043 0.032 0.042 0.042
***, **, * p , 0.01, p , 0.05, and p , 0.1, respectively.
This table shows the effects of providing CLV information on the segment composition of customers that buy a mortgage between April 2001 and April 2003. The dependent variable is the segment of
the customer, ordered from A to D. Post-CLV is a dummy taking a value of 1 for the months following the implementation of the CLV. Branch Mortgages is a dummy taking a value of 1 for branch
customers and 0 for internet customers. The interaction of Post-CLV and Branch Mortgages measures the effect of CLV. Seasoned Branch Manager is a dummy taking a value of 1 for branch managers
with tenure above the median and 0 otherwise, where tenure is measured at the time of the mortgage sale. The control variables Mortgage Interest Rates, Mortgage Market Size (Number), Mortgage
Market Size (Euros), Banking Intensity, Population, and Unemployment Rate are defined in Appendix B. We also include a time trend and region fixed effects in some of the regressions. Ordered logit
regressions are used in all models and odds ratios are reported. Robust standard errors are in parentheses.

Casas-Arce, Martı́nez-Jerez, and Narayanan

TABLE 5
Conversion of Mortgage Applications into Mortgage Loans
Mortgage Mortgage
Application Offer
Approved Accepted
Post-CLV 0.778 0.616
(0.150) (0.186)
Segment A 3.646*** 5.625***
(0.540) (1.084)
Segment B 4.102*** 5.500***
(0.600) (1.050)
Segment C 2.298*** 3.055***
(0.352) (0.605)
Segment A Post-CLV 1.150 1.136
(0.245) (0.354)
Segment B Post-CLV 0.944 1.503
(0.200) (0.467)
Segment C Post-CLV 0.946 1.539
(0.209) (0.493)
Constant 1.479*** 0.420***
(0.195) (0.077)
Observations 10,109 8,168
Pseudo R2 0.025 0.025
***, **, * p , 0.01, p , 0.05, and p , 0.1.
This table shows the impact of CLV provision on the odds of a mortgage application being converted into a mortgage loan as a function of the customer
segment of the applicant between April 2001 and April 2003. This table only includes mortgage applications through the branches. Using a logit
framework, the first column models the bank’s decision to approve or deny the mortgage application. The second column models the customer’s decision
to accept or reject the mortgage offered by the bank (i.e. only for mortgage applications approved by the bank). Post-CLV is a dummy taking a value of 1
for the months following CLV introduction. Segments A–C are dummies describing the customer segment classification. Odds ratios are reported in this
table. Robust standard errors are in parentheses.
CLV acting as a substitute for experience and benefiting novice managers more because of the information processing it entails
(H2).13
Finally, Table 5 provides further evidence that changes in the bank’s strategy or the competitive environment are not likely
to drive the results. It combines data from our main sample with the data on mortgage applications that the bank rejected or that
the customer, after being approved, declined to buy.14 Column 1 presents a logit model that assesses the likelihood of a
mortgage application being approved as a function of the applicant’s customer segment classification, before and after the
provision of CLV.15 The lack of statistical significance of all the post-CLV coefficients—with and without interaction with
customer segment—suggests that the odds of a mortgage application being approved conditional on the customer segment did
not change after the provision of CLV. Thus, the data do not point to changes in the credit approval policies of the bank
favoring more attractive customers.16 Column 2 models the likelihood of an approved mortgage being accepted by a customer.
The odds of an approved mortgage being accepted by the customer marginally decreased after the provision of CLV (odds ratio
of 0.62 with a p-value of 10.9 percent), but this change was consistent across all segments (as suggested by the statistical
13
We also analyzed whether the segment targeting effect varied as a function of the demographics of the target market, the local competitive environment,
or the business characteristics of the branch. Of all the variables analyzed, only banking intensity and branch size show some statistical significance
(and only when personal loans are used as the control set). Moreover, the manager tenure effect, which is stronger, is not affected by the inclusion of the
additional variables. The results, which are available from the authors, suggest that the effects of experience are not driven by differences in the location
or characteristics of the branches.
14
The results of these analyses should be interpreted with caution, as the data available for mortgage applications that did not result in a mortgage contract
are often incomplete.
15
A mortgage application is initially submitted to the bank’s automated credit risk system, which approves or rejects the mortgage. However, a branch
manager, or the appropriate risk officer, may override the automated system and approve a mortgage that is initially rejected. Analyses not tabulated
indicate that the proportion of mortgage applications approved after an override of the system did not change after the provision of CLV.
16
In field interviews, the bank managers denied any significant change in the bank’s credit risk strategy and conjectured that if there were any significant
change in the approval rates, then this would have been the consequence of a change in the credit risk profile of the applicants.

TABLE 6
Cross-Selling to Mortgage Customers
All Segments Segment A Segment B Segment C Segment D
Branch Mortgages
Pre-CLV 6.53 7.18 6.46 6.00 5.38
Post-CLV 6.79 7.31 6.67 6.18 5.48
Change Pre-Post 0.26 0.12 0.21 0.18 0.10
(p-value) (0.000) (0.071) (0.000) (0.009) (0.693)
Personal Loans
Pre-CLV 8.06 9.04 8.38 7.63 6.43
Post-CLV 7.97 8.97 8.23 7.40 6.27
Change Pre-Post 0.09 0.07 0.16 0.23 0.16
(p-value) (0.029) (0.441) (0.010) (0.000) (0.155)
Internet Mortgages
Pre-CLV 5.79 5.95 5.76 5.58 5.32
Post-CLV 5.99 6.11 5.89 6.09 6.00
Change Pre-Post 0.20 0.16 0.13 0.51 0.68
(p-value) (0.002) (0.218) (0.124) (0.002) (0.358)
Change Mortgages Change Pnal Loans 0.35 0.19 0.37 0.41 0.25
(p-value) (0.000) (0.088) (0.000) (0.000) (0.342)
Change Branch Mortgages Change Internet Mortgages 0.06 0.04 0.08 0.32 0.59
(p-value) (0.369) (0.807) (0.360) (0.058) (0.077)
This table analyzes the cross-selling per segment to customers who buy a mortgage or a personal loan between April 2001 and April 2003. The sample is
divided between branch customers who bought a mortgage, those who bought a personal loan, and internet customers who bought a mortgage. We
distinguish between mortgages and loans sold before and after CLV provision. The table also reports the change in the average number of products held by
customers of each segment before and after CLV provision. Change Mortgages Change Personal Loans computes the difference between the before and
after change for branch customers who bought a mortgage and those who bought a personal loan. Change Branch Mortgages Change Internet
Mortgages computes the difference between the before and after change for branch customers and internet customers who bought a mortgage.
insignificance of the odds ratios for the interactions between segments and post-CLV). Customer behavior is, therefore, stable
for the observation period, suggesting that the results are not driven by changes in the competitive landscape of the market.
In summary, our evidence shows that after CLV was introduced, the proportion of mortgage buyers belonging to more
attractive segments increased significantly. The evidence is consistent with CLV provision influencing branch managers’
decisions, rather than bank-wide strategic actions such as changes in the banks’ credit approval policies or customers’
preferences causing this shift. Finally, the differential change in the behavior of branch managers as a function of their tenure
suggests that the provision of CLV acts as a substitute for experience.
Cross-Selling (H3)
In this section, we analyze whether CLV introduction resulted in an increase in the average number of products sold to
customers acquiring a mortgage. The bank’s tool encouraged managers to cross-sell in two ways: by suggesting actions
(products to sell) and by showing the impact of those actions on current and future branch performance.
The results in Table 6 for branch mortgages show that, consistent with H3, there was a significant increase (0.26) in the
average number of products held by mortgage customers post-CLV. If we disaggregate the effects for the different segments,
then we see that two-thirds of the 0.26 increase is explained by significant increases in cross-selling in all segments except for
D; the remaining third is explained by the shift in segment composition analyzed above. Results not tabulated show that the
increase is concentrated in new clients; cross-selling levels to existing customers who purchased a mortgage are statistically
indistinguishable pre- and post-CLV.17
As in the previous section, we explore whether this trend was induced by CLV provision or whether it was the result of
bank-wide strategic initiatives. The decrease—consistent across all segments—in the average number of products sold to
personal loan customers shown in Table 6 suggests that CLV availability induced this shift. Controlling for the change in the
17
Results are available from the authors upon request.

TABLE 7
Impact of CLV Information on the Number of Products Purchased by Mortgage Customers
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8
Post-CLV 0.040*** 0.026*** 0.023*** 0.014 0.011** 0.020*** 0.034*** 0.034***
(0.005) (0.005) (0.005) (0.009) (0.005) (0.005) (0.011) (0.011)
Branch 0.211*** 0.239*** 0.120*** 0.262***
Mortgages (0.005) (0.005) (0.008) (0.039)
Post-CLV 0.050*** 0.046*** 0.006 0.007
Branch (0.007) (0.007) (0.012) (0.012)
Mortgages
Segment B 0.099*** 0.101*** 0.108*** 0.091*** 0.091***
(0.006) (0.006) (0.008) (0.004) (0.005)
Segment C 0.174*** 0.182*** 0.189*** 0.181*** 0.162***
(0.007) (0.007) (0.010) (0.005) (0.007)
Segment D 0.287*** 0.298*** 0.301*** 0.342*** 0.257***
(0.022) (0.022) (0.027) (0.009) (0.020)
Segment B 0.014
Post-CLV (0.012)
Segment C 0.014
Post-CLV (0.015)
Segment D 0.003
Post-CLV (0.046)
Banking 0.000*** 0.000*** 0.000
Intensity (0.000) (0.000) (0.000)
Population 0.006*** 0.006*** 0.004**
(0.002) (0.002) (0.002)
Unemployment 0.017*** 0.016*** 0.001
Rate (0.002) (0.002) (0.002)
Constant 1.876*** 1.967*** 1.874*** 1.879*** 2.087*** 2.154*** 1.756*** 1.735***
(0.003) (0.005) (0.025) (0.025) (0.003) (0.025) (0.007) (0.044)
Control set None None None None Personal Personal Internet Internet
loans loans mortgages mortgages
Region fixed No No No No No Yes No Yes
effects
Observations 15,496 15,496 15,467 15,467 29,711 29,652 17,839 17,839
Pseudo R2 0.001 0.007 0.008 0.008 0.015 0.028 0.003 0.012
This table shows the effects of CLV provision on the effort of branch managers to cross-sell to mortgage customers between April 2001 and April 2003.
The dependent variable is the number of products held by mortgage or personal loan buyers at the bank. Post-CLV is a dummy taking a value of 1 for the
months following CLV implementation. Branch Mortgages is a dummy taking a value of 1 for mortgage customers and 0 for personal loan customers. The
segment variables are dummy variables indicating the segment of the customer. The control variables Banking Intensity, Population, and Unemployment
Rate are defined in Appendix B. We also include region fixed effects on some specifications. Columns 1–4 use the sample of branch mortgage customers.
Columns 5–6 use the samples of branch mortgage and personal loan customers. Columns 7–8 use the samples of branch and internet mortgage customers.
Poisson regressions are used for all models in the table. Robust standard errors are in parentheses.
number of products held by personal loan customers, the number of products held by a branch mortgage customer post-CLV
increased by a significant 0.35. However, controlling for the change in the number of products held by internet mortgage
customers, the number of products held by branch mortgage customers post-CLV increased only by a small and statistically
insignificant 0.06.
The results in Table 7 provide support for H3 using a Poisson regression framework.18 The first four models analyze
changes in cross-selling in the branch mortgage sample alone. Models 1–2 look at branch mortgages without any control, and
18
For robustness, we also estimated the coefficients using OLS and a generalized Poisson regression (Consul and Famoye 1992) and the results were
essentially identical to those reported in Table 7.

