Incentive Compensation For Business Developers in the Federal IT Marketplace (08-01-2001)
As is well known, each fiscal year the Federal
Government spends the majority of its IT budget on purchases from multi-year
contracts. Some time ago, CAI/SISCo studied the approaches that major
players in the Federal IT arena take toward incentive-compensating their
business developers and operations managers involved in the capture
and exploitation of multi-year contracts. Our client, a Fortune 500
company, identified 3 representative functionaries to use as reference
points for presenting our findings:
- the Opportunity Sales Manager (OSM);
- the Program Capture Manager (PCM); and
- the Program Implementation Manager (PIM).
We interviewed about 150 well-placed business development personalities
to cover 40 of the major corporate players in Federal IT.
Highlights of Our Findings
While it is largely true that people buy from
people, it is also increasingly true that, these days, agencies award
to contractors with positive past performance records. Accordingly,
companies can no longer limit incentive compensation to the front-end
operatives (i.e., the OSM and PCM) since delighted customers mostly
get that way because of the efforts of the PIM.
The fundamental OSM and PCM incentive compensation
- If they assist with a win, what benefit will they receive, when,
and for how long?
- If the result is a loss, is there a penalty?
Some companies have a single and rather rigid incentive compensation
plan or approach for their Federal IT business developers that covers
all personalities and situations. Others favor quasi-flexible guidelines
and/or a suite of plans and approaches that management can adapt to
accommodate different situations, personalities and opportunity types.
Generally, business developers are incentive-compensated
within three fairly narrow, one might even say competitive, tiers or
ranges. The low tier (total annual compensation in the range of $75K
to $150K) is occupied by entry- to mid-level business developers who
have little or no standing to negotiate outside of their employer’s
standard compensation range.
The middle tier (total annual compensation in
the range of $150K to $300K) is occupied by experienced practitioners
with a track record of wins. Practitioners in this range tend to be
able to break the standard mold and negotiate incentive compensation
for successes on a deal-by-deal basis.
Persons that belong to the high tier are wild
outliers (e.g., $1M+ win bonuses). These are extremely rare, but they
are not apocryphal. More common in this tier are companies that allow
their business developer incentive compensation to accrue, rather like
the corporation’s, cumulatively over time from a growing book of business.
Under their standard plans, it appears that most
firms treat different contract types (e.g., IDIQ versus FFP) differently
for incentive compensation purposes. In addition, a smaller number of
firms discriminate based on the types of products and services being
sold. Not surprisingly, the OSMs and PCMs who chase complex integration
or transformation jobs are likely to have more generous incentive compensation
plans than those who chase lower margin, lower risk/reward work. Most
interviewed said there is a definite trend toward incentive compensation
schemes that reflect the relative desirability of company offerings
sold in terms of, say, relevance to corporate strategic goals or margin
Most incentive compensation schemes tend to measure
business developer performance in terms of booked gross revenue and/or
gross margin. While this approach may be right for sales success in
TOs/DOs on existing IDIQ contracts, it is quite wrong for capturing
multi-year deals by means of quality marketing for major opportunities
that may have a mean-time-to-award of 15 months, or more.
If one was to conclude that incentive compensation
in the Federal IT arena is generous, one should temper that conclusion
with the fact that only a modest percentage of those covered by such
plans actually benefit much beyond the salary portion of the package.
This is because Federal IT is often brutally competitive at both the
contract and the Task and Delivery Order (TO/DO) opportunity levels.
With an average of four bidders per opportunity, it is definitely not
easy to be successful repeatedly.
Some companies in the Federal IT marketspace
favor the “Sellers Do -- Doers Sell” (SD/DS) model whereby everyone’s
job is selling. With SD/DS, the marketing/sales people are absorbed into
one of the firm’s business sectors. This is fine as long as the opportunities
that the firm is chasing fit neatly into the sector’s domain. If this
is not the case, and success relies on cooperation among sectors, problems
related to focus and relative incentive compensation can occur.
Complex Federal bids initially require marketing,
concept development, and solution development, not sales. The drawback
of the SD/DS model for complex bids is that the SD/DS model’s sales
orientation could be used to veto complex, riskier and potentially more
profitable opportunities on the grounds that the greater the risk of
delivering the work, the less the certainty of reward. With SD/DS, the
professional PCM’s role, concentrating on meeting management’s strategic
opportunity capture objectives, becomes somewhat blurred if not superfluous.
Key questions for those attempting to hire business
developers is, “Where will they come from? Will they be home grown or
bought?” Regardless of how positions are filled, there needs to be competitive
and powerful motivation built into a business developer’s incentive
According to those we interviewed, business developers
who are destined for success are those with pre-positioned and demonstrable
networks in the agencies and/or functional environments to which they
are to be assigned. This is in addition to strong communication
and interpersonal skills. Anything less than these attributes, and mediocre
performance is likely to result, even for the keenest hire.
To continue to employ good business developers,
management must lead business developers, not just manage them. Leadership
should extend to providing the firm’s business development front-line
troops with opportunities for growth, both in stature and incentive
compensation. This, and the need to retain good people, is accomplished
effectively by the very few companies we interviewed that allow incentive
compensation to accrue cumulatively from a growing book of business.
Another means of enhancing business developer
retention is to avoid compensation misunderstandings that can lead to
dissatisfaction and separation. To this end, remuneration contracts
should cover as many of the positive and negative eventualities that
can be anticipated by corporate management. Leaving such details to
the imagination of either party guarantees future problems.
Attesting to the fact that prerequisites for
benefiting from a firm’s incentive compensation package are not met
by many is the reality that, even at successful Federal IT companies,
the business developer turnover/attrition rate is often as high as 40%
per year. Many firms turn over their entire business development staffs
every 3 to 5 years. In addition, a good business developer may only
stay around for 3 to 5 years. A mediocre one will only last 1 to 2 years.
To survive, senior business developers need a major win to their credit
every 2 to 4 years.
Given these business developer attrition rates,
we were not greatly surprised to learn that many in corporate management
view their business developers with disdain, if not downright skepticism.
Business developers are sometimes viewed as a necessary evil overhead
function that is, on the whole, prone to over-promising, over-spending
and under-achieving. This debate centers around whether or not existing
customers buy or are sold a particular company’s IT products and services.
Documenting The Incentive Compensation Deal
Negotiations are key to mutually successful incentive
compensation plans. We learned that often, much is left to be desired
with regard to documenting what happens in unexpected situations such
as unanticipated success on the part of an OSP or documenting expectations
concerning residual payments in the event of termination of employment
by either party. In the Federal government arena, there is always the
possibility that a contract or an agency may, for whatever reason, develop
into a gusher. When this happens, there is a tendency to try to “shut
the compensation gate after the success horse has bolted” by capping
remuneration post-award. Not surprisingly, this leads to animosity and,
eventually, to attrition, effectively killing the goose that may have
laid the golden egg.