Dangling the Carrot
How to Build Compensation Incentives That Work
When Christopher Cabrera was working in sales for a large Silicon Valley company in the 1990s, he received a bonus check that by his calculation should have been for eight thousand dollars. Opening the envelope, he found that it was instead made out for $80,000, so he took the check back to the finance department.
“They thanked me profusely,” he says, “and told me that if I hadn’t called it to their attention, they would probably never have caught the mistake.” That personal experience was an early window on to the problems with incentives and compensation plans, an area in which Cabrera, who earned his MBA at the Leavey School of Business in 1997, is now an authority with worldwide recognition. The company he founded in 2005, Xactly Corp., helps businesses of all sizes deal with their incentive and compensation issues.
Xactly, headquartered in downtown San Jose, now has more than 600 clients, ranging in size from American Express and Bank of America to smaller operations that can count the number of sales reps on their toes and fingers. It has been named to the Wall Street Journal’s list of “Top 50 Venture Backed Companies.” And it probably never would have been started if Cabrera’s employer in 2004 had bought his pitch instead of firing him.
After earning his MBA at Santa Clara, “I felt I could go toe-to-toe with anybody.”
Cabrera at the time was selling incentive-compensation software that the purchasing companies owned directly, which meant the cost was so high that only the largest corporations could afford it. He made a sales call on Steve Cakebread, CFO of salesforce.com, who refused to buy his product but told Cabrera that if he started a company to make such software available on the cloud, Cakebread would be the first customer. That conversation led Cabrera to become a passionate advocate of cloud software, which would allow companies of any size to license it for monthly fees that reflected their needs. But the company he worked for had no interest in the idea and finally fired him for pushing it so aggressively. It was at that point that he decided to start Xactly and realized the full benefit of his Santa Clara University degree.
“When I made the decision to become the founder of my own company,” Cabrera said, “the things I learned at Santa Clara about teamwork and the relationships that I had made there gave me confidence and credibility. I always felt I could go toe-to-toe with anybody.”
Xactly deals with incentive and compensation questions in two general ways. One, which addresses issues of the sort raised by Cabrera’s wildly inaccurate bonus check, is to develop and license cloud software that enables companies and sales reps to track incentive-based compensation in real time and all but eliminate calculation errors.
These problems, Cabrera says, are a CFO’s nightmare. There are currently 13.5 million sales people in the United States with annual compensation of more than $820 billion. That compensation is often based on plans with multiple elements that can be confusing and lead to mistakes. When a company runs the calculations on an ordinary spreadsheet, the known error rate runs to 10 percent, which adds up to a lot of money incorrectly spent.
In addition to developing and licensing software, Xactly uses the information on its clients’ compensation structures, in redacted form, to help other clients design better compensation and incentive systems than they currently have.
“We have the ability to mine our data for insights and benchmarks,” Cabrera says. “We can take the compensation plans that work best and look backward to their structure. Then we can provide our other clients with a set of best practices. We don’t design plans for them, but we provide them with the data and the software tools to create and implement their own plans.”
His work in this area led Cabrera to write a book, Game The Plan: Every Sales Rep’s Dream; Every CFO’s Nightmare, released early this year. Fittingly, the introduction is by Steve Cakebread. Its purpose, he says, is to encourage companies to work on incentives and compensation programs that will reward sales people for selling in a way that effectively works toward the firm’s best interests.
Most companies think that’s what they’re already doing, but far too often, Cabrera says, sales reps will “game” the system in ways that ratchet up their compensation without helping the company all that much. A key point of his book is that CFOs shouldn’t fret about that gaming tendency, but rather design an incentive and compensation system that better benefits the business when gamed.
“It’s all about the behaviors of people,” he says. “Sales reps are hard-wired toward going for that dangling carrot. The company should take advantage of that by paying in the right ways, compensating to drive the right behaviors, and designing better incentives and compensation plans in the first place.”