CA Restatement a Cautionary Tale on Designing, Monitoring Sales Compensation Programs

By Sammer, Joanne | Workforce Management, July 31, 2006 | Go to article overview

CA Restatement a Cautionary Tale on Designing, Monitoring Sales Compensation Programs


Sammer, Joanne, Workforce Management


Plans that aren't in line with business strategy can cause a company to miss out on opportunities for growth or waste sales commission dollars

THE OLD COMPENSATION adage that "what gets measured, gets done" is even more accurate when it comes to sales compensation. That is why it is so important to make sure sales compensation programs are in tune with a company's business strategy and are producing the desired results.

Just ask CA. The company, formerly known as Computer Associates International, announced in May that it would be restating its earnings because it had to pay $70 million in unexpected sales commissions. The reason: The company had "a new sales commission plan that did not appropriately align commission payments with the company's overall performance," according to a company statement. CA's worldwide sales chief and its CFO have departed the organization in the wake of the sales-compensation uproar and the earnings restatement.

The company declined an interview request for this article, but news reports suggest that quota problems and double crediting on certain sales following acquisitions led to the overpayments.

While its situation is unique, CA serves as a cautionary tale for companies that may not pay as much attention to their sales compensation programs as they should.

"This is a wake-up call to other companies because it shows what could happen if you get this wrong," says Shanker Trevedi, senior vice president of Callidus Software in San Jose, California.

However, a company doesn't have to have a CA-level public meltdown to have sales compensation problems. In some cases, a poorly designed or monitored sales compensation program has the much more insidious effect of causing the company to miss out on business or growth opportunities or simply to waste sales compensation dollars.

"Too often, companies simply put in a sales compensation design and live with it," says Terry Gilbert, a vice president with Wachovia Corp. in Charlotte, North Carolina. "As much as 20 to 25 percent of sales compensation dollars are not spent in the most effective way. But by modeling the program before implementing it and monitoring its effectiveness after implementation, companies can reduce that level of waste to 10 to 12 percent."

INVOLVE THE RIGHT PEOPLE

There are a number of people in an organization who can-and must-have input on sales compensation design. David Cichelli, senior vice president of the Alexander Group in Irvine, California, recommends involving a broad group of individuals in all sales compensation discussions, including representatives from finance, HR and information technology, as well as sales and marketing.

"To determine if program design is right or wrong, these individuals should examine every element of that program to make sure everything lines up," he says. "When there is a problem with sales compensation, it is often the result of good intentions on the part of one person or department that did not vet changes or design with the necessary parties."

To ensure this level of involvement, for example, Maynard, Massachusetts-based Monster Worldwide assigns dual accountability for sales compensation to both sales and HR.

"This ensures that everyone is on the same page and that we have right programs in place," says Greg Limoges, the company's vice president of compensation, benefits and systems.

This broad involvement can also help companies make sound decisions about whether to tweak a sales compensation plan during the year in response to something unexpected, such as low sales of a particular product or complaints from the sales force. The trouble is, "tweaks tend to be made out of context with the broader business strategy," Cichelli says. And when that happens, the company runs the risk of one tweak causing unintentional changes or consequences somewhere else.

To avoid this, companies can develop an approval process for any sales compensation changes. …

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