Inadequate internal controls and paying commissions to
multiple employees for the same sale helped trigger CA Inc.'s
latest financial-reporting woes, according to people familiar with the
situation.
The big software maker's commission costs got so out of
hand earlier this year that it considered paying salespeople less than
the amounts it had promised, according to a person familiar with the
matter. But CA management concluded that reneging on the commission plan
would demoralize salespeople and risk lawsuits from them, this person
said.
A CA spokesman declined to comment, saying the
discussions were "an internal matter." He added that CA salespeople will
receive the commissions to which they were entitled.
CA said May 30 that higher-than-expected costs for
sales commissions in recent months will force it to restate results for
the fiscal third quarter ended Dec. 31 and to miss previous earnings
estimates for the fourth quarter by seven cents a share. The company
hasn't reported its fourth-quarter results, originally scheduled for
release May 30.
CA attributed the added commissions, which were $70
million more than expected for the fiscal year ended March 31, to "the
poor design and administration of the sales commission plan." The
company said it is working to fix the problems.
CA's failure to control commission costs is both an
object lesson in the perils of changing compensation incentives for
salespeople and a major embarrassment for the Islandia, N.Y., company,
previously known as Computer Associates International Inc. CA has been
trying to demonstrate clean accounting as part of its recovery from a
financial fraud involving backdating sales contracts that caused several
top officers to plead guilty to criminal charges.
Since April 24, just before CA first announced its
earnings disappointment, its stock has fallen 14%, to $21.88 in 4 p.m.
composite trading on the New York Stock Exchange yesterday.
The latest snafu was a factor in the recent
resignations of CA's sales chief and its chief financial officer, and is
roiling managers who lost part of their bonuses as management tried to
offset the impact of the unexpectedly high commission costs. In
addition, executives have been told they can't exercise options to buy
CA stock or to sell stock until CA completes its financial report.
Under Securities and Exchange Commission reporting
regulations, CA is supposed to file its annual report by June 14,
although it can request a delay. A spokesman said it hasn't decided
whether to do so.
Many CA employees also are upset by a recent company
decision to forgo an optional payment to 401(k) retirement accounts to
help offset the commission payments. Newsday reported the nonpayment of
the 401(k) supplement.
CA's commission problems started more than a year ago,
when it unveiled a plan to encourage salespeople to drum up new business
rather than rely on existing accounts. It adjusted commission levels in
different areas, raising quotas where the opportunities were biggest. A
sales manager at a rival firm who has recruited CA salespeople says a
low-level salesperson at CA gets base pay of about $45,000, with a
potential to make $120,000 if a quota is exceeded.
CA declined to comment on compensation levels. The
company says the program it put in place worked well for the first half
of the 2006 fiscal year, but in the second half, growing numbers of
salesmen started beating their quotas.
"Changing commission plans, if done incorrectly, can
have devastating results," says Mark Gilmore, a veteran software sales
executive now working as a sales-commission consultant in Boone, N.C.
He says setting quotas involves negotiating between
sales managers and individual salespeople who are "notorious for
sandbagging," or understating what they think is a realistic goal. CA
declined to make sales executives available to discuss how quotas are
set there.
Under a 2004 agreement, the Justice Department said it
would defer prosecution of CA for financial fraud in return for the
company's commitment to improve accounting. In April, the company
completed installation in North America of a sophisticated software
system from SAP AG to monitor its finances.
CA has installed a separate sales-commission tracking
system to work with the SAP software. Last year, the patchwork internal
system failed to alert management to the growing problem with sales
commissions, according to two people familiar with the situation.
Costs rose in part due to what CA insiders call
"overlays" -- or paying multiple salespeople for the same sale. Entire
sales teams were often involved in big deals with companies buying
millions of dollars of sophisticated software. Sales managers normally
limit the number of salespeople who are allowed to include that sale in
their quota, but last year the number of overlays soared, a person
familiar with the situation said.
CA commissions exploded because of the success of
salespeople from newly acquired Niku Corp. and Concord Communications
Inc. units. CA promised its existing salespeople that any sales in their
accounts would be credited to their quotas as well as to the new
salespeople. In effect, CA ended up paying double commissions on those
sales, the same person said.
Write to William M. Bulkeley at
bill.bulkeley@wsj.com1
