In a prior post for the FCPA Blog, I talked about a Harvard Business Review article in which the authors shared their findings that “performance pay can actually have dangerous outcomes for companies that implement it.”
That outcome goes from bad to worse when you mix in “stretch goals,” especially in what we call frontier markets, where lucrative business opportunities and corruption risk often collide.
Stretch goals are quite common in forecasting and quotas. When a sales person achieves a goal, a manager might think it was too easy and had too much cushion. So the manager ups the ante for the next quarter or reporting period. It’s also called quota ratcheting, and I’ve been at the giving and receiving end of it.
Here’s the problem. In many developing overseas markets, there may be few opportunities for a company to sell its products or services. At the same time, the institutions of procurement in such regions are typically weak and concentrated at the national ministry level. That sets up a sales cycle marked by large and unpredictable swings. From the perspective of the field employee, it’s a “win-big, lose-big” dynamic.
When sales goals are met in a win-big, lose-big market, a manager might seek to extract more revenue by ratcheting up the sales quota for the next reporting period. Even though that might be what a sales manager is paid to do, in this context, it’s a dangerous exercise.
Thinking that big international sales should be followed by others is a fallacy. In the defense business, for example, large ministry procurements are often a one time buy, even if spread among multiple quarters. It’s not a repeatable event. Using those sales to ratchet up the next quota puts unrealistic expectations on front-line sales personnel, and those expectations can threaten a compliance program.
When a company follows a big international sale in a low-integrity region with a new stretch goal tied to lucrative variable compensation, it sends a message to the field, “win again, above all else.”
Designing carefully calibrated sales goals and compensation plan is more work for managers. But it’s an investment in everyone’s ethical and sustainable long-term success.
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Richard Bistrong is a contributing editor of the FCPA Blog and CEO of Front-Line Anti-Bribery LLC. He was named one of Ethisphere’s 100 Most Influential in Business Ethics for 2015. He consults, writes and speaks about compliance issues. He can be contacted by email here and on twitter @richardbistrong.
2 Comments
Richard Bistrong makes an excellent point. Stretch goals can be problematic. And a contributing factor is the nature of the process that normally produces those goals: it is entirely numbers-based.
There are ways for compliance to mitigate this risk. For example, in a corporate sales environment that has frontier market activity, compliance should make it an operational priority to become a regular participant in senior sales management meetings. With presence and participation in these meetings, there are opportunities to: (a) ask the questions that may cause a revisiting of the “stretch” element; or (b) if the aggressive goals remain, put additional controls and oversight in place to mitigate the increased risk.
From a governance perspective, and depending on the facts and circumstances, the compliance chief should consider whether the compliance program’s overall risk assessment needs revision as a result of the stretch goal. Open and honest communications with senior sales management about this possible assessment change (preferably before the stretch goal is formally introduced) may again cause a rethinking of the business case for the stretch – particularly if the board will be informed of any actual risk assessment adjustments.
Very incisive and informative article about what goes on "below the trenches" in developing countries.In general sales culture taxes,death and increasing targets are the realities of life.The problem gets compounded by these stretch objectives,quarter over quarter pursued by Regional or Global sales management.As mostly in developing countries local sales is thru Distributor or the rep sales force,company officials find them as suitable whipping boys to achieve those unwise figures! Defense sector deals are few and far between,and becomes breeding ground for unethical activities.Even assigning team quotas,annual quota etc doesn't solve these field situations . India has recently achieved " no large corruptions" situation in ministries level projects.Hope this stays.Vishnu Goel T&M +919810101238
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