TABLE 8
Change in Average Customer Value Pre- and Post-CLV Availability
Seasoned Branch Novice Branch
Total Bank Managers Managers
€ %D € %D € %D
Average CLV pre-simulator €2,698 €2,720 €2,683
Change in segment mix 136 89% 127 102% 156 89%
Average CLV pre-simulator weighted at post-simulator segment proportions 2,834 2,847 2,839
Change in CLV within segments 17 11% (3) 2% 19 11%
Total change 153 100% 124 100% 176 100%
Average CLV post-simulator 2,851 2,844 2,859
p-value of difference in average CLV pre- and post-simulator (H4) 0.000 0.003 0.000
The value of a customer (CLV) is the sum of the discounted monthly profitability calculated by the bank over the 48-month period starting the sixth month
after the sale of the mortgage. The discount rate used is 3 percent (inflation rate) because profitability calculations include adjustments for risk. Profitability
numbers are Winsorized at the top and bottom 1 percent. To estimate the Average CLV pre-simulator weighted at post-simulator segment proportions we
first calculate the average CLV pre-simulator for each of the four customer segments and then we calculate a weighted average weighting the segments by
their post-simulator share in the mortgage portfolio (from Table 3). A Seasoned Branch Manager is a branch manager with above-median experience
(defined as tenure in the bank at the time of the mortgage sale). A Novice Branch Manager is a branch manager with below-median experience.
Models 3–4 control for economic conditions in the market of the branch. We observe that CLV introduction leads to a
significant increase in the average number of products held by mortgage purchasers and—by comparing the coefficients on
Post-CLV in Columns 1 and 2—that roughly one-third of that increase is explained by changes in segment composition.19 The
insignificant coefficients for the interactions between Post-CLV and segment indicators suggest that the increase in cross-selling
induced by CLV provision is not meaningfully different across segments. We also tested whether CLV introduction had a
differential effect on managers as a function of their experience. In results not tabulated, we found similar changes in cross-
selling for seasoned and novice branch managers. To discern whether the observed increase in cross-selling is the result of a
bank-wide strategic change or mainly induced by CLV provision, in Models 5–6, we use personal loans as a control set, and in
Models 7–8, internet mortgages. The variable of interest is the interaction between Post-CLV and branch mortgages. Its
consistent positive and significant coefficient across all specifications in the models using personal loans as the control set
suggests that CLV introduction led to higher cross-selling. However, in Models 7–8, the coefficient on the interaction variable
is insignificant and its sign is not stable, suggesting that the increase in cross-selling for branch mortgage customers is no
different than that of internet mortgage clients.
To better understand these seemingly inconsistent results, we consider whether CLV affected the kind of products sold. In
an analysis not tabulated, we find that both branch and internet mortgage customers hold slightly more product families post-
CLV (3.77 versus 3.61 for branch customers, and 2.97 versus 2.80 for internet customers).20 However, while the increase in
branch customers’ product holdings is somewhat concentrated in products typically sold with the mortgage (i.e., insurance), as
one would expect after CLV introduction, for internet customers, the increase is concentrated in payment products (i.e., debit
cards).
Overall, these results suggest that CLV provision increased average cross-selling (H3). A significant portion of this
increase seems to be caused by the targeting of customers naturally inclined to hold more financial products. However, these
results are less certain than those observed in the previous section with respect to shifts in segment composition, as the effects
are robust to controlling for personal loans, but not for internet mortgages.
Value Creation Implications of CLV (H4)

Table 8 analyzes whether the realized CLV of customers who purchased a mortgage increased after CLV introduction. We
calculate the value created by a customer as the sum of his or her monthly profitability—discounted at an annual rate of 3
19
Notice that Post-CLV in Column 1 measures the average treatment effect. By controlling for segment, Column 2 strips out the effect on cross-selling
due to changes in the segment composition. As a result, Post-CLV measures only the changes in cross-selling within a segment.
20
A product family is defined as the set of products offered by the bank that satisfies similar financial needs. For example, the different types of checking
and savings accounts would form the transactional products family.

