Category Archives: Sales strategy

Revenue Planning 2016: Don’t Plop All Your Risks on Sales

Four years ago, Martin Winterkorn, now the former CEO of Volkswagen, described an audacious goal to triple the company’s US sales. As he explained it, that achievement would be a milestone for toppling Toyota as the world’s largest automaker. “By 2018, we want to take our group to the very top of the global car industry,” he said.

In October, it was Winterkorn who was toppled as CEO when Volkswagen admitted to circumventing emissions rules. The company confirmed that software designed to fool regulators was installed in over 11 million diesel-powered vehicles. Deceit, too, can be mass produced.

But the idea behind VW’s strategy wasn’t original. It came from an ancient financial fact: transferring risks to others produces revenue and profit. Through clever software coding, VW saved billions of Euros in research and development, time-to-market, and the possibility that they might get bupkis for their effort. Health risks from dirty air? Deaths from emphysema and asthma? Those will be someone else’s problems. The VW Marketing team provided the right message: Clean Diesel. “Let’s face it: VW took advantage of a bunch of hippies with that line,” Dan Neil wrote in an article, VW Lost Its Moral Compass in Quest for Growth.

Winterkorn’s peripeteia reminds me of Yertle the Turtle, by Dr. Suess. King Yertle was a tyrant who conscripted his turtle underlings to place themselves in a stack so he and his throne could be higher than the moon. His project came to an end when the lowest turtle, Mack, burped, causing the pile to crash back to earth.

Then again, from below, in the great heavy stack,
Came a groan from that plain little turtle named Mack.
“Your Majesty, please . . . I don’t like to complain,
But down here below, we are feeling great pain.
I know up on top you are seeing great sights,
But down at the bottom we, too, should have rights.
We turtles can’t stand it. Our shells will all crack!
Besides, we need food. We are starving!” groaned Mack.

Presidential candidate Bernie Sanders can probably recite this dark rhyme in his sleep. It’s all about blind ambition, passion, and arrogance – a recurring, toxic C-suite trifecta, not limited to Volkswagen. “Shouldn’t a business manager care about whether capital is productively deployed to maximize returns, not about generating sales volume for its own sake?” Holman W. Jenkins, Jr. asked in The Wall Street Journal last week.

But many executives view selling risks the same as Winterkorn. They believe that sound financial strategy means dumping risks on others whenever possible. Sales workers toil under this ethos, bearing the brunt of business uncertainty. Employment-at-will. Compensation-at-risk. Flex scheduling. The Uberization of work. Orwellian-sounding terms routinely embedded in commercial parlance. “If this sales game is too much I’ll figure something else out,” a commenter, Mimii, wrote on Indeed.com in a forum titled, Things You Should Know about a Sales Position with AT&T Wireless.

Another commenter, Katie D, wrote “. . . since the last time I posted on here, AT&T changed the commission structure, which they do quite often. So yes, I am now working for peanuts and missing all my son’s football games . . .”

Not everyone in the conversation shared Katie D’s misery. But I couldn’t help thinking about her spirit as she tackles AT&T’s revenue goals. I envision her at the store, clad in a powder blue AT&T polo shirt, feigning a happy demeanor, while she longs to be part of her son’s fleeting childhood. Retail bosses and business bloggers call the Katie D’s of the world Customer-facing personnel, an appropriately tepid and joyless term.

“They have up to 48 hours in advance to change the schedule on you. So make sure you always check your time the night before so you don’t get a point for tardiness,” Katie D opined in another comment. Some would say she’s lucky to have a job. “Oh yeah, I used to be a salesman, it’s a tough racket.” The written rendition doesn’t come close to replicating Alec Baldwin’s mocking sarcasm in Glengarry Glen Ross.

Today, Mack from Yertle wears a tie and carries a mobile phone. And his belching can be heard all over social media:

“Hundreds of people are leaving [Oracle] each quarter,” a salesperson said in 2013, speaking on condition of anonymity. “Oracle has a horrible reputation in the tech sales circles at this point, so yes I see a migration from those who are competent, experienced, and see the writing on the wall,” another said, quoted in an article in Business Insider. “One issue frustrating salespeople is that they have been given quotas to sell Oracle hardware, even though they specialize in software, our sources tell us. That’s problematic because at many enterprises, the IT people who buy software are not the same people as the ones buying [hardware]. It’s an entirely different process.”

A salesperson from IBM shared a similar story:

“I was with IBM for 10 years and was the #1, #2, #1 rep in my software brand in the NATION for years 2009, 2010, 2011 respectively. In 2009 and 2010, I was paid accordingly. At least by IBM standards. In 2011, they screwed us all. 2012 was shaping up to be the same. In 2011, I was paid $40,000 commissions on $12,000,000 in revenue. Why? I was given a $12,000,000 quota. I left in February…and my former region’s best and brightest are peeling off.”

Why do companies shovel risk on employees, and then claw back their remuneration? Because the ka-ching is irresistible. And, because they can. Many employees simply put up with it. “I’ll take my chances with the added pressure of sales and high quotas if it means being able to provide for my daughter a bit better,” Mimii wrote in 2013. I don’t know whether she stuck it out, but the odds aren’t good. The employees “least committed to a company are its salespeople, 38 percent of whom planned to leave within two years.” A finding from a 2001 Hay Group Survey, titled The Retention Dilemma.

Variable compensation for salespeople offers many advantages, including higher pay, and lower risks for employers. But risks must be equitably shared. And they must be managed – not dumped elsewhere, like raw sewage into a river, or carbon into the atmosphere.

In 2016, there are seven imperatives for managing revenue risk:

1. Capturing, preserving, and sharing information. Quality information repositories have become the linchpin of selling. Yet, using a smokescreen called capital preservation, some organizations maintain antiquated systems that heighten selling risks. That’s changing. Companies currently spend approximately $23 billion each year on sales software, according to The Wall Street Journal, in an article, The Data-Driven Rebirth of a Salesman. “Sales offers possibly the biggest opportunity today in adding [artificial] intelligence in the enterprise,” said Mike Dauber, a partner with venture-capital firm Amplify Partners who has invested in the new generation of sales tools.

2. Acquiring, hiring, and retaining business development talent. “Talent acquisition and retention is a huge component of what we [CEO’s] need to think about,” said Christopher H. Franklin, CEO of Aqua America, Inc, a water utility in Bryn Mawr, PA. “That is where you get to set the culture.”

3. Ensuring high workforce productivity. The traditional numbers game mentality involves flogging salespeople for more revenue output. While that approach might provide positive short-term results, it sacrifices equipping salespeople with ways to be more productive. That means giving them proper tools, information, education, and professional development.

