Variable and fix comp

Populist politicians and journalists. Both deserve to be chained together in the bottom of the ocean. The latest in a series of gaffes in this country is the headline news a few days ago about the Fortis management who, days before government intervention rescued the Bank from doomsday, approved bonus allocation to staff of their Wealth Management Division.

The innuendo and the tone of the message, read on the hourly news of the local national broadcast Radio One, was more than pointing to a cruel guilt and totally corrupt behavior of those Fortis functionaries involved. The Prime Minister Yves Leterme, self proclaimed moral leader of this miserable nation, stood up in fury to damn those involved for immoral behavior of the worst kind. Whereas millions of simple investors lost fortunes from the sudden and unbridled fall of the Fortis stock.

That's the theory of the men in power. Who, especially Leterme, all they care about is manipulate ignorant masses for their personal pop-polls and electorate benefit. Like that aging comedian who interrupted his campaign to run to Washington 'to fix the economy' three weeks ago. John the 'fixer'! Wow! We're all saved and well. Bye bye Great Depression 2.0!

The local news goes like: Fortis management approved bonuses to the staff of their Wealth Management Division days before Government Intervention. PM Leterme condemned heavily those responsible for immoral behavior.

How do you expect a common average IQ citizen to react to a message like this? Simply thinking: Corrupt sonsofbitches! Well done Leterme. Take those f*ckers bonuses away! Show the bastards who's da man!

Talking about pitiful reporters throwing oil to the fire! Always been like that. The jealous and ignorant have got the widest gob. Aware of their pitiful comp they don't like the hearing of some others 'making bonus'.

Let me tell you though how it works in modern companies, for more than 30 years that I've experienced them operating over both sides of the Atlantic, myself working out of pretty senior management positions.

Above all, most companies in today's competitive climate work in ways that are driven by short term performance. Growth in profits and revenues. They mainly act driven by trying to achieve profits and benefits for their shareholders. In terms of stock valuation and dividends. Shareholders being those 'heartless and selfish capitalists', large or small, who don't even thank you when you do well but they shout death and fire when you miss a quarter. And drop your company value in double digits afterhours after you announce lesser than consensus predictions and you forecast short of analyst expectations.

Actually, only revenue counts... like an old boss of mine at CA, Sanjay Kumar, God bless'm, used to say: "if the revenue is in, the profit will take care of itself...".

Who's bringing in the revenues then? Simple answer: those responsible to bring it in! We call them salesmen. We know how much revenue we want to generate, we know from the past what an average salesman achieves and we divide the two. The result we increase by an empirical factor and we got suddenly the size of our sales-force. The troops to send out to fight competitors and bring in the spoils of war.

That's one thing. Now, how do we make sure we have our average Joe the salesman 'do his numbers'? We can check-upon them day in day out but this ain't the way. We can fire them too if they are lazy and ineffective but this should be the last resort; on top, how do we know the new recruits will be any better than those we fired? Sales is the scariest function for any company operating in free markets. After years of experimentation, most companies in almost all industries resonated to a sales-staff compensation scheme based on fixed and variable comp. Here's how it works.

Every salesperson, like any other employee, receives a fixed salary. He/she also receives some 'intangible' benefits which are in fact non-taxable tangible (company cars, tickets to work, meals, free coffee and parking, etc...). Salespeople then also receive what we call 'incentive compensation', or 'sales commission' based on achievement of individual targets, mostly sales bookings.

There's a myriad of formulas how to calculate a variable part based on someone's targets and for the same company rules typically change every single year, depending on top management's specific goals for the year. In some countries, relation between fix and variable is highly leveraged. In the UK for instance and in the software industry, don't be surprised if a salesman accepts a 40 fix - 60 variable for OTEs (on target earnings). In conservative countries though, like Switzerland, it's the other way around... 80 fix - 20 variable. Anyways...

Salesmen achieving more than 100% of their targets (overachieving, that is) get so-called 'accelerators'. For every dollar sold above target, they get an 'accelerated' (50% AND HIGHER) part of corresponding commission compared to what they got for on target or undertarget achievement. Most great salesmen get rich on accelerators! Sales is a risky job with more than generous comp if you do well. We had a kid in Computer Associates West Coast Sales, 27 yrs old or something, who did more than a million bucks a year in variable pay for a few years in a row. He would categorically refuse promotion to manager. Why should he? Managers don't make that kinda dough even in their wildest dreams. Does it say 'stupid' here?

What is a bonus then? Well normally, bonuses are discretionary. At Texas Instruments we used to distribute bonuses to employees when we beat profit targets at the company level. Top management would still protect the overall committed figure and distribute a fraction of the remainder to all the staff on a prorate basis and often based on individual performance formalized during annual employee assessments. In practice, if your boss liked you a lot, then you'd have a good cut in the profit bonus cake. That's a bonus! You don't count on it to live on, it's a nice windfall if it's there but make sure you can raise your family based on your fixed pay. Because bonuses ain't gonna be there all the time. No guarantees.

How about the Wealth Management Division folks getting 'bonus' at Fortis then.? I have not really verified the details but I am not buying that 'bonus' claim the news spoke about... and made Leterme start a new crusade against the Fortis management. These bank divisions work like any other commercial departments. Driven by sales (attracting investment capital in their funds, earning wealth management commissions, etc). I'm pretty sure that those folks in that department made their numbers in fiscal 2007 (a year ago) and based on their contractual labor agreement they are entitled to their variable comp, like anyone else is entitled to his/her fix salary. Where's the problem then?

Problem is, the pathetic reporter who spread the news spoke of 'Bonus' and not of a 'variable and target related comp'. Bonus feeds a much more powerful innuendo. It can make a Populist Prime Minister jump in as a modern day sibling of Godefroidt de Bouillon to punish the atheists!

And what does Joe the plumber, or Wendy the Waitress (or George the President) think about the incident? Guilty on all counts... burn those Fortis heretics into ashes...

How pathetic have we become...