percent—for the four years starting the sixth month after the mortgage sale. This allows us to focus on the long-term portion of
CLV (i.e., value created after the mortgage sale), potentially maximizing the difference in the decision consequences of
customer value and short-term profitability signals.
Descriptive results in Table 8 show that the average CLV rises from €2,698 to €2,851 for customers who bought a
mortgage pre- and post-CLV provision, respectively. In other words, this tool resulted in a statistically significant 5.6
percent increase in average CLV. Moreover, 89 percent of this increase is attributable to an increase in the proportion of
mortgages sold to more attractive segments, and 11 percent to an increase in value within the segment.21 As Figure 1
shows, D is the only segment with an increase in realized customer value over 1 percent. The results suggest that
decision-makers in this environment find it easier to capture and develop ex ante more profitable customers than to change
customer behavior.
Columns 2 and 3 of Table 8 repeat the analysis for seasoned and novice branch managers. The larger average value of
customers to whom seasoned managers sold mortgages pre-CLV (€2,720 versus €2,683 for novice managers) is consistent with
more experience leading to higher-quality decisions. All managers increase the average value of the clients they sell mortgages
to, but the increase is larger for novice managers than for seasoned ones (€175 versus €124, or 6.5 percent versus 4.6 percent).
Moreover, while all managers increase the average CLV by targeting customers in more attractive segments, only novice
managers show an increase within a segment, suggesting that the simulator’s description of products to cross-sell is more
informative to managers with less experience. Although we cannot completely rule out the possibility that implicit incentives
are at play, the evidence is consistent with CLV acting as a substitute for experience.
Although this evidence is not consistent with managers destroying value through excessive price discounts or risk-taking,
given the predictions of the economics and marketing literature, we look directly at these issues next.
Pricing (H5)
In this section, we analyze whether CLV altered the way branch managers priced mortgages. One manager explained
the extent of their pricing discretion: ‘‘If we thought it was justified by the money we could make [from the client]
through other sources, such as products or referrals, we could have offered mortgages at 0 percent interest.’’ Because
mortgages are not a frequent purchase, and because refinancing is uncommon in our bank’s market (due to adjustable-rate
mortgages), mortgages entail important switching costs for customers. This creates a risk—higher than in other products—
that CLV may induce managers to overinvest in customer acquisition through low prices (Klemperer 1987; Villanueva et
al. 2007).
Similar to the conclusions of the previous section, the evidence in Table 2, Panel A does not support the hypothesis of
value destruction through excessive discounting. Rather than observing a drop in spreads post-CLV, on average, we see a small
(one basis point), but statistically significant, increase; this is especially relevant if we consider the shift toward higher segments
analyzed above, which should have increased branch managers’ willingness to lower prices.22,23
An alternative interpretation of this evidence is that managers simply ignored CLV when setting mortgage prices.
Mortgage prices usually reflect a combination of risk and commercial considerations that lead to, for instance, offering
lower rates to customers with more valuable collateral (Manove, Padilla, and Pagano 2001) or who purchase more
products (indeed, the third model of Table 9 shows that rates were lower for more valuable segments). If CLV alters
managers’ beliefs about the value implications of observable factors, then this should be reflected in the weight managers
give these factors in the pricing of the mortgage. This is consistent with the bank leadership’s rationale for using CLV:
‘‘we wanted the outcome of the sale process to be based on objective factors, not on the negotiating skills of the
customer.’’
In Table 9, we use a multivariate regression framework to analyze the mortgage pricing model implicitly used by branch
managers. Our variable of interest is the spread charged to mortgage customers.24 For branches, the pricing model shows that
managers gave greater discounts to customers with larger mortgages (Capital) and higher coverage ratios (Value to Loan), but
reduced the price breaks associated with cross-selling (Number of Products) after CLV introduction. Because mortgage size,
coverage ratio, and cross-selling are inputs to the CLV estimation that can be managed during the selling process, the results of
21
We performed similar decompositions for price and ex post risk performance. However, the between- and within-segment (as well as the total) effects
are very small.
22
When controlling for segment composition, the difference between pre- and post-CLV spreads for branch mortgages remains around one basis point.
23
As observed in Table 9, there is a positive, but insignificant, increase in internet mortgage spreads. The increase in branch mortgage spreads is larger,
albeit statistically indistinguishable from the change in internet mortgages.
24
The interest rate quoted for the mortgages in our sample was the sum of a reference interest rate (usually the Euro Interbank Offered Rate [Euribor]) and
a spread, and was adjusted annually following the market changes in the reference rate. Branch managers could not influence the reference rate, but had
complete discretion over the spread.