4. Continually matching sales resources to customer need. A sales process that doesn’t match buyer need jeopardizes revenue. Yet many companies fail to adapt, insisting that sales teams adhere to ineffective processes, or maintain ones that provide little value to customers.

5. Assigning, monitoring, and enforcing sales goals that create value for the company. Many organizations are short-sighted when developing sales goals, limiting them to revenue objectives. Executives overlook other opportunities for Sales to bring value, including high customer satisfaction, market intelligence, and higher profits.

6. Modeling and preserving high ethical standards. This needs no explanation as Volkswagen’s brand reputation implodes.

7. Increasing revenue opportunities. – A roll-up of all of these. Managing revenue risk requires getting better at growing sales. That includes expanding the number of accounts to call on, increasing win-rates, growing installed customer revenue, and reducing customer churn.

“Everyone knows that quotas will be going up next year . . . ” The predictable preamble to fourth-quarter sales meetings around the world. But will risks increase, too? I challenge anyone to find a Volkswagen salesperson who has been offered quota relief for the risks that Winterkorn shoved into the dealer channel.

Before I stomp on C-Level executives who blithely chuck their risks onto someone else – or in Volkwagen’s case, blast it out their tailpipes – I want to share a thought: transferring risks is as much a part of business as the exchange of goods and services. But management’s goal should be not only ensuring it’s done profitably, but openly, equitably, and legally.

This article originally was originally published on CustomerThink for Navigating Revenue Uncertainty. To view the original article, please click here.

Announcing the 2015 Sales Ethics Hall of Shame

“Money doesn’t talk, it swears.” – Bob Dylan

When I need a burst of energy, I don’t reach for an espresso or Red Bull. I pick up a revenue plan. Any plan will do. Wanna dance? I know the Cash Flow Hustle!

Targets! Sales process! Profit margins! Lead generation! Capture rate! Conversion rate! Market share! When saying these words, watch for errant spittle flying off the tongue. It can’t be helped.

Ethical Governance deserves a special place in every revenue plan, but this dowdy topic doesn’t fit with the excitement. Many companies simply shove ethics into a metaphorical closet and then down the stairs. “Let Legal handle that.” Muffled banging, a distinct thud, and then the thrill of watching the revenue curve soar to the heavens, unencumbered, according to plan. “Guilt? We don’t use that word around here, Buddy.”

The party ends after an inopportune disclosure from an employee, or a journalist’s investigative report. Business poop hitting a whirling fan. What gets propelled through the other side sullies everything in its path. The myopic pursuit of the almighty dollar seldom ends up pretty.

That describes the 16 companies inducted into the 2015 Sales Ethics Hall of Shame. When I first made these awards in 2013, the inductees had to meet three standards:

1. The primary purpose of the enterprise couldn’t be selling an illegal product or service, like crystal meth or human trafficking.

2. More than one employee had to be involved in unethical activity. Scams involving a single, rogue employee did not qualify.

3. Any chicanery had to be repeatable and scalable—in other words, embedded in the company’s business process.

These standards apply to 2015’s award recipients as well, and all 16 inductees cleared each threshold, with room to spare.

Turing PharmaceuticalsHiking prices on Aunt Betty’s lifesaving medication by 5,500%.

This year, Turing’s CEO, Martin Shkreli made news by increasing the price of Turing’s Daraprim to $750 per tablet from the original price of $13.50. A change that instantly drove annual treatment costs for some patients into the six figures. “What is it that they are doing differently that has led to this dramatic increase?” Dr. Judith Aberg, the chief of the division of infectious diseases at the Icahn School of Medicine at Mount Sinai, asked rhetorically. She said the price increase meant hospitals might have to use “alternative therapies that may not have the same efficacy.” Translation: the price increase will kill some patients – literally.

Valeant Pharmaceuticals International / Philidor Rx Services LLCBad ethics infect a supply chain.

Valeant, and its retail partner Philidor had a cozy working relationship – too cozy for some. Valeant manufactures drugs, and Philidor distributes them, with Valeant as a sole-source provider. “Valeant’s critics say the flap shows some pharmaceutical companies have established or controlled pharmacies expressly to dispense their drugs and ensure reimbursement by insurers – sometimes through aggressive tactics that evade insurers’ efforts to control costs,” The Wall Street Journal reported on November 1, 2015.

Recently, “a short [stock] seller has accused [Valeant] of using Philidor in an accounting scheme, and former Philidor employees say Valeant staffers worked directly in the pharmacy’s offices, sometimes using fake names,” according to another Wall Street Journal article (Tough Sales Tactics Used at Philidor, October 29, 2015). None of this would be possible without good old infrastructure and documented business procedures for staff to follow. A Philidor training manual advised dropping a drug’s cost in $500 increments “until paid and then increase by $100 to get as close as possible to the max amount allowed by the insurance company,” the Journal reported.

Valeant’s revenue scheme with Philidor came to ignominious end on Friday, October 30th, when the three largest US pharmacy-benefit managers – CVS Health Corp, Express Scripts Holding Company, and United Health Group Inc.’s OptumRx – announced they were terminating all purchases from Philidor effective immediately. Valeant followed suit the next day, saying it was “ending all ties with Philidor.”

American Honda Finance Corporation: When Marketing loves minorities, but for all the wrong reasons.

In July, the US Department of Justice filed a complaint against American Honda Finance Corporation, alleging that the company’s dealers had overcharged minority customers, causing them to pay higher interest rates than white borrowers. Honda’s auto finance division agreed to pay a $24 million settlement to minority buyers, and to restructure the division.

Honda does not make direct loans to consumers. Instead, it authorizes dealers to mark up its loan rates up to 2.25%. But “regulators found rate discrimination within those mark-ups,” Assistant Attorney General Vanita Gupta said in an interview. The Justice Department and the Consumer Financial Protection Bureau began their investigation in 2013, and found that minority borrowers were paying $150 to $250 more than white borrowers. “The hope really is that Honda’s leadership is going to trigger the rest of industry to constrain dealer mark-ups and discriminatory pricing,” said Gupta.

Volkswagen“Clean Diesel” – marketing lipstick on an ethical pig.

When VW’s management decided to embed software for circumventing environmental regulations into the brains of its engines, it mass produced lying on an unprecedented scale. Eleven million vehicles are driving around with deceitful code, and now, we’ve just learned, not all of them are Volkswagens. The flagship brand Porsche just entered the scandal.

The case will be studied for years in business classes around the world as an example of a catastrophic junction of ethics and finance. $18 billion in potential fines. Billions of dollars pending in class-action lawsuits. 20% decline in VW’s stock price when news of the cheating scandal broke. Hospital and social costs estimated at $450 million. 30 Volkswagen managers directly implicated in the scandal. Massive worker cutbacks.

