Chapter 2 – Bonuses, Commissions, and the Unintended Benefits of Coin Operated Executives
The CFO was informed that several sales executives were paid the wrong commissions amounts for the first three quarters of the year. The payments will have to be made in the fourth quarter for an amount that was not projected nor recorded in the Company’s financial statements.
One of the best ways you can integrate yourself into your company is to administer its bonus and commission plans, which are notoriously difficult to negotiate and administer. Yes, they are the largest cost to a company other than basic payroll, or hardware costs if you are manufacturing a product. And yes, sales personnel and key executives on bonus plans don’t normally want to interact with back office personnel who administer these plans, mostly because they can’t be bothered. Yet, like Shakespearean lovers, employees compensated by variable compensation plans are tortured by a lack of continual feedback, and their curiosity is fed by not knowing results versus plan information in real time, turning it into an obsession.
A wily back office executive can use this to his or her advantage. Let us examine how you can benefit with the story of “The Coin Operated Sales VP.”
A peculiar aspect of corporations is that they are not single cohesive units, but instead composed of layers of hierarchies and teams, and these units often compete with each other for influence and resources. And while it may not be true that back office functions always stop at the end of these battles, they are never at the forefront of emphasis unless the Company is going public – and even then the priority lasts about ninety days, or until the Company receives its Sarbanes-Oxley merit badge. Yet, the people who negotiate, structure, or get paid under these incentive plans will always have power, especially the Vice President of Sales. As an administrator of these plans, you now have a motivated partner who will sponsor your compensation improvement projects. An experienced VP knows that a critical key to motivating his or her team is a well-structured incentive plan that is accurately calculated and reported in a timely manner.
Make no mistake, you need the Sales VP as a sponsor and ally when compensation plans are being structured. You may not be directly responsible for structuring or negotiating variable compensation plans, as Board members and C level VP’s are, but you can influence the process. Offer to poll other companies in your market for range of plans and percentages allocated to variable compensation. Share some of the common flaws in plan structure or in administration of plans to put some fear into your leadership. Tell them about your former employer who mistakenly overpaid its sales team by tens of millions of dollars due to a flaw in its overly complicated commission algorithm. Finally, tell them about the company that missed its profitability targets because the CEO agreed in an email to pay commission accelerators to the sales and engineering teams without informing the finance or HR teams.
Make the effort to explain how structuring good bonus and commission programs do not require intricate plans or complicated systems. Simpler is better. Use past examples of how complications resulted from executive or board interventions to manage behavior or attain a short-term result. Describe how these complications always lead to unforeseen consequences, followed by apologies about the unforeseen aspect of the consequences, then to another intervention to correct the secondary effects, leading to a cascade of “unforeseen” responses, each one more difficult to negotiate or predict than the next.
Ultimately, you will need the Sales VP working with you when you meet with members from the teams that have an input into your compensation processes. As mentioned in the payroll chapter, the goal of this extended meeting is to document current practices, assess the practices and decide on how to improve. This is when you most need a sponsor’s support and involvement. The concepts of Lean were initially met with resistance (it took ten years to implement Lean at Toyota). You need help from the top to get participants to meet and agree to change processes. A VP’s top down mandate, to accurately calculate and report her team’s bonus and commission in a timely manner, will give you the cover to make improvements that you need.
Self-interest is what drives a team to its administrator. By allowing the VP and members of the team a window into the end-to-end challenges that occur at each step in the process, you can demonstrate how approving maximum and minimum commission amounts as a percentage of total net sales will help them better forecast their costs. The team will understand how having everyone sign compensation plans before making payments from these plans will prevent team members from fighting over unclear targets or forgotten accelerators. They will become intimate with the coordination needed to input actual data into a standard commission table and publish it each month. And they will appreciate the effort that goes into updating quotas and making payments (to them) each quarter. That, at the end of the day, is and should be their constant target. For you, the target is building a process so efficient and effective that the only way to improve is to automate. Only when you have built an effective process that the customer trusts can you build a system that reduces your total cost to process variable compensation.