TABLE 9
Determinants of Mortgage Pricing
Seasoned Novice
Branch Internet Branch Branch
Branch Internet Mortgages Mortgages Managers Managers
Mortgages Mortgages Pricing Pricing Pricing Pricing
Base Base Model Model Model Model
Post-CLV 0.952** 0.606 5.588 1.365 10.450 2.700
(0.434) (0.770) (5.154) (10.074) (7.671) (7.437)
Segment B 1.934* 1.552 1.378 1.958
(1.098) (2.615) (1.685) (1.542)
Segment C 3.258* 1.558 4.656* 2.243
(1.716) (4.036) (2.588) (2.420)
Segment D 5.479 9.187 0.541 8.820
(4.752) (10.497) (7.677) (6.059)
Capital 0.013 0.092*** 0.003 0.032**
(0.012) (0.035) (0.020) (0.016)
Value to Loan 0.003 0.002 0.002 0.004
(0.011) (0.021) (0.017) (0.014)
Mortgage Length 0.021*** 0.012 0.018* 0.023***
(0.006) (0.013) (0.010) (0.009)
Age 0.079 0.200 0.100 0.031
(0.056) (0.124) (0.084) (0.080)
New Customer 0.196 0.238 0.311 0.418
(1.036) (1.917) (1.575) (1.452)
Number of Products 0.809*** 0.095 0.681* 0.953***
(0.229) (0.540) (0.362) (0.312)
Potential 3.284** 14.271*** 0.687 5.471**
(1.668) (4.708) (2.386) (2.320)
Segment B Post-CLV 0.930 0.143 0.681 0.346
(1.325) (3.124) (1.961) (1.958)
Segment C Post-CLV 1.475 4.993 2.171 2.405
(2.134) (4.744) (3.082) (3.224)
Segment D Post-CLV 2.360 8.857 1.523 3.424
(6.093) (20.075) (9.397) (8.445)
Capital Post-CLV 0.037** 0.012 0.023 0.052***
(0.015) (0.042) (0.024) (0.020)
Value to Loan Post-CLV 0.028** 0.006 0.030 0.030
(0.013) (0.026) (0.019) (0.019)
Mortgage Length Post-CLV 0.001 0.011 0.008 0.006
(0.008) (0.015) (0.012) (0.011)
Age Post-CLV 0.003 0.150 0.029 0.108
(0.070) (0.151) (0.100) (0.105)
New Customer Post-CLV 0.758 0.830 0.953 0.400
(1.246) (2.287) (1.828) (1.844)
Number of Products Post-CLV 0.604** 0.017 0.599 0.700*
(0.279) (0.668) (0.424) (0.400)
Potential Post-CLV 1.178 7.194 1.836 3.561
(1.991) (5.870) (2.798) (2.849)
Constant 52.387*** 42.824*** 61.528*** 45.177*** 58.891*** 63.972***
(0.320) (0.514) (4.209) (8.613) (6.492) (5.764)
Observations 15,503 2,343 11,840 1,413 5,831 5,181
Adjusted R2 0.000 0.000 0.013 0.018 0.013 0.011


TABLE 9 (continued)
This table shows the effects of CLV provision on the pricing decisions of branch managers regarding mortgages sold between April 2001 and April 2003.
The dependent variable is the spread charged over the reference interest rate. Post-CLV is a dummy taking a value of 1 for the months following CLV
implementation. The segment variables are dummy variables indicating the segment of the customer. Capital is the amount loaned. Value to Loan is the
ratio of the value of the property and the size of the loan. Mortgage Length is the length (in months) of the loan. Age is the age of the customer. New
Customer is a dummy that takes a value of 1 for customers new to the bank at the time of the mortgage purchase, and 0 for existing customers. Number of
Products measures the number of products held by the customer. Potential is the bank’s measure of the potential profitability of the customer (in euros). A
Seasoned Branch Manager is a branch manager with above-median experience (defined as tenure in the bank at the time of the mortgage sale). A Novice
Branch Manager is a branch manager with below-median experience. Robust standard errors are in parentheses.
this regression could be interpreted as evidence that branch managers used CLV when making the mortgage pricing decision.
No such changes are observed in the internet mortgage pricing model. Moreover, the last two columns of Table 9 show weak
evidence of novice managers relying more on CLV information to price their mortgages, as evidenced by the higher
significance of the coefficients on the size of the mortgage (Capital) and the number of products cross-sold (Number of
Products) after CLV introduction. This evidence is consistent with CLV being a decision aid that substitutes for experience and
helps novice managers to achieve a pricing outcome that is more aligned with customer attractiveness and less influenced by a
customer’s negotiation skills.
Thus, although branch managers did use CLV information to price mortgages, our data do not support the theoretical
prediction that CLV information leads managers to destroy customer value through steep discounting.
Ex Post Risk Performance of the Mortgage Portfolios (H6)

Another possible consequence of CLV introduction is a change in the way branch managers input risk in loan-making
decisions. The risk assessment of any loan decision has two components: the credit score calculated by the bank’s credit risk
models, and the subjective estimation of the branch manager based on local information that is not codified in the bank’s
systems. If the focus on CLV increases the incentive to close certain sales, then managers may underweight local signals of
higher credit risk, which could lead to defaults and workouts. The trade-off between CLV and credit risk differs from the trade-
off between CLV and price analyzed above because the economic impact of bad credit materializes years after the mortgage is
signed. Thus, in this section, we analyze whether CLV introduction results in an increase in the realized credit risk of the
mortgages that branch managers sold.
The bank has a credit classification system that flags problematic mortgages by indicating the level of risk associated with
the client. The quality of the classification is high because this system determines both the amount of loan loss provisions and
the level of capital required by banking regulators. It identifies four levels of credit risk: (1) incidence, (2) tardy, (3) doubtful,
and (4) defaulted.25 A customer may remain in a given category for as long as the qualifying conditions persist, evolve to a
higher risk category, or return to the normal (non-risk) status if she normalizes her payment standing. Although we cannot
observe the risk of a mortgage at the time of sale, it is sensible to assume that if branch managers react to CLV introduction by
relaxing their credit risk standards, then we will observe a higher incidence of bad risk situations in the mortgages sold post-
CLV.
Table 10 summarizes the frequency of risky classifications for the mortgages sold pre- and post-CLV through the branch
and internet channels. To simplify the analysis, we compare the frequency of risky classifications in the eight years following
the mortgage contract.26 We then focus on the frequency of what we call ‘‘bad’’ risk standings, or classifications at every
level above incidence (as the latter may reflect temporary or atypical oversight). Overall, the table shows that risky
classifications are infrequent, which is consistent with the bank’s conservative approach to risk management. Moreover,
CLV availability did not impact the frequency of risky classifications. While the number of customers with a risky standing
at any point in time in the eight years after the mortgage sale increases from 6.3 percent pre-CLV to 6.8 percent post-CLV,
when the analysis is limited to bad risk situations, the percentage falls from 0.7 to 0.6. Furthermore, internet mortgages,
which present a slight decrease in the frequency of risky classifications (3.9 percent pre-CLV versus 3.7 post-CLV),
25
The bank’s risk documentation defines the risk classifications as: (1) Incidence: Clients with any payment delayed for a period longer than 30 days. (2)
Tardy: Clients with any payment delayed for longer than 90 days. (3) Doubtful: The risk management department (or the branch manager) manually
indicates a higher level of risk. Typically, this situation applies to ‘‘incidence’’ clients or to clients who have requested a bankruptcy protection
procedure. It also includes ‘‘tardy’’ clients against whom the bank has initiated a judicial process of debt recovery. (4) Defaulted: Clients with written-
off balances over €300 who had previously been fully covered by loan loss provisions.
26
These are year-end observations in the year the mortgage is sold and the seven following years.