“I personally am deeply sorry that we have broken the trust of our customers and the public,” Volkswagen’s former CEO, Martin Winterkorn, said after the news of the scandal broke. His contrition appears to be lipstick on a pay-plan pig. Winterkorn’s pension from his former employer will be around $32 million.

General MotorsWhen fixing a fatal product flaw cuts into profit margins.

“They let the public down. They didn’t tell the truth in the best way that they should have — to the regulators, to the public — about this serious safety issue that risked life and limb,” said US Attorney Preet Bharara. The product flaw – ignition switches that unintentionally slip from the “run” position, cutting power to the engine – has been implicated in at least 169 deaths. GM has spent more than $5.3 billion “on a problem authorities say could have been handled for less than a dollar per car. Those expenses include fines, compensation for victims and the recall of millions of vehicles,” according to the Oneida Daily Dispatch.

There was evidence that GM knew about the faulty engineering for over ten years, but chose to conceal the defect from the government and the public. “We understand that lives were impacted. That is something that we understand and we take forward and will have with us every day,” GM’s CEO, Mary Barra said. But her circumspection won’t take place in prison. As part of the deal with government prosecutors, no GM employees will go to jail.

“If a person kills someone because he decided to drive drunk, he will go to jail,” said Laura Christian, the mother of a woman who died in her 2005 Cobalt. Yet GM employees “are able to hide behind a corporation because our laws are insufficient. It must change.”

TakataStuffing ten pounds of product defects into a five pound airbag.

Defective Takata airbags have been attributed to at least 139 injuries across all automakers. Two people have died from faulty Takata airbags in Honda vehicles, Takata’s largest customer. Approximately 34 million vehicles of all makes have installed Takata airbags that are potentially defective. Takata’s airbag inflators can explode, causing shrapnel to shoot into auto cabins.

On November 3rd, US regulators assessed Takata a $70 million fine, and ordered the company to stop using ammonium nitrite-based propellants in their products. In 2014, The New York Times published a report “suggesting that Takata knew about the airbag issues in 2004, conducting secret tests off work hours to verify the problem. The results confirmed major issues with the inflators, and engineers quickly began researching a solution. But instead of notifying federal safety regulators and moving forward with fixes, Takata executives ordered its engineers to destroy the data and dispose of the physical evidence. This occurred a full four years before Takata publicly acknowledged the problem,” Car and Driver reported on October 26, 2015 (Massive Takata Airbag Recall: Everything You Need to Know, Including Full List of Affected Vehicles).

“’We deeply regret the circumstances that led to this,’ said Takata Chief Executive Shigehisa Takada, adding that the company is ‘committed to being part of the solution,’” The Wall Street JournalReported on November 4th (Honda Adds to Mounting Woes at Takata). On November 3rd, the same day that US regulators announced the $70 million fine, Honda said it “will no longer use Takata Corporation front driver or passenger air-bag inflaters in new vehicles under development,” alleging Takata misrepresented or manipulated test data.

Coca ColaUsing “scientific research” to “inform” the debate about obesity.

In the last 20 years, consumption of full-calorie sodas in the US has declined 25%. Coca Cola wanted to stem the tide with “science.” “Most of the focus in the popular media and in the scientific press is, ‘Oh they’re eating too much, eating too much, eating too much’ — blaming fast food, blaming sugary drinks and so on,” said the vice president of the Global Energy Balance Network, Steven N. Blair, adding, “and there’s really virtually no compelling evidence that that, in fact, is the cause.” Coca Cola provides Blair’s organization financial and logistical support.

Health experts objected to Blair’s assertions, saying they are “misleading and part of an effort by Coke to deflect criticism about the role sugary drinks have played in the spread of obesity and Type 2 diabetes. They contend that the company is using the new group to convince the public that physical activity can offset a bad diet despite evidence that exercise has only minimal impact on weight compared with what people consume,” according to an article in The New York Times (Coca Cola Funds Scientists Who Shift Blame for Obesity away from Bad Diets).

Coca Cola heard the health community’s response loud and clear. In a Wall Street Journal editorial published August 19 titled, We’ll Do Better, Coca Cola CEO Muhtar Kent wrote,

“I am disappointed that some actions we have taken to fund scientific research and health and well-being programs have served only to create more confusion and mistrust. I know our company can do a better job engaging both the public-health and scientific communities—and we will. By supporting research and nonprofit organizations, we seek to foster more science-based knowledge to better inform the debate about how best to deal with the obesity epidemic. We have never attempted to hide that. However, in the future we will act with even more transparency as we refocus our investments and our efforts on well-being.”

Axact Corporation College degrees provide wealth . . . to the faux institutions that issue them.

Online access to education has provided opportunities to millions of people to earn college degrees. It also provides opportunities for unscrupulous scam artists who operate from behind of smokescreen of proxy Internet services and weak international regulations, particularly in Pakistan, the home country of Axact Corporation.

“At Axact’s headquarters, former employees say, telephone sales agents work in shifts around the clock. Sometimes they cater to customers who clearly understand that they are buying a shady instant degree for money. But often the agents manipulate those seeking a real education, pushing them to enroll for coursework that never materializes, or assuring them that their life experiences are enough to earn them a diploma. To boost profits, the sales agents often follow up with elaborate ruses, including impersonating American government officials, to persuade customers to buy expensive certifications or authentication documents. Revenues, estimated by former employees and fraud experts at several million dollars per month, are cycled through a network of offshore companies,” according to an article in The New York Times (Fake Diplomas, Real Cash: Pakistani Company Axact Reaps Millions).

In late May, Axact’s CEO, Shoaib Ahmed Shaikh, and four others were arrested in Pakistan, and charged with fraud, forgery and illegal electronic money transfers, money laundering, and violating Pakistan’s electronic crimes act.

Peanut Corporation of America (PCA)Neither mold, nor cockroaches, nor salmonella will delay this company’s deliveries. 

Peanut Corporation’s products were involved in a two-year salmonella outbreak from 2007 to 2009. In 2015, Stewart Parnell, former CEO of PCA, was sentenced to 28 years, the most severe punishment ever meted to an executive of a food company for a safety issue. The Center for Disease Control estimates around 700 PCA-related cases were reported, including nine deaths in 46 states. Possibly thousands of people were harmed.

Parnell wasn’t guilty of lax oversight and poor quality control. This scandal resulted from the fact that his company knowingly shipping tainted food. After discovering that a shipment might get delayed because of lab results that indicated the presence of salmonella, Parnell wrote, “s***, just ship it,” according to The Wall Street Journal. Parnell was also accused of falsifying lab reports.

