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The Wall Street Journal  

June 8, 2006


Behind CA's Woes:
Holes in Internal Controls

Pay Scale Meant to Motivate
Led to Double Commissions
And New Turmoil for Firm
June 8, 2006; Page A3


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

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