TABLE 10
Ex Post Risk of Mortgage Portfolios
Branch Mortgages Internet Mortgages
Pre-CLV Post-CLV All Pre-CLV Post-CLV All
Number % Number % Number % Number % Number % Number %
All risk events 987 894 1,881 107 79 186
Customers with a Risk Event 528 6.3% 482 6.8% 1,010 6.5% 60 3.9% 30 3.7% 90 3.8%
Bad Risk Events 112 70 182 11 25 36
Customers with Bad Risk Events 62 0.7% 40 0.6% 102 0.7% 5 0.3% 7 0.9% 12 0.5%
Customers with Maximum Risk Classification:
Normal 7,900 93.7% 6,593 93.2% 14,493 93.5% 1,470 96.1% 783 96.3% 2,253 96.2%
Incidence 466 5.5% 442 6.2% 908 5.9% 55 3.6% 23 2.8% 78 3.3%
Tardy 36 0.4% 17 0.2% 53 0.3% 0 0.0% 1 0.1% 1 0.0%
Doubtful 25 0.3% 21 0.3% 46 0.3% 5 0.3% 6 0.7% 11 0.5%
Defaulted 1 0.0% 2 0.0% 3 0.0% 0 0.0% 0 0.0% 0 0.0%
Total No. of Customers 8,428 100.0% 7,075 100.0% 15,503 100.0% 1,530 100.0% 813 100.0% 2,343 100.0%
This table analyzes the amount of ex post risk suffered by the bank’s portfolios of mortgages sold between April 2001 and April 2003. It reports the
number and fraction of mortgages that show a risk event within an eight-year period after their sale. The risk classification contains five levels. Normal
refers to non-problematic mortgages. An Incidence occurs when a client delays payment for longer than 30 days. Payment delays for longer than 90 days
are classified as Tardy. Doubtful indicates a higher level of risk, such as clients who have requested bankruptcy protection, or against whom the bank has
initiated a judicial process of debt recovery. Defaulted indicates clients with written-off balances over €300. All Risk Events include Incidence, Tardy,
Doubtful, and Default. Bad Risk Events include only Tardy, Doubtful, and Default. The sample is divided between branch and internet customers. We also
distinguish between mortgages sold before and after CLV provision.
experience an increase when the analysis is limited to bad risk situations, although the level remains very low (0.3 percent
versus 0.9 percent).
In Table 11, we use a regression framework to analyze whether there is a change in the way branch managers input risk
in their lending decisions post-CLV. The dependent variables in these analyses are an ordered ranking of the customer’s
worst risk classification or indicator variables for the presence of a risk or bad risk event in the eight-year period following
the mortgage contract. The explanatory variables are indicators of the mortgage sale taking place through the branch channel,
being made in the post-CLV period, and their interaction. The positive and significant coefficient on the branch channel
indicator is consistent with the higher risk standards applied to internet mortgages. More important, the coefficient on the
interaction term shows no credit risk deterioration. If anything, its negative and significant value in the bad risk events
models suggests that branch managers raise their risk standards post-CLV. These findings are robust to the inclusion of
segment indicators in the regressions. The coefficients on these indicators are consistent with less attractive segments having
higher risk levels.
In summary, branch managers did not destroy customer value by relaxing risk standards. Rather, they put more
weight on the potential negative consequences of a default, as the likelihood of a serious credit risk classification for
mortgages sold in the branches decreases vis-à-vis the control sample of internet mortgages. These analyses are very
robust, as they span a period that includes the peak of the financial crisis, which should amplify any deterioration of the
default risk.
VI. CONCLUSION
In this paper, we analyze how the addition of forward-looking metrics to the employees’ information set influences their
decision-making behavior. At the mid-sized southern European bank where we conducted our study, management developed a
mortgage simulator that calculated the expected value of a customer relationship (CLV) and the impact of mortgage terms and
cross-selling on this value. We analyze how this decision aid affected the behavior of branch managers at the time of a
mortgage sale.
We find evidence consistent with branch managers using CLV in their decisions even though there is no corresponding
change in their compensation system, which continues to link rewards to short-term profitability. Branch managers increase their