“I cannot afford to loose [sic] another customer,” he wrote in a statement that should not be confused with customer-centricity.

M.C. Dean and Hilton Hotels. You can get a wireless connection – but not before you give up your credit card number.

“Consumers are tired of being taken advantage of by hotels and convention centers that block their personal WiFi connections,” said Travis LeBlanc, chief of the FCC’s Enforcement Bureau. “This disturbing practice must come to an end. It is patently unlawful for any company to maliciously block FCC-approved WiFi connections.” The FCC began investigating M. C. Dean in 2014 after it received complaints that the company was blocking wireless Internet access for guests at the Baltimore Convention Center, where the company is the sole Internet provider. M. C. Dean admitted to obstructing hotspots using auto-block mode on its WiFi system, engadget.com reported on November 4th. “The company was charged with violating the FCC’s Communications Act by maliciously interfering with or causing interference to lawful WiFi Hotspots.” The FCC has fined company $718,000.

Hilton has been fined $25,000 for failing to cooperate with an FCC investigation into similar efforts to block WiFi access at its properties.

Wells Fargo: What happens when a company insists on its sales force making quota, but doesn’t care how they do it.

This summer, The Los Angeles City Attorney, Mike Feuer, sued Wells Fargo on behalf of the city. The suit states, “. . . Wells Fargo’s business model imposed unrealistic sales quotas that, among other things, have driven employees to engage in unlawful activity including opening fee-generating customer accounts and adding unwanted secondary accounts to primary accounts without permission. These practices allegedly have led to significant hardship and financial loss to consumers, including having money withdrawn from customer’s authorized accounts to pay for fees assessed by Wells Fargo on unauthorized accounts and derogatory notes on credit reports when unauthorized fees went unpaid, causing some customers to purchase identity theft protection.” The complaint further alleges that Wells Fargo failed to properly inform customers of misuse of their personal information and failed to refund unauthorized fees,” according to a press release from Feuer’s office.

A judge dismissed the lawsuit, but the City has appealed. In September, the City of Oakland, California, filed a related suit against Wells Fargo, accusing the company of “steering minorities into high-cost mortgage loans that allegedly led to foreclosures, abandoned properties and neighborhood blight,” according to Reuters.

“African-American borrowers in Oakland were 2.4 times more likely to receive a predatory loan than comparable white borrowers. Hispanic borrowers were 2.5 times more likely to receive a predatory loan. Loans in minority neighborhoods were 4.75 times more likely to end in foreclosure. The disproportionate number of foreclosures among minorities would not have happened if [Wells Fargo] applied uniform lending practices,” the lawsuit said.

Access Funding: Why let mental impairment jeopardize a profitable deal? 

To critics, “Access Funding is part of an industry that profits off the poor and disabled. And Baltimore has become a prime target. It’s here that one teen — diagnosed with ‘mild mental retardation,’ court records show — sold her [structured settlement] payments [to Access] through 2030 in four deals and is now homeless. It’s here that companies blanket certain neighborhoods in advertisements, searching for a potentially lucrative type of inhabitant, according to the Washington Post (How Companies Make Millions of Lead-poisoned, Poor Blacks, August 25, 2015).

Access Funding and other companies have found gaps in the legal protections offered to victims of lead poisoning, allowing them to buy structured settlements for pennies on the dollar. “Over the past two decades, state legislatures and the U.S. Congress have passed measures to protect vulnerable people selling structured settlements. In 2000, Maryland inked the Structured Settlement Protection Act, which enumerated a series of requirements. First, a seller must seek the counsel of an independent professional adviser. Then the proposed deal must go before a county judge, who decides whether that agreement reflects the seller’s best interests,” according to the Post article.

“There are weaknesses and ways people can circumvent it,” said Eric Vaughn, Executive Director of the National Structured Settlements Trade Association. “And these companies are getting around the intents of the law. . . . And when that happens, people get hammered.”

Medtronic: M-E-D-I-C-A-R-E: another way to spell revenue.

A former Medtronic sales rep, Jason Nickell of Austin, Texas, alleged in a whistleblower lawsuit that the company promoted off-label use of a neurostimulation device. He made as much as $600,000 per year selling it. The suit states, “Medtronic sales staff was directed to promote the off-label procedure by selling the neuromodulation device at steep discounts to pain management doctors and by promising those physicians that they could ‘make upward of $10,000 profit on each patient, while adding only minutes to the procedure,’” according to an article in the Star Tribune (Medtronic to pay $2.8 million to Settle Off-label Promotion Charges, February 7, 2015). Nickell quit his job “over concerns about the way that Medtronic devices were being promoted for an investigational procedure known as subcutaneous stimulation, Sub-Q or subcutaneous peripheral nerve field stimulation,” according to the suit.

Under the terms of Medtronic’s agreement with the US government, the company will pay $2.8 million in fines, in exchange for dismissal of criminal charges, and no obligation to admit liability. “Medtronic is committed to following appropriate marketing and reimbursement practices at all times, and for many years has had in place a comprehensive and robust employee compliance program,” the company said in the statement.

The US government interpreted the company’s actions differently. “Medtronic’s scheme,” as the government described it, turned many doctors “from dispassionate medical professionals … into retail salesmen pushing ‘snake oil’ because of large profits.”

Office Depot: A price commitment that’s worth less than the paper it’s printed on.

In January, the law firm Philips and Cohen reported that “more than 1,000 cities, counties, school districts and other government entities in California – including Los Angeles and Santa Clara County – will share in a $68.5 million settlement paid by Office Depot for allegedly overcharging them for office supplies. The case was initiated by a former Office Depot employee, David Sherwin, in a whistleblower lawsuit.

“Participants in the contract are guaranteed to receive Office Depot’s best available prices for government purchasers, according to Sherwin’s complaint. But Office Depot allegedly gave Los Angeles, Santa Clara and the other California entities that are part of the settlement a lower discount rate than other government entities were given,” according to Philips and Cohen. The case alleged that “Office Depot failed to give most of its California government customers the lowest price it was offering any government customer as required under its contracts.” Other pricing misconduct also was alleged.

“David Sherwin’s insider knowledge and his determination to do the right thing were the most important factors in bringing Office Depot’s alleged misconduct to light,” said Stephen Hasegawa, a San Francisco attorney who represented Sherwin. “He worked tirelessly on his own and with his lawyers for several years to try to prove Office Depot had overcharged its government customers.”

Formosa Plastics: When quality control measurements don’t conform to industry standards, make them up.

On April 4th, Formosa Plastics agreed to pay $22.5 million “to settle its liability in a whistleblower lawsuit involving PVC pipe manufactured by a former subsidiary, JM Eagle, under the terms of a settlement agreement approved by a federal judge. The settlement by Formosa Plastics doesn’t cover JM Eagle’s liability. The lawsuit alleges that JM Eagle ‘falsely represented to its customers . . . that the PVC pipe products sold to them conformed to applicable industry standards when in fact the products were made using inferior materials, processing, and tooling that resulted in their having substandard tensile strength, as measured by various tests,’” according to PRNewsire (Formosa Plastics Agrees to Pay $22.5 million to Settle Its Liability in Whistleblower Case That Former Subsidiary JM Eagle Lost at Trial) 

It’s impossible to read about these appalling ethical choices without recognizing disturbing patterns. All were heartless and deliberate. Most created human calamity, including death, personal injury, job and financial losses. All exploited information power. All depended on legal loopholes, regulatory gaps, or lax enforcement. All caused incalculable financial losses. All resulted from persistent chains of unethical choices – not from a single bad decision. Most infected more than one company.

These patterns can be broken when Ethical Sales Governance gets wedged into every company’s revenue plan. I propose putting it in between Sales Process and Lead Generation, so it won’t be missed. Jazz up the title by calling it Optimized Ethical Sales Governance – that way, people will read it. Then, pack the section full of content, including Corporate Responsibility, a Code of Business Conduct, Ethics Monitoring and Assessment, Reporting Violations, Compliance, and Ongoing Ethics Training and Development.

My reasons for making these recommendations are entirely self-serving: I want fewer candidates to cull when I make my choices for 2016.

Filthy Money: When Selling Creates Moral Conflict

“Have you ever encountered an ethical dilemma and how did you handle the situation?”

I’ve been asked to answer that question next week as a presenter at a Virginia science and tech high school as part of Ethics Day. My colleagues come from a breadth of professions, and each of us has been allotted 20 minutes. For me, the greatest difficulty is knowing where to begin.

One topic I will cover: are there situations when – morally and ethically – revenue is not worth having? As I answer this question and others, I expect that these savvy students will find my inconsistencies huge, like a full moon in Autumn. As author David Quammen wrote, “not every crisp line represents a triumph of ethical clarity.”

But most high school students have not had to meet a demanding revenue target or “make quota.” They can afford to be idealistic. And I hope they are. This is a good age, and a safe place, to learn and explore “what is the right thing to do?”

I plan to share a poignant example: In 2011, Marine Medal of Honor recipient Sgt. Dakota Meyer was conflicted over selling his company’s product, a sophisticated rifle scope, to the Pakistani military. “We are taking the best gear, the best technology on the market to date and giving it to guys known to stab us in the back . . . These are the same people killing our guys,” he explained.

If you followed this story, Meyer worked for BAE Systems when he refused to pursue the deal with the Pakistanis. BAE fired him, and Meyer sued the company. In December, 2011, BAE announced that the parties had settled the dispute out of court.

I will follow that story with two examples of my own ambivalence in professional selling:

1. Cigarette manufacturing

Cigarette manufacturing is a huge part of Virginia’s economy. The Philip Morris Richmond Manufacturing Center alone occupies 200 acres, with six connected buildings totaling 1.6 million square feet. An outsider cannot appreciate the size of the US tobacco industry until he or she drives on I-95 through Richmond, and smells ambient tobacco leaf particles flowing into the car’s air ducts. The huge network of suppliers—from production machinery to carton printers to filter manufacturers to warehousing—have similar logistics challenges to other manufacturers.

For years, the technology I sold to companies in the tobacco value chain helped them manufacture and distribute a legal-lethal product better, faster, and cheaper. Not a rapport builder in the health-care vertical. “My marquis customer? Sure . . . are you familiar with Marlboro cigarettes? . . .” I overcame my dissonance because I rationalized that cigarette smoking is voluntary. But that required suspending another scientific fact – that nicotine is non-addictive and that cigarette manufacturers don’t malevolently tinker with its concentration in their end products.

Had I stood on principal and refused to help cigarette manufacturers, my competitors would have gladly filled the void. Could I subtract tobacco-related revenue from my account portfolio and still make quota? Answer: no – not in Virginia.

2. Firearm manufacturing

One of my prospects was a large handgun manufacturer with a single-location factory in my sales territory. I decided not to call on the company. Unlike the first example, I wanted the revenue, but I didn’t need it to make quota. While I recognize that it’s perfectly legal to manufacture and distribute firearms in the US, my objection – again – was the lethal thing. For me, it would have been indescribably strange to walk the production floor, looking at bins of forged parts and watching Quality Control test bays, knowing the use of the finished product. I imagined speaking with the same detached operational terms for other my other manufacturing customers, but not being able to escape knowing the ultimate purpose of the precision and quality was to deliver bullets better. Just writing about it still makes me queasy. Call me a wimp. I can handle it.

Was my idealism fair to my employer? Probably not. I referred the gun manufacturer to a third-party reseller who didn’t share my compunction.

In less than 10 years, many of the students in my session will face similar quandaries. How will they respond, for example, when an employer asks them to sell products to people with impaired decision-making abilities, as described in an August, 2015 Washington Post article, How Companies Make Millions off Lead Poisoned, Poor Blacks? The practice is borderline illegal, with the emphasis on borderline. Laws have not fully caught up with an obvious moral wrong, underscoring why ethics matters, and why it’s so important that discussions about ethical choices in one’s career begin in high school – or earlier. The biggest mistake people make about ethics is denying that conflicts can occur.

When quotas and revenue goals are on the line, having the courage to be selective about the intended purpose for one’s products and services can be difficult. These vignettes illustrate how complicated the choices can be, and twenty minutes hardly leaves time to dig beneath the surface.

Still, I will carve out time for students to question the answers.

How Risky Is Your Revenue Plan?

The English language needs a new word. A word that combines the meanings of hope and stupidity. Hopeidity sounds right. A versatile noun I can use when someone exclaims, “Hey y’all, watch this!”

I searched for this phrase online, and began an adventure to the boundaries of risk taking. Among the gems I uncovered:

• spud gun with propane and oxygen (“dangerous, NOT RECOMMENDED !!!”)
• the 25 most death-defying stunts ever
• “we try to pull down a 30 foot tree with a Hunt V and its wench. We fail.”
• The longest motorcycle ride through a tunnel of fire

These specimens are among the few I can call cerebral. The rest? Sheer hopeidity. Which opens deep questions: what motivates people to accept risks? Why do some BASE jump, or willingly leap from high bridges with a bungee cord strapped to their ankles? Why do men and women descend into coal mines 175 stories deep in the earth to earn a paycheck? Why do entrepreneurs invest their entire savings to start companies, when others say, “no freaking way!”

