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Sales Performance Management: TARP Restrictions May Affect Salespeople at Non-TARP Companies

Originally published March 2, 2010

Items D and E under Section 102 of the TARP Reform and Accountability Act of 2009 state that companies receiving government bailouts must limit bonuses and other incentive pay to their most highly compensated executives.

The ramifications have roiled Wall Street, raised the ire of the Obama administration and become rife for discussion at the company water cooler. Yet, over the long run, the items in this executive compensation oversight act are not likely to begin and end with TARP companies or with C-level executives. In many cases, the resultant public and political backlash over the policies of companies like AIG and Merrill Lynch that rewarded rogue traders – those who got them into trouble in the first place – with millions of dollars in bonuses may very well affect the future of salespeople in all industries to earn the commissions that constitute the very lifeblood of their income (and who very well may fall within a company’s 20 or 25 highest compensated employees). And, while the present restrictions may be focused on those companies accepting emergency bailout money, there is every likelihood that an SEC reporting requirement, or an audit perspective, or a PR episode, or some combination of the three, will springboard us into an environment where every company soon falls under the same guidelines. In fact, “organizational viability” is likely to become a key phrase that will affect the bottom line of any compensation plan moving forward.

Over the last five years, more and more companies have moved from a total sales compensation plan into the area of margin or net sales for determining compensation. Sarbanes Oxley has already caused companies to tighten up on incentive compensation. Now, we are about to see yet another hurdle created, whereby companies are going to further tighten their belts by deciding what defines the viability of the company. Where before incentive compensation merited a mere line item at most companies, resulting in little attention paid to it, now I think that such post-bailout events as the AIG fiasco will trigger the need for shareholders and the public to focus much more intensely on these plans.

With companies like AIG and Merrill Lynch coming forward to say that the executive bonuses paid were “contractual obligations,” many companies will have to start reviewing these contractual obligations in all their compensation plans. Their compensation plans, whether related to executives or to the sales force, will have to develop an out clause in case the organization is in financial downfall.

The public relations aspect itself cannot be overestimated. Zbigniew Brzezinski, a former national security advisor, has spoken about how the disparity between the angry jobless and the highly compensated may very well foment the kind of conflict that led to riots in the streets over one hundred years ago.

This will all have a greater impact on the incentive compensation world for the simple reason that more accountability will be demanded for corporations to protect their viability. In doing this, they will have to closely monitor how people earned their bonus, what the viability is of that transaction, and whether it can be shown to be profitable to the company’s bottom line.

How salespeople are incentivized is likely to change, but how so? It could mean during this “pay for performance” environment that it will become increasingly more difficult for salespeople to earn the same amount of money they now do. It could mean more and more people will begin to earn flat salaries. Or, it could mean targets and goals will be set higher as more profit-based formulas come into play.

It could also mean that there may be additional delay in the incentive being paid out. Instead of paying the first half when a sale is closed and the second half when the invoice gets paid, the sales force may find that they are paid 30 - 90 days in arrears of the payment of the invoice. It may also mean the there is a need to allow time for all possible adjustments that may affect the sale to be closed, such as credits applied, before the commission is paid. Or, should there be a series of payments, salespeople may not receive their commission until the sale is paid in full.

While such a change is unlikely to happen overnight, it should occur within the next two or three years. After all, it is likely to take most companies that long to find ways to define organizational viability and to construct incentive compensation plans that will effectively carry out that definition.

Viability will be the key issue, critical to all such plans moving forward. Incentive compensation plans will need to be clearly written – in this climate, they can’t very well afford to foster complaints that they encourage in any way the manipulation of reported earnings. Anything that even remotely smells of salespeople receiving bonuses based on incomplete data – where, for example, an expense that hasn’t yet hit the books as an accrued liability is likely to cause a hardship in the company’s future – will become a point of contention. Companies may very well need to include “out” clauses that make guaranteed bonuses and incentive payments non-payable if the company is in a financial bind.

It remains to be seen how incentive compensations will look in the near future – but it is safe to think that the effect of TARP restrictions will be far ranging, affecting salespeople in many industries, whether or not their companies have accepted government monies.

  • Susan MajorSusan Major

    Susan is a management consultant of the sales performance management (SPM) practice at Revelwood, a technology solutions provider for IBM Cognos and Varicent. She can be reached at smajor@revelwood.com or by phone at (817) 688-7251.

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