AOL’s Settlement With Eliot Spitzer

Every company wants to retain customers. But AOL Inc. went too far when it tied employee compensation to minimum “save” percentages.

So says New York State Attorney General Eliot Spitzer, who this week announced a $1.25 million settlement with the online giant. The deal resolves a probe into complaints that AOL’s telereps failed to honor cancellation requests.

The payment, covering $1.2 million in penalties and $50,000 in investigative costs, is the least of it: The company will also have to restructure its bonus plan. And it will have to implement third-party verification of member’s consent to continue services.

Finally, it must repay New York customers for up to four months of improper post-cancellation charges.

How did AOL get into this mess?

AOL’s retention program has long been based on persuading people who call to cancel into staying. That entails fnding the “sweet spot” that will appeal to individual subscribers, and is similar to others in the online industry, says spokesperson Nicholas Graham.

But one aspect of it troubled Spitzer’s office: The bonus structure created in 1998.

According to the settlement agreement, the so-called Save Employee reps were awarded generous cash incentives if they saved 49% of the subscribers who called to cancel. Until last August, the percentage was 48%.

This system, in which reps could earn tens of thousands of dollars, “had the effect of employees not honoring cancellations, or otherwise making cancellation unduly difficult for consumers,” according to Spitzer’s office.

Employees who failed to make the save rate (“low savers”) were referred for additional training, or deemed ineligible for promotion, and they did not receive bonuses, the document continues.

And this program was well publicized internally. A guide published by the company in 2003 described an employee named Johnny Saver, who in one month recorded 655 24-hour saves (i.e., the consumer did not cancel services within 24 hours of the save) and 320 90-day saves. His bonus for that feat? $3,115.

The alleged failure to honor cancellation requests resulted in roughly 300 complaints to Spitzer’s office. `

This isn’t AOL’s first regulatory scrape over customer retention. Earlier this year, the firm paid $75,000 to Ohio to cover the costs of a probe into its online membership cancellation processes. It also provided a small number of refunds to consumers.

And in 2003, AOL signed a consent decree with the Federal Trade Commission regarding the alleged billing of subscribers after they had asked to cancel their subscriptions. According to the FTC, the settlement required that AOL send confirmation notices to subscribers who were retained after calling to cancel. In addition, the company made changes in its rebate programs.

One thing that came out of the FTC settlement is that the company improved its ability to monitor random cancellation calls, and this has helped in identifying employees who failed to honor the requests, according to the settlement.

And the settlement with Spitzer? Graham says AOL is pleased with the resolution, and that changes will “increase quality assurance” at the firm. (Spitzer put it a different way: “This agreement helps ensure that AOL will strive to keep its customers through quality service, not stealth retention programs,” he said in a statement).

Graham adds that the changes will be made nationwide, not just for New York customers. And he claims that AOL is the first ISP to provide third-party verification.

That verification will be handled by an outside contractor, will be done in increments, with 100% compliance expected by next June.

Meanwhile, AOL has 60 days to eliminate its program of rewarding bonuses based on minimum “save rates.” Graham declines to specify how bonuses will be allotted without the save rate, and adds that the program is “a work in progress.”

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