GAB is pleased to welcome back anti-bribery consultant Richard Bistrong, who contributes the following guest post:
These days, most sophisticated multinational firms, at least those that might be subject to liability under the Foreign Corrupt Practices Act or similar laws, have official anti-bribery compliance programs. But as many observers have rightly noted, while formal control systems are important, they have their limits: the formal rules in place, or what top-level management asserts when setting the “tone from the top,” may often differ from what actually happens on the ground. As I’ve emphasized my earlier posts on this blog, understanding what actually happens out in the field requires careful attention to the actual incentives of the people on the front lines: the regional managers, salespeople, and the like. And with respect to these individuals, many corporations that have seemingly robust anti-bribery programs, and whose C-Suite executives say all the right things about ethics and integrity and zero tolerance, are actually creating incentives that foster corruption. Here I want to focus on incentive plans for international sales, marketing, and business development teams. I have identifies three common features of the compensation system for salespeople may contribute substantially to bribery risk.
- First, many salespeople have compensation packages that provide a relatively low base salary, but with the possibility of much higher compensation through sales commissions or bonuses for hitting certain quotas. From the company’s perspective, this sort of compensation package is attractive because it creates strong incentives; indeed, salespeople seem to be very responsive to monetary rewards, and behave accordingly. This is fine when the monetary rewards motivate salespeople to work harder, be more innovative in finding new opportunities, and so forth. But in high-risk environments where bribery is widespread, and expected by many public officials and third parties to “move things along,” making so much of a salesperson’s compensation contingent on his or her individual sales performance is a strong tipping point to corrupt behavior. Indeed, when a front-line employee weighs small bribe requests against large bonuses by achieving sales plan, the employee might even consider paying the bribe out of his or her own pocket, viewing this as a reasonable investment to make plan and bonus. How is the audit and compliance department going to see that transaction? Moreover, lucrative sales compensation structures also tends to attract people who have a larger appetite for risk. Unfortunately, this high risk tolerance is conducive to other kinds of risk-taking, personally and on behalf of the company, including the risks associated with bribery.
- Second, in addition to the fact that so much of a typical salesperson’s compensation is indexed to his or her individual performance, in many cases this performance-based compensation is keyed to a relatively short timeframe, often to quarterly quotas. But indexing bonuses to quarterly performance is perilous in business environments characterized by the unstable and unpredictable sales cycles that characterize many emerging markets, including lucrative frontier markets. It also sends a message to front line teams to close deals quickly—which may be difficult or impossible to do in many countries without paying bribes, especially small bribes. While the corporation may have an official “zero tolerance” policy that “we don’t pay bribes, no matter what.” But what kind of unspoken message is the corporation sending through its compensation system? Suppose a front-line manager faces a situation where saying no to a bribe request doesn’t mean losing the sale, but does mean rolling that sale into the next quarter, or the quarter after that. When facing such a dilemma (and a common one I might add), the firm’s compensation system should encourage employees to report such requests and the consequential delays, as opposed to using illicit means to push and pull sales from quarter to quarter in order to make plan and quota.
- Third, the problems associated with tying salespeople’s compensation to individual quarterly performance—in the form of hitting particular targets or quotas—are compounded when managers readjust targets on the basis of past performance. Again, this is an especially troublesome problem in regions characterized by high sales instability. Imagine that a salesperson or team hits its quarterly target—for the sake of argument, without any corrupt or otherwise unethical behavior. What about the next quarter or the following year? Unfortunately, management often has a tendency to think, “Well, if this sales team met the targets so easily this year, it must have been too easy, so let’s ramp it up.” Indeed, I once had a colleague who secured a substantial procurement in an Asian country that resulted in his far exceeding his sales target, only to be given a greatly increased forecast for the following year. But the huge success in the first year was a one-off event, not the sort of sale that could regularly be repeated. My colleague told his supervisor that “unless you invent another Asian country with a mirror requirement, it is literally impossible for me to meet that goal.” Yet all too often companies ratchet up sales targets, a detrimental practice that makes it very difficult for front-line teams to continue to meet their quotas (and get their bonuses) and that can lead to a zero-sum game between anti-bribery compliance and continued success at the field level.
This is not to say that firms should never tie sales compensation systems to individual quarterly performance, with increasingly ambitious targets. After all, businesses need to grow, and frontier markets offer tremendous opportunities. In some markets—high-integrity countries with strong state institutions, stable economic and social conditions, and steady sales cycles—the risks of an “eat what you kill” bonus plan might well be worth the cost. However, this is an area where we need to “think globally, but act regionally.” In a country or region characterized by high corruption risk and an unstable sales cycle, lucrative incentive plans indexed to quarterly forecasts and individual performance (as opposed to group or corporate earnings) may well make front-line teams wonder, “What does management really want, compliance or sales, as I can’t deliver both?” Unfortunately, the strong monetary incentives these plans foster may lead salespeople to “irrationally” calculate risk, as having a personal stake in short term bonus will outweigh an uncertain likelihood of either getting caught of facing the consequences of corrupt conduct.
To put the point in a slightly different way: “tone at the top” is important and essential, but it’s not just (or even mostly) about what the C-Suite executives say about ethics and anti-bribery specifically. A firm’s compensation plan is the most powerful tool it has to influence the behavior of its employees, not only through direct material incentives, but by signaling what the firm values. The C-Suite, through its regional managers, may talk about the importance of compliance and the social goals of anti-bribery—but this means little if the message on those quarterly calls to front-line teams is “make plan or else.” If firms are serious about compliance, then they must tailor and calibrate their sales compensation plans to reflect the regions and the industries in which the firm is operating. For anti-bribery compliance to truly take hold in the field, it must align with the unspoken messages of forecasts, quotas, and incentives.