I accept that I will not come close to solving this bafflement. It joins a collection of other perplexities: how infants transform from joyously happy to shrill meltdown in a mere instant. Why GM ever produced the Pontiac Aztec. But I see a bright side to my willful ignorance. Disparities in risk perception drive capitalist economies, of which I am a part. Ignorance as a patriotic duty? That’s a discussion I will take up later. Today, I will not talk politics.

If every individual had an identical view on risk, commerce would grind to a halt. Financial exchanges and commodities markets would not exist. Money would not be loaned or invested. And that means no farming, no livestock, no food production. Everyone would be forced to subsist on wild mushrooms and berries. Microwave ovens would be cannibalized to provide scrap metal for roofing.

I offer a simple, though imperfect, explanation for why I won’t voluntarily don a wingsuit, and sprint from a sheer, rocky cliff, arms and fingers extended, with experimental clothing and air pressure differential as my only means to support a safe descent: I can’t tolerate the risk. And, for sure, I lack capacity to deal with a failed outcome.

Risk tolerance is a mushy concept. It’s hard to quantify, and difficult to explain. I’ll just say that risk tolerance relates to feelings and attitudes about uncertainty in the context of attaining a goal. Besides, I’ve promised to keep this article short, and Sigmund Freud, I’m not.

What I do know is that for wingsuit flying, the possible outcomes are binary. I can either live to talk about a thrilling experience that few others have the viscera to try, or through an unfortunate landing, I can become sustenance for coyotes and vultures. My thoughtful decision: nein! Here, my risk tolerance relegates me to watching someone else fly, while I’m solidly plunked in a folding chair, eighty feet from the precipice, cold IPA in hand, faithful hound at my side. I’m OK with that. I can still get an adrenaline rush without needing to be asked whether I have updated and signed my will.

I’ll leave risk tolerance to be dissected in touchy-feely psychology journals. But risk capacity? – well, that’s quantifiable, and it fits nicely in my wheelhouse. Give me a number, and straightaway, I’ll crunch it into a ratio or performance indicator. In business, I can’t easily gauge risk tolerance, but I can certainly calculate whether people or companies have the assets and cash flow to sustain a failed outcome.

“Hey, y’all! Watch this!” I can spot versions of this bravado from a mile away. For example, “One year after its inception, IMSWorkX Inc. expects to grow 300 percent in 2014 because of a key personnel addition and recently introduced production.” A feat that requires spunk, and boundless hope. The company’s president, Shannon Chevier, added, “We started off with a little bit of an installed base, but we’ve increased that dramatically this year and we have huge plans for the coming year.” In this vicinity, I expected her to mention customer and future demand. But no. I had to settle for installed base. Hopeidity. We need this word.

Customers create revenue. So executing huge revenue plans requires more than making tangential references to them. It also requires financial muscle to cover the risk of failure. Something that can’t be assumed, as Richard Harris, CEO of AddThis explained at the Mid-Atlantic Venture Association’s June, 2015 TechBuzz event in Virginia. Harris described a company he worked with which had an operating plan that “relied on one big deal” closing. Hail, Mary! “And what if that doesn’t happen?” Harris asked the company’s senior executive. “We run out of cash at the end of the year.” At least the executive was honest, and didn’t waste time dancing around the answer. The company lost the deal, and suffered a hard landing. High Risk Tolerance with Low Capacity for Failure. This story needs a shorter, less-jargoned title. How about, Hey y’all! Watch This!

Massive layoffs and bankruptcies. These are conspicuous artifacts of incongruity between risk tolerance and risk capacity. Yet, companies often ignore the canary in the coal mine: repeated revenue shortfalls. Which underscores why CXO’s need to soil their A. Testoni shoes, and wade into the sales weeds.

When I asked a related question on several LinkedIn forums recently (“Does your company’s CFO provide input, governance, or guidance over sales lead qualification?”), I received one lonely response: “Please clarify why a CFO would need to provide input, governance, or guidance over sales lead qualification. Do they have any experience in any of those fields?”

Had I substituted the F in CFO for an M, my inbox would have been inundated with adamant opinion and pointed advice. Serendipitously, the solitary answer I received illuminated an important concern: few recognize the connection between financial planning and selling risks.

In fact, the two are intertwined. In 2010, an in-house blog for Rubicon Project, Inc. stated that the company “generates over $100 million in revenue annually” through advertising volume. Beneath the headline MAKING IT RAIN, the company forecast that revenue would “grow to $200 million in 2011.” But in January, 2014, the company’s IPO prospectus “showed just $37.1 million in revenue for 2011 and a net loss of $15.4 million,” according to The Wall Street Journal (Tech Startups Play Numbers Game, June 10 2015). The company’s revenue “surged [in 2014] to $125.3 million, but that was still far below the $200 million number announced by Rubicon in 2010. Rubicon had a net loss of $18.7 million last year.” “Hey y’all! Watch This!” This revenue estimate collided with a rock.

Such disparities create shock and awe. Rubicon Project missed its revenue goal by 82% – an epic planning failure. But I’m not surprised. Marketing and sales executives hoard many crucial decisions that influence revenue risk: How to qualify leads, which pipeline multiplier to use, how much revenue to sell through channel partners, how to guide social media conversations, which sales process to use, how to develop and train the sales force. When shortfalls hit the fan, CXO’s scratch their heads, wondering why so many of their spreadsheet cells are populated with red numbers.

Decisions about how to achieve profits, market share, revenue growth, customer loyalty, and high shareholder returns are rarely compatible. Nor are personal attitudes about risk, which vary from “hey y’all watch this!” to “no freaking way!” So companies must establish a risk appetite framework for revenue operations that guides the nature, types, and levels of risk that the organization is willing to assume. That gives decision makers guidance for discriminating between which risks to accept, and which to reject.

The Wall Street Journal describes a risk appetite framework as “a structured approach to governance, management, measurement, monitoring and control of risk.” (The Benefits of Implementing a Risk Appetite Framework). There are three tiers – risk capacity, risk appetite, and risk limits – represented as an inverted triangle, with risk capacity at the top and risk limits at the bottom. The inferences are clear: a company’s risk appetite should never exceed its capacity to absorb failure. And its self-imposed limits shouldn’t exceed its appetite.

According to the article,

Risk capacity: management’s assessment of the maximum amount of risk that the firm can assume, given factors such as its capital base, liquidity, borrowing capacity and regulatory standing.

Risk appetite: the level and type of risk a firm is able and willing to assume in its exposures and business activities, given its business objectives and obligations to stakeholders.