TABLE 11
Impact of CLV Information on the Likelihood of a Future Risk Deterioration
Bad Risk Bad Risk Mora Bad Risk Mora
Risk Event Event Risk Event Event Maximum Risk Event Event Maximum
(1) (2) (3) (4) (5) (6) (7) (8)
Branch Channel 0.023*** 0.004* 1.637*** 2.260* 1.640***
1.549*** 2.075 1.553***
(0.007) (0.002) (0.228) (1.053) (0.228)
(0.216) (0.968) (0.217)
Post-CLV 0.002 0.005 0.939 2.649* 0.944
0.962 2.733* 0.969
(0.010) (0.003) (0.214) (1.555) (0.215)
(0.220) (1.606) (0.221)
Branch Channel 0.008 0.007* 1.165 0.290** 1.156
1.211 0.307* 1.197
Post-CLV (0.011) (0.004) (0.276) (0.180) (0.274)
(0.288) (0.191) (0.284)
Segment B 1.348*** 1.904** 1.350***
(0.107) (0.515) (0.108)
Segment C 1.886*** 2.605*** 1.887***
(0.174) (0.787) (0.174)
Segment D 5.299*** 8.785*** 5.340***
(0.839) (3.646) (0.844)
Constant 0.039*** 0.003 0.041*** 0.003*** 0.299*** 0.002***
(0.006) (0.002) (0.005) (0.001) (0.004) (0.001)
Model class OLS OLS Logit Logit Ordered Logit Logit Logit Ordered Logit
Observations 17,846 17,846 17,846 17,846 17,846 17,846 17,846 17,846
Adjusted R2 0.001 0.000
Pseudo R2 0.004 0.004 0.003 0.017 0.022 0.016
This table shows the effects of providing CLV information on the risk management of branch managers regarding mortgages sold between April 2001 and
April 2003. The dependent variables are Risk Event, Bad Risk Event, and Mora Maximum. Risk Event is a dummy variable taking a value of 1 if the
customer is classified as Incidence, Tardy, Doubtful, or Defaulted at any point within an eight-year period after the purchase of the mortgage. Bad Risk
Event is a dummy variable calculated in a similar way, but only taking a value of 1 if the customer is classified as Tardy, Doubtful, or Defaulted. Mora
Maximum is a rank ordered variable reflecting the worst risk classification received by the customer in the eight-year period after the purchase of the
mortgage (0 ¼ No Risk Classification, 4 ¼ Defaulted). Branch Channel is a dummy taking a value of 1 for branch customers and 0 for internet customers.
Post-CLV is a dummy taking a value of 1 for the months post-CLV. Branch Channel Post-CLV measures the effect of CLV. The segment variables are
dummy variables indicating the segment of the customer. Columns 1 and 2 estimate an OLS model, Columns 3–4 and 6–7 use a logit model, and Columns
5 and 8 an ordered logit. Odds ratios are reported in Columns 2–8. Robust standard errors are in parentheses.
commercial focus on the most attractive segments, increase cross-selling, and change their pricing model. This suggests that the
organization in our study—with a highly educated workforce and a CLV model developed by its management—overcame the
skepticism toward centrally estimated metrics traditionally identified in the literature. Moreover, the decision changes observed
result in an average increase of over 5 percent in the value of mortgage customers. The results indicate that forward-looking
information can help align the long-term value creation strategy of an organization with the short-term profit objectives of its
employees and enables a decentralized implementation of strategy. After the introduction of CLV, we observe deeper changes in
the decisions of novice managers, as well as larger increases in the average customer value of their sales, a result that is consistent
with CLV acting as a substitute for experience. Finally, contrary to predictions in the literature, our results show that CLV
availability did not encourage managers to attract valuable customers at the expense of making excessive price concessions or
increasing ex post risk, suggesting that managers increased sales to more valuable customers by providing better service.
Our contributions should be viewed in the context of our study, which was based on an institution that offered freedom of
action and responsibility for profitability and value-creation to its decision-makers, invested in their human capital, and had low
employee turnover. The same result may not hold in environments with higher employee turnover or lower employee
sophistication. We leave for future research an exploration of the contingent factors that influence the effectiveness of forward-
looking metrics in affecting employee decision-making.
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APPENDIX A
Proofs
We let the expected value obtained from the customer be V(am, axs, h) ¼ p(am)v(axs, h). Assume that v(axs, h) is increasing
;
in h, so that vðaxs hÞ . vðaxs ; hÞ for all axs. The share of mortgages sold to high-type customers at time t is

lp at
m ðhÞ
at ¼ .
lp atm ð
hÞ þð1lÞp atm ðhÞ

t t t t t
value per customer in the mortgage portfolio is given by Eðv Þ ¼ a v ðhÞ þ ð1 a Þv ðhÞ,
The average

where we denote
t
v ðhÞ ¼ v axs ðhÞ; h for ease of notation. We denote the change in the share of high-value customers by Da ¼ a1 a0, and the
t
change in value for a given customer type by Dv(h) ¼ v1(h) v0(h). Then, in the spirit of a variance analysis, we can decompose
the effect of the CLV information on average value as follows: DEðvÞ ¼ Da½v0 ðhÞ v0 ðhÞ þ ½a1 DvðhÞ þ ð1 a1 ÞDvðhÞ. The

first term represents the effects of the change in segment composition of the mortgage portfolio, while the second term
measures the increase in value for the average customer (holding the segment composition constant). The following result
shows that both these effects are positive:
Proposition 1: Da½v0 ð
hÞ v0 ðhÞ 0 and a1 DvðhÞ þ ð1 a1 ÞDvðhÞ 0. As a result, DE(v) 0.

