According to numerous reports, WorldCom has fired several employees over the problem--one of many cracks in the telecommunications company's finances, which are now the subject of a Securities and Exchange Commission investigation.
Though WorldCom's financial woes are certainly more rare and massive than most companies will ever encounter, its experience with the administration of commission plans is a common problem. On average, companies that don't use information technology to track payments from customers overpay their employees by 3 percent to 8 percent of their bonuses and commissions, according to technology research firm Gartner.
These errors can have a significant effect on the corporate bottom line because bonuses, commissions and other performance-based pay accounts for nearly 11 percent of the average company's total payroll expenses, according to Hewitt Associates, a human resources consulting firm based in Lincolnshire, Ill.
Exacerbating the problem is that mistakes in the company's favor are almost always caught by the employees, but errors in favor of the employee must be caught by the employer--a time-consuming endeavor.
"Companies always hear about payment errors that are a disadvantage to employees, but not always (about) those that aren't," said Dee DiPietro, founder and chief executive of Advanced-HR, a compensation consulting firm in Saratoga, Calif. "And audits don't always catch this stuff because a lot of times few people have the background to understand the pay plan."
For many companies, the answer increasingly is specially tuned software.
An emerging software market
Despite an overall slowing in spending for business software, several smaller companies report a growth in sales of niche products that promise to catch payment discrepancies. The technology, they say, is resonating with businesses as the economy teeters on the brink of a double-dip recession, and every dollar saved is considered a dollar earned.
Among the developers working on pay-tracking technology are privately held Advanced Information Management, Callidus Software, Centiv, Kadiri, Motiva and Synygy.
Callidus said revenue grew in 2001, and is on track to beat last year's sales in what has been a calamitous year for business applications. The company would not provide overall sales figures, but the average sale for Callidus has grown from $350,000 in license revenue in 2000 to $800,000 this year, said Geoff Roach, vice president of marketing for the San Jose, Calif.-based company.
By contrast, most other business application makers, such as Siebel Systems, report that the value of an average sale has declined this year.
Major sales this year to Novell, Philips Electronics and DirecTV, as well as a new marketing partnership with IBM, make Callidus' management optimistic about taking the 5-year-old company public "sooner rather than later," Roach said.
Bigger companies such as Oracle, SAP and Siebel offer similar applications. PeopleSoft plans to introduce its first set of incentive-payment applications by the end of the year--a move that will increase competition for smaller players but highlights the demand for such products.
If you're a CFO, one of your biggest expense items is cost of sales. Many companies have no way of getting a good look at that, so there has been train wreck after train wreck of companies missing their earnings because they can't audit it.
Avoiding the train wrecks
Pay-tracking software is designed to help businesses gain better financial management over employee incentive payments, while reducing errors, more effectively motivating workers and reducing administrative costs.
Here's how it works: Companies configure the software to model the internal rules and structure of their commission and bonus programs. The software then grabs sales and other performance data from a company's ordering system or HR system and calculates the commission. Then it feeds the payment data back into the company's payroll system.
Along the way, the software generates reports for managers that can also be used in audits to catch errors and cheats.
"If you're a CFO, one of your biggest expense items is cost of sales," said Robert Conlin, vice president of marketing at Bedford, Mass.-based Centiv. "Many companies have no way of getting a good look at that, so there has been train wreck after train wreck of companies missing their earnings because they can't audit it."
Managers can also use the applications to model changes to their incentive-pay programs so they understand the financial effect of new rules before instituting them.
Accountants at Hewlett-Packard, for example, might have benefited from using the modeling capabilities of such applications in the company's last quarter of 2000, Conlin said.
During that quarter, a new commission structure sent HP's cost of sales soaring. When the company missed its profit target that quarter despite strong sales, HP Chief Executive Carly Fiorina told investors that the change in its commission plan was one reason for the disappointing results. The company has since resolved the problem, an HP representative said. She didn't specify whether the company used incentive-management software to make the fix.