Risk limits: amounts of acceptable risk—measures and thresholds—related to specific risks, or to specific departments or processes.

Evidence of a company’s risk appetite is found in its culture. Some companies instill a culture of knock-kneed fear. They perennially take cautious baby steps with new initiatives, and flagrantly penalize employees for failing. Others have high risk appetite, encouraging employees to try things that have uncertain outcomes. Most are utterly inconsistent. One company I worked for had a policy of putting any salesperson who made less than 85% of goal on a Performance Improvement Plan (read: in three months, you will be fired). Meanwhile, executives in other departments kept their jobs as they speculatively tinkered with products and programs, and squandered millions of dollars.

In Defining Your Appetite for Risk (Corporate Risk Canada, Spring 2012), Rob Quail provides a low-to-high scale for risk appetite – averse, minimalist, cautious, flexible, and open. Companies can adopt these levels enterprise-wide, departmentally, or for a specific process. The point is, establish a policy. Don’t leave risk acceptance to personal whim.

Quail shares four questions for determining appetite:

1) What is the organization’s overall philosophy toward the achievement of the [revenue] objective?
2) How much uncertainty or volatility is acceptable?
3) When faced with choices, how willing is the organization to select something that puts the objective at risk?
4) How willing is the company to trade off achieving this objective for other objectives?

Richard Barfield of PriceWaterhouseCoopers outlines three measures for risk in an article, Risk Appetite – How Hungry Are You?

Quantitative measures. Companies must connect business plans to risk measurement processes. For example, “appetite for earnings volatility.” These “describe the type and [quantity] of risk the business wants to and is willing to take.”

Qualitative measures. “Recognize that not all risk is measurable but can affect business performance. For example, appetite for business activities outside core competencies.”

Zero tolerance risks: A subset of qualitative measures. Identify the categories of risk to eliminate. For example, regulatory non-compliance or ethics violations.

Keys for success.

1. Risk appetite must support present and future strategy. A company that accepts too little risk will fail as surely as one that accepts too much.

2. To ensure that the right revenue risks are accepted, senior management must be involved in the decisions that are considered most consequential to achieving plan.

3. Risk appetite statements must include clear guidance for discriminating between acceptable and unacceptable risk.

I haven’t met any successful business developers who don’t enjoy an occasional shot of adrenaline. The pang of excitement that comes from the opportunity to master uncertainty. “Hey y’all, watch this!” I’m with you! But please, if you’re wingsuit flying with your revenue plan, get everyone at your company aboard, and make sure you can absorb a hard landing.

This article was part of Navigating Revenue Uncertainty, featured on CustomerThink. To view the original article, please click here.

Teach Your Sales Force Well: Learning from Pay for Performance

As Americans breathlessly awaited release of the Wells Report concerning the New England Patriots football deflation scandal, another one was unfolding. A scandal that didn’t feature star athletes and lascivious double entendres, but one that was more heinous. USA Today reported that “the city of Los Angeles filed a civil lawsuit [May 5th, 2015] against Wells Fargo, alleging that the bank has been looking the other way as its sales people take advantage of customers, including Mexican immigrants, by opening accounts and issuing credit cards without their permission.”

Those aggressive, money-hungry salespeople! They have no scruples!

So easy to point fingers. But if you’re looking for a root cause, search upstream. In the direction of power breakfasts, bespoke suits, and C-Suite MBA’s. There, on the shiny boardroom table, you will find the smoking gun. The alleged chicanery originates from the Wells Fargo business model, aided and abetted by the sales culture and the sales rep pay plan.

According to a press release from LA City Attorney, Mike Feuer, “. . . Wells Fargo’s business model imposed unrealistic sales quotas that, among other things, have driven employees to engage in unlawful activity including opening fee-generating customer accounts and adding unwanted secondary accounts to primary accounts without permission. These practices allegedly have led to significant hardship and financial loss to consumers, including having money withdrawn from customer’s authorized accounts to pay for fees assessed by Wells Fargo on unauthorized accounts and derogatory notes on credit reports when unauthorized fees went unpaid, causing some customers to purchase identity theft protection. Furthermore, the complaint alleges that Wells Fargo failed to properly inform customers of misuse of their personal information and failed to refund unauthorized fees.”

The inspirational chant, sell, sell, sell! just took on an appallingly noxious odor. “The result is that Wells Fargo has generated a virtual fee-generating machine, through which its customers are harmed, its employees take the blame, and Wells Fargo reaps the profit,” according to the lawsuit. A wearily-familiar story line: executives at a monolithic corporation become enriched at the expense of customers and employees. Theft, on an efficient assembly line where the workers have white collars. Rube Goldberg, if he were alive today, would have struggled to draw an amusing caricature.

Wells Fargo blamed the bad tactics on a few rogue employees, and claimed the offenders were fired or disciplined. But a former Wells Fargo rep, Rita Murillo, tells a different story: “We were constantly told we would end up working for McDonald’s . . . If we did not make the sales quotas, we had to stay for what felt like after-school detention, or report to a call session on Saturdays.” Ms. Murillo, a Florida branch manager, resigned from the company.

For just a moment, set aside hype from companies espousing their keen commitment to doing the right things for their customers. Ms. Murillo’s comments paint a seamier, often unnoticed picture. We’re reminded that employers can use performance pay plans to enforce practices that are anything but customer-centric. Arm wrenching communication, delivered via the paycheck. For example, “Above all, we expect you to make your number!” Go ahead – try to find nine words that inject more risk into the customer experience, with the possible exception of please hold, your call is very important to us.

Take a manic focus on revenue or market-share growth, add a hefty portion of variable comp into the sales pay-package, and the result compares to tossing battery acid on customer relationships. Back in 2013, Scott Reckard, reporter for the Los Angeles Times, wrote a prescient article, Wells Fargo’s Pressure Cooker Sales Culture Comes at a Cost. “To meet quotas, [Wells Fargo] employees have opened unneeded accounts for customers, ordered credit cards without customers’ permission and forged client signatures on paperwork. Some employees begged family members to open ghost accounts.” Show me repeated sales misbehavior, and I’ll show you a pay plan that influenced and rewarded it.

On the flip side of the Wells Fargo case is Best Buy, which in 1989, famously unleashed a novel pay plan for its sales staff that helped crush archrival Circuit City. Acting on research that revealed consumer distaste for high pressure sales techniques, Best Buy eliminated revenue-based commissions. The Wall Street Journal reported in 2009 (Best Buy Confronts Newer Nemesis) that Best Buy CEO-designate Brian Dunn “opposed [Best Buy’s] 1989 decision to do away with commissioned sales in favor of salaried staff, which was widely opposed by sales workers who feared losing income. He now concedes it was the most important shift in company history, lowering worker costs, and changing the core model of electronics retailing. Best Buy expanded across the US, and Circuit City eventually followed by eliminating sales commissions.”