Proof: The objective of the DM is to solve:
max E½pðam ÞVðaxs ; hÞj I cðam Þ:
am ;axs
The optimal effort choice, atm ðhÞ, and cross-selling actions, atxs ðhÞ, satisfy the following first-order conditions:
E½p 0 ðatm Þvðatxs ; hÞj I ¼ c 0 ðatm Þ;
E½pðatm Þv’ðatxs ; hÞj I ¼ 0:

Notice that at time t ¼ 1, because the manager knows h, we have v 0 (axs, h) ¼ 0. Hence, v a1xs ðhÞ; h vðaxs ; hÞ for all axs. In

particular, we have that v a1xs ðhÞ; h vða0xs ; hÞ. Therefore, it must be the case that a1 DvðhÞ þ ð1 a1 ÞDvðhÞ 0. Moreover,

v a1xs ð
hÞ;
h v a1xs ðhÞ;
h . v a1xs ðhÞ; h , where the first inequality follows from the optimality of a1xs ðhÞ, while the

second follows from the monotonicity of v. As a result, it follows from the first-order condition with respect to am that
1 1 0
am ðhÞ , am ðhÞ. am ðhÞ
Furthermore,
¼ a0
m ðhÞ, as the manager does not observe the customer’s type in period t ¼ 0. Therefore,

p a1m ðhÞ p a0m ðhÞ
we have that . ¼ 1. Notice that:
p a1
m ðhÞ p a0
m ðhÞ

lp atm ðhÞ
t ¼ l ;
a ¼
lp atm ð
hÞ þð1lÞp atm ðhÞ lþð1lÞp atm ðhÞ =p atm ðhÞ

which implies that a . a . Because v ð

1
hÞ . v0 ðhÞ, it follows that Da½v0 ðhÞ v0 ðhÞ . 0.
0 0

APPENDIX B
Definitions and Sources of Control Variables
In order to provide additional controls, we collected a list of variables that describe the mortgage market and the general
economic conditions in which the branches developed their activities:
Mortgage Interest Rates: National average of the mortgage interest rates charged by banks, savings banks, and credit
cooperatives. Frequency: monthly. Source: Boletı́n Estadı́stico del Banco de España (see: http://www.bde.es/bde/es/
secciones/informes/boletines/Boletin_Estadist/).
Mortgage Market Size (Number): Number of mortgages sold per province. Frequency: monthly. Source: Instituto
Nacional de Estadı́stica (see: http://www.ine.es/jaxiT3/Tabla.htm?t¼3201&L¼0).

Mortgage Market Size (Euros): Volume in euros of mortgages sold per province. Frequency: monthly. Source: Instituto
Nacional de Estadı́stica (see: http://www.ine.es/jaxiT3/Tabla.htm?t¼3201&L¼0).
Banking Intensity: Number of banking branches per 1,000 inhabitants per city. Frequency: annual. Source: La Caixa.
Anuario Económico de España (see: http://www.anuarieco.lacaixa.comunicacions.com/java/X?cgi¼caixa.le_DEM.
pattern&).
Population: Number of inhabitants per city as of January 1. Frequency: annual. Source: La Caixa. Anuario Económico
de España (see: http://www.anuarieco.lacaixa.comunicacions.com/java/X?cgi¼caixa.le_DEM.pattern&).
Unemployment Rate: Percentage of city inhabitants registered as unemployed in the National Employment Services as a
percentage of the total population aged 15–64. Frequency: annual. Source: La Caixa. Anuario Económico de España
(see: http://www.anuarieco.lacaixa.comunicacions.com/java/X?cgi¼caixa.le_DEM.pattern&).

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THE ACCOUNTING REVIEW American Accounting Association

Vol. 92, No. 3 DOI: 10.2308/accr-51554

The Impact of Forward-Looking Metrics on Employee

The Accounting Review

II. INSTITUTIONAL BACKGROUND

The Bank and the Mortgage Market

The Mortgage Simulator

The Accounting Review

The Accounting Review

III. MOTIVATION OF THE EMPIRICAL ANALYSIS

A Simple Model of the Use of Customer Information

The Accounting Review

The objective of the DM, therefore, is to solve:

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IV. SAMPLE AND DATA DESCRIPTION

The Accounting Review

The Accounting Review

Panel A: Branch and Internet Mortgages

Panel B: Branch Mortgages and Personal Loans

The Accounting Review

Panel C: Branch Managers’ Characteristics

The Accounting Review

The Accounting Review

The Accounting Review

Panel A: Impact of CLV Information on Segment Composition

The Accounting Review

Volume 92, Number 3, 2017

Panel B: Impact of CLV Information on Segment Composition

The Accounting Review

Volume 92, Number 3, 2017

The Accounting Review

The Accounting Review

The Accounting Review

Value Creation Implications of CLV (H4)

The Accounting Review

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***, **, * p , 0.01, p , 0.05, and p , 0.1, respectively.

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Ex Post Risk Performance of the Mortgage Portfolios (H6)

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Bad Risk Events 112 70 182 11 25 36

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The Accounting Review

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E½pðatm Þv’ðatxs ; hÞj I ¼ 0:

which implies that a . a . Because v ð

The Accounting Review

The Accounting Review

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, , p , 0.01, p , 0.05, and p , 0.1, respectively.