Another selling point of incentive-management applications is that they can send frequent updates to employees via the Web or e-mail, deterring so-called shadow accounting. Shadow accounting happens when salespeople calculate and track commissions on their own because they don't trust their company to get it right. Reconciling the shadow accounting with the official accounting can divert time away from meeting with customers and prospects, and can also lead to bickering between the sales and accounting departments.
"These systems often create trust between the finance and sales departments for the first time," Roach said. "Think of the nonsense that takes out of the system."
For example, Motiva customer Trimble Navigation, a manufacturer of global positioning systems in Sunnyvale, Calif., has been able to reduce the number of people dedicated to administering commissions for 300 salespeople. One employee now does the work it used to take a team of five to do because of the Motiva software, said Nam Trinh, who is Trimble's lone commissions analyst.
Motiva's software replaced an older mainframe-based commission system that generated complicated reports, requiring a team of people to translate them for the sales department, Trinh said.
In many cases, applications such as Motiva's replace simple Excel spreadsheets and manual calculations by teams of consultants and administrative staff. Those methods can be inadequate and too costly for commission programs that encompass hundreds of employees, thousands of products, millions of sales transactions and still more criteria by which commissions are awarded.
That's why Jamba Juice, a fruit drink chain based in San Francisco, decided it needed incentive-management software when it revamped its bonus plan for store managers. In a bid to expand nationally, the company embarked on a complex bonus program that calculated payments on a wide array of variables.
These systems often create trust between the finance and sales departments for the first time. Think of the nonsense that takes out of the system.
The company went with a software package from Centiv, and Andrews said it has paid off. The company now has 360 stores across the country and ended 2001 with 33 percent general manager turnover, down from 50 percent turnover before, Andrews said.
"Something is going on right in the stores, and I've got to believe that the compensation and incentive program, along with the culture and the product, is driving that," Andrews said.
The ability to better align employee behavior with company goals is an important capability of the software, said Centiv's Conlin.
Incentive-management applications can be a challenge to set up, however. It took Trimble a year to fully configure its Motiva system, Trinh said. Trimble management had expected it would take about half that time.
"That was the downside," he said. "In the implementation phase we had to work through a lot of problems."
Those problems included conveying all the intricacies of Trimble's commission plan and sales credit rules to Motiva, whose programmers configured the system. Trimble also had to set up interfaces between Motiva's applications and its mainframe computers that process orders.
In an example of how things can go really wrong, Qwest Communications International in June said that it wasn't able to pay 1,500 salespeople their full commissions because of data-entry problems with a new commission system. The problem stemmed from delays in moving data on thousands of accounts into the new system.
After six months of trying to get the new application to work, the company switched back to its previous system last month, a Qwest spokeswoman said. Qwest sales agents rely on commissions for 20 percent to 50 percent of their income, she added. The company did not identify the software that caused the problem.
A technology loophole also aided sales people at WorldCom in booking fraudulent sales commissions. According to reports, the telecommunications company never merged overlapping order-booking systems following its acquisition of MCI in 1998. Some salespeople allegedly found a way to double their commissions by transferring orders from one system to another.
Much of the initial pain in setting up an incentive management application comes from conflict within the company undertaking the project, said Roach from Callidus.
"The length of a project depends on how much the customer has its own act together," Roach said. "We sometimes go into a meeting with a company, and different groups spend time yelling and screaming at each other over what the compensation plan is. There's not much we can do about that."
Despite some problems, analysts agree that incentive-management software could become a prosperous new applications market. The question is, to what degree?
The average cost of an incentive-management application is half a million dollars, according to AMR. That's a relatively humble sum compared with the multimillions many companies spend on order management, sales and service software from companies such as Oracle, Siebel and SAP.
And as companies such as PeopleSoft and SAP introduce and enhance competing products, analysts wonder if incentive management will become just another feature of their wide-ranging business application suites, as has happened with other niche business applications.
"Incentive management is at a stage that it's not at all clear what happens to it," said AMR analyst Jim Shepherd. "Can it get enough attention to turn it into a real market? Or does it end up getting absorbed by the high-end software vendors?"