Two retail companies with two points of view for motivating, managing, and paying the sales force. And the disparity in outcomes could not be any starker: one company suffering an indelible stain on its reputation and brand, the other vanquishing a formidable competitor and achieving strategic success.

Sales compensation rarely makes it to annals of business history, but it has provided powerful muscle for executing strategy. One reason that many companies routinely tinker with sales rep pay plans. “85% of companies will change their sales compensation plan this year,” wrote Andris Zoltners, a pioneer in sales force analytics, in a Harvard Business Review article, Getting Beyond Show Me the Money (April, 2015). “Though it’s only one driver, changing a compensation plan is relatively easy, and it can get quick results. It’s also an area where there’s always room for improvement – it’s hard to get right. When you create a plan, it’s almost impossible not to overpay some people and underpay others.” The rep at your former company who never worked very hard, but was consistently crowned “top producer?” Overpaid. You don’t need to mention any names.

Most sales workers today are paid for performance, with revenue attainment nearly ubiquitous in calculating compensation. Some reps receive full commission, others receive a blend of salary plus commission. Put another way, for the majority of salespeople, a component of income is at risk. In sales organizations, the practice has endured for three reasons: 1) output from salespeople is easy to tally, 2) many sales reps work with scant supervision, and variable pay gives managers control over results, and 3) the sales profession attracts people who have a greater tolerance for risk compared to other fields. So, despite Best Buy’s successful groundbreaking pay strategy, pay-for-performance remains solidly anchored in selling.

As Cornell Professor Rob Bloomfield explains in an eBook, What Counts and What Gets Counted – Seeing Organizations through an Accountant’s Eyes, there are four purposes for providing performance-based pay to salespeople and other workers:

1) Motivation. Effective pay-for-performance programs are designed to provide incentives for working harder and working smarter.

2) Communication. The activities and outcomes that are paid for determine where the employee’s effort goes.

3) Risk sharing. When outcomes are not guaranteed, companies can afford to pay when the desired result has been achieved.

4) Screening. Pay structures determine who will apply for a position. A risk-averse individual would not likely consider a position with a high proportion of variable pay.

Done right, pay-for-performance aligns the interests of the employer and employee. But Professor Bloomfield describes the limitations and pitfalls. Performance pay is a simplification of reality, and employers must “decide how much distortion is allowable,” he says. Achieving a revenue goal doesn’t necessarily comport with working harder, working smarter, or even being honest, and ethical. And it doesn’t dependably translate to high customer satisfaction or customer loyalty. Bloomfield cautions that no pay-for-performance system is perfect, and that employers must “choose their poison:” low motivation, high pay, or costly reporting. Improving or optimizing one element sacrifices the others.

Risks lurking in pay-for-performance

1. Misunderstanding the controllability principal. Many of the problems associated with pay-for-performance result from tying employee pay to risks they cannot control. This problem is particularly acute in business development. Salespeople do not influence many significant conditions for quota attainment: product quality, pricing, delivery schedules, economic conditions, information quality, hiring practices. There’s a long, long list. Yet, year after year, millions of reps are asked to “commit to a number.” In 2013, 58% of sales reps achieved quota, according to CSO Insights.

2. Misalignment of incentive intensity. Incentive pay should be proportionate to the control that salespeople have over outcomes. In other words, the greater the risks salespeople assume, the greater the pay reward for achieving desired results. The converse is also true, as Andris Zoltners describes: “In many product categories, if you sell something one year, there’s a high probability you’ll make residual sales the next year without any effort. If a salesperson is paid a commission or bonus for free sales, we call that a ‘hidden salary’,’ since it’s an incentive paid for something that’s nearly automatic.”

3. Unintended consequences. Also known as The Cobra Effect. Companies want to establish and maintain high-value customer relationships. But very often, they measure and reward other outcomes, particularly those that improve short-term results. Presumably, Wells Fargo did not originally intend to exploit and deceive its customers, but their pay system created those results. Ideally, companies should strive for harmony between wanted results, and what employees are paid to achieve.

4. Moral hazard. Imperfect measurements create opacity where the employer cannot distinguish whether a positive outcome results from hard work, skill, luck, or fraud. Whether it’s Wells Fargo, the Atlanta Public Schools, or other organizations, incentive pay also motivates employees to distort measurements – especially when incentive intensity is high (see #2 above).

5. Bad assumptions, including:

• Paying an employee motivates him or her to care about an outcome. In fact, extrinsic rewards such as pay-for-performance can be demotivating. One example comes from an effort to improve reading skills in which school children were offered a Pizza Hut voucher for every book read. The incentive backfired, creating “fat kids who hate to read.”

• Measuring effort improves performance. The person who works 80 hours a week might not serve her clients any better than one works 50 hours a week. An apropos example comes from a Seinfeld episode, in which George Costanza devises a scheme to get a promotion by leaving his car in the parking lot at Yankee Stadium, where he works. He receives the promotion because his boss thinks he is getting to work earlier and staying later than his co-workers, but his plan fails when his incompetency is exposed.

6. Flawed proxies. “Does what gets counted count?” asks Professor Bloomfield. For example, in education, grade point average (GPA) serves as a proxy for subject mastery and knowledge retention. There are gobs of examples in customer service and business development. Those mistaken causal links between output (e.g. number of service calls handled) and outcome (e.g. customer satisfaction scores). Or in sales, prospecting calls made (output), and quota attainment (outcome). “If you’re not measuring it, you’re not managing it!” So, companies start measuring away, forgetting that, in many instances, the data they collect has weak, or non-existent, connection to what matters.

“I don’t care how you make your number, as long as you make it.” Verbatim, from my District Sales Manager in the mid-‘90’s. His straightforward statement belies the difficult conundrum many companies face when paying salespeople on performance. When you can’t easily measure how hard or smart people are working, you must calculate pay on outcomes such as revenue achievement. That confusion costs companies through higher commission payouts, and in sales force churn when income doesn’t pan out as expected.

Pay-for-performance provides a carrot and a stick. The Wells Fargo lawsuit illustrates just how dysfunctional sales behavior becomes when executives are misinformed or misguided on how to use the tools, and when corporate governance has fallen asleep at the controls, or chooses to look the other way. Two questions must continually be asked and answered: how will pay-for-performance programs work for achieving strategy, and how will employees and customers respond?

This article is part of my monthly column, Navigating Revenue Uncertainty, on CustomerThink. To read the original article, please click here.