Why Spica Consulting is Abolishing its "Incentive System"

Hello.
I am Tsuneo Watanabe, Representative Director and CEO of Spica Consulting.

Although it will be irregular, I am starting a note to share my thoughts on management and organizational structure.

This time, I would like to talk about the future direction of our company.

Spica Consulting has decided to abolish its incentive system (a performance-based compensation system linked solely to individual sales) effective this fiscal year.

Until now, like the general M&A industry, we have based our compensation structure on the individual performance of consultants, but we are discontinuing this. Why are we stopping an incentive system that is considered the "norm" in this industry and a powerful engine for growth? I would like to share my honest thoughts on the reasons for this and the kind of organization we are aiming to become.

※While we are abolishing the incentive system, we will still have a performance-based bonus system. I have written about our thinking regarding this difference, so I hope you will read on rather than closing the page thinking, "So there are no bonuses?"

A question I had since my days as a salesperson in my 20s

In fact, ever since I was a salesperson in my 20s, I have always had significant doubts about incentive systems.

At the time, I was fortunate enough to achieve top-class sales results and received incentives commensurate with them.

However, deep down, I always thought this:

"Is this achievement really due to my own ability alone?"

Behind the closing of a single deal lies the company's brand and history, the high-level support from department managers and supervisors in the team, and experts such as certified public accountants and lawyers within the company. And there are members of indirect departments like HR and accounting who perfectly prepare the system so that we can act on the front lines without fear of risk.

Does a structure where only those standing at the front get the spotlight and receive large incentives truly reflect the contribution of the entire organization?

That sense of discomfort has remained with me as a formative experience.

The structural issue of "what" compensation is evaluating

M&A is an extremely significant decision that affects the future of companies, the employment of employees, and the lives of business owners. That is precisely why M&A consultants like us should ideally be in a position that is always sincere and cautious.

However, I believe that an incentive system can sometimes be the cause of distortions in that field.

So, what exactly is an "incentive"? I have written down the differences between that and the "performance-based bonus" that our company adopts.

◆ Incentive-based compensation: "Deal-linked (spot) type"

This is a mechanism where a predetermined percentage or amount is paid for each individual contract (spot). It is disconnected from the company's overall performance or the support of others, and has a nature that focuses solely on the "result" of closing a deal.

Because of this structure, I feel that a psychology of rushing for immediate deals is easily created.

I am concerned that this can sometimes lead to troubles such as overlooking potential risks in the process or engaging in aggressive negotiations.

◆ Performance bonus: "Comprehensive contribution (process/quality evaluation) type" compensation

This is a mechanism where the source of funds is the overall performance of the company, and compensation is distributed by comprehensively evaluating "overall contribution," including individual skills, cooperation with the team, and above all, how one approaches the client.

It allows all employees to focus on "actions the company deems good (for example, at Spica, this means 'what is truly the right decision for the client in front of me' or 'diligence in continuing to learn')" so that they can maximize the source of funds and evaluations, and provide the highest quality service as professionals.

The distortions in the M&A field brought about by an "incentive-first" policy

The structure of an incentive system can cause serious problems in actual practice.

For example, the following types of trouble:

• Hiding important risk factors in order to prioritize closing the deal

• Demanding a significant reduction in stock price without a rational reason just before closing, in order to prioritize the deal

• As a result of prioritizing the deal, brokering a buyer company that does not release the seller's joint and several guarantee even after the M&A is completed

These risks and dangerous signs are things that consultants should thoroughly investigate and prevent in advance. However, when the mindset of "I want to close the deal quickly and get my incentive" is at work, the risk of overlooking or intentionally turning a blind eye to this dangerous information increases.

In the past, when I heard people in the industry say "it's like killing two birds with one stone" after a company was immediately resold against the seller's intentions right after the deal closed, I felt a sense of intense shock and alarm.

Additionally, I sometimes hear that at companies that have a mechanism where incentives are paid upon signing an advisory contract with a buyer (buy-side advisory), contracts are being made solely for the sake of the incentive, such as "signing a buy-side advisory contract even with companies where an acquisition is difficult in terms of performance, just so the sales representative can get the incentive."

I also think there is the anguish of having to act in accordance with incentives as a "salesperson."

Viewing M&A as a sales-heavy brokerage business that makes forced matches, and pursuing immediate profits, results in the interests of the client—who should be protected above all else—being compromised. I feel this is a challenge that this industry must face.

The sense of discomfort I feel in job interviews and our reason for existence

Whether for new graduates or mid-career hires, conversations like this often occur during job interviews.

Me: Why are you aiming for this industry?
Candidate: Because it is an industry where you are fairly evaluated (compensated) for your results.

Me: Do you have any questions?
Candidate: Please tell me in detail about your company's incentive system!

It is wonderful to have the drive to earn as a business professional.

However, I cannot shake a strong sense of discomfort with the current situation where the simplistic equation that "individual results = incentives" and "incentives = results linked to rewards" has become far too entrenched.

What we are looking for are not people who want to maximize their individual profits, but professional consultants who are motivated to provide high added value for our clients and society.

Our work is not just brokerage business that matches companies day after day.

Spica Consulting exists as an M&A consulting firm that spreads truly valuable "M&A consulting" in Japan and corrects distortions in the overall value chain for the development of the Japanese economy.

Ensuring that acquired companies continue to grow thereafter.
Protecting an environment where employees of transferred companies can work more brilliantly than ever before.
Is it not through the results of truly contributing to the Japanese economy that we receive our own rewards?

The Future of Spica Consulting

Spica Consulting currently achieves top-tier average annual income within the industry (especially for indirect departments).

Moving forward, we intend to gather only those members worthy of providing the industry's highest level of M&A consulting and evolve into a compensation system that is commensurate with that highest level.

Spica hires only for "consultant" positions, not "sales" positions.
The evaluation of Spica consultants is not based solely on numerical figures from sales.

We evaluate the process multi-dimensionally and carefully, including understanding of the direction, strategy, and tactics aimed for by the Spica team; whether they uphold our code of conduct, 7STARS; team collaboration; