Talk about nightmares that won’t end. In late April, $3.5 billion software firm CA — ostensibly in the midst of a postscandal turnaround — shocked investors with the news it would miss GAAP EPS estimates by at least 75 percent. CA’s original turnaround artist and former CFO Jeff Clarke left for a new job, while CFO Bob Davis and other executives were ousted. By late May, CA was delaying its annual report and planning to restate the previous quarter. A month later, more accounting irregularities had emerged, leading CA to miss its extended 10-K filing deadline and contemplate restating results as far back as 1997.
A key issue in CA’s most recent travail appears to be a new sales-commission plan gone awry. The goal was to motivate salespeople to get new business instead of just maintaining old accounts. The result, however, was that the firm ended up paying out higher-than-expected rewards on lower-than-expected revenues and billings. “The only conclusion is that they must have had a poorly designed commissions program,” says Walter Pritchard, a research analyst with Cowen and Co.
The problem of paying higher commissions for lower sales can arise for a number of reasons, says Raoul Choos, sales compensation practice leader for Pearl Meyer & Partners. Timing is one issue: if a company defers revenue over the life of a contract — as CA does — but pays a large percentage of commission upfront, there may be a gap between sales revenues and costs. Using accelerators, or higher incentives for selling particular products or for going over quota, can also lead to margin erosion. Rewarding multiple people for the same sale — as CA did in trying to integrate acquired companies — can also lead to disproportionately high payouts.
CA is now paring down its sales force and relying more heavily on resellers, according to a June announcement. But analysts doubt the firm will get back on track until it improves more fundamental issues. “The biggest problem is that it’s been unable to achieve the amount of sales it forecast,” says Bert Hochfeld, an analyst with Hochfeld Independent Research Group. “It needs best-of-breed products, and it doesn’t have them now.”