Ibm Leans On Its Sales ForceIra Sager
The $382 million in net earnings that IBM reported for the fourth quarter of 1993 has given the computer giant its first taste of black ink in more than a year. And Chief Executive Louis V. Gerstner Jr. wants more in 1994. Having slashed overhead, hired new top managers, and rejiggered the organization, he's now turning to the 30,000 men and women around the world who sell IBM products and services. This year, they'll be asked to bring home the bacon--not just sales but profits. In an unprecedented move, IBM is tying 60% of sales-force commissions to the profits they bring in.
That's a sharp departure. Last year, only 20% of compensation above the base salary--the bulk of a salesperson's pay--was tied to profits. The year before, it was 6%. "We have gone from different sales objectives to financial objectives," says Robert J. LaBant, the senior vice-president in charge of sales and marketing in the U.S. and Canada. In the past, IBM has adjusted the compensation plan every January--usually to boost sales of specific products or raise market share in targeted areas. Mainly, Armonk wanted to hit revenue targets--however it could. "In the old days, we'd give a branch manager a revenue quota, and that would be it. We'd see him at the yearend, and he'd tell us how he did," says Duke N. Mitchell, general manager for IBM's New Jersey trading area.
SMILING CUSTOMERS? The switch to pay-for-profits is intended to stop the sales force from cutting deals without understanding what they--and IBM--stand to make on the order. And to make sure that sales reps don't simply push fast-turnover, high-margin products, LaBant is linking the remaining 40% of their commission to customer satisfaction. By doing that, LaBant & Co. are sending the right message to IBM's salespeople, says Marc Butlein, chairman of market-watcher Meta Group. "It makes them more like business managers," he says.
Part and parcel of the compensation program is a new information system to let the salesperson know what the margins are on various products--until now, closely guarded secrets. Since 1991, headquarters has given IBM reps some latitude on pricing so that they could close deals. But they had no way of knowing how much profit they were giving up--and had little reason to care.
Another benefit of the new compensations scheme is that it begins to simplify how the company evaluates its salespeople, says LaBant. Until recently, it wasn't unusual to find 240 separate measurements for a branch manager because different product groups would set quotas to spur sales of their gear. "We used to have a lot of real goo-ball measurements," LaBant concedes. Now, he says, the sales representative only needs to worry about two things: satisfying the customer and profits.
Pay-for-profit isn't unique. It's a growing trend. But few companies have tied so much pay to profits. Computer-services giant Electronic Data Systems Corp. has based a portion of its sales commission on the profits in a deal, but it's only one of several gauges. And rival Digital Equipment Corp. is moving managers that oversee large territories in that direction. But DEC will not extend that plan to individual salespeople. Most computer companies are closer to the model used at Hewlett- Packard Co. HP pays salespeople a variable commission of up to 40% based on the overall revenue from a deal. "It's pretty aggressive," says Alan D. Bickell, an HP senior vice-president, of IBM's plan. "My worry about something as high as 60% focused on profitability is that I have a feeling the customer could be the loser."
"HIGH MARKS." IBM's insur-ance against overzealous salespeople is that big chunk of pay linked to customer satisfaction. At 40% of compensation, Big Blue's payback for customer satisfaction is about the highest around. "I give them high marks for that--most organizations only have that up to 20%," says Craig Ulrich, a compensation specialist with consultants William M. Mercer Inc. Moreover, Ulrich says, it makes good sense to give the sales force the same accountability as top executives have. Already, Gerstner has tied 75% of the compensation--above base pay--for members of his executive committee to corporate profits. And the general managers underneath those executives have 35% of their pay tied to profitability.
So far, customers like the idea. "The notion of driving profitability measurement as far down in the organization as you can is superb," says John D. Loewenberg, CEO of Aetna Information Technology, the computer arm of Aetna Life & Casualty Co. And with so much money tied to customer satisfaction, he expects to be satisfied indeed.