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 questions are:

• 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 achievement.

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.

Recruiting

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 compensation package.

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.