Striking the Right Balance: Sales Incentives and Internal Controls | Michael volkov
When you examine the heart of several major financial scandals, it’s easy to point out issues with sales incentives and corporate culture. A business can grow quickly thanks to the extraordinary performance of its business culture. In many cases, this sales culture creates real and significant risks of misconduct.
To deal with such potential for misconduct, companies rely on internal controls to limit abusive sales, especially with respect to financial reporting, foreign bribery, fraud, and other illegal schemes. The problem is that internal controls are often insufficient to counter the powerful incentives of sales programs to reward individual players.
The child-poster in this case is Wells Fargo (of course) – a vivid example of how “upselling” or senior management mandates were transferred to sales staff who had to meet a requirement of 8. for 1: For each existing customer, sales were necessary to enroll each customer in at least 8 accounts (i.e. credit card, CDs, and other products).
In response to this draconian and inflexible program, no one was surprised at the misconduct and fraud. Sales staff have been sanctioned and suffered retaliation for failing to meet their sales targets.
Wells Fargo had controls in place – they had a hotline, compliance staff, internal audit, and other core systems. Unfortunately, as the record shows, all of these items have been outdated. Whistleblowers who complained about the system have been fired and no one in management has ever raised serious concerns about the program and its inevitable outcome.
Wells Fargo is an extreme case, but there is an important point. Sales incentives are important to a business and help ensure effective sales staff performance. But these incentives and behaviors must be subject to appropriate financial controls.
To this end, financial controls must ensure that reported and recorded sales are actual transactions. The potential for misconduct increases dramatically when sales incentives are structured around reporting quarters. Sales staff may face pressure to record sales by the end of the quarter or year to match a reporting period. In these cases, sales staff are encouraged to close deals, report them in order to reach a target amount.
When sales incentive programs are not contained by appropriate controls, the risk of misconduct increases dramatically. Sales staff can “play” with the system to earn immediate rewards and, worse yet, seek to achieve sales goals through fraud.
Financial controls should be designed to reduce these risks. For example, individual bonuses for meeting sales targets should only be paid when the money from a sale is actually collected and the approval of any sales contract should be reviewed by supervisors to ensure it. is real and accurate.
Ultimately, a system of financial controls surrounding sales activities must be based on reasonable assurances and, ultimately, liability. Sales staff who operate without financial control are more likely to engage in fraud. Such incentives are exacerbated when leadership and corporate culture are based on a company’s revenue performance. A narrowly focused definition of success based solely on sales performance is a recipe for disaster. Ultimately, companies can only be successful when they strike the right balance between sales incentives, accountability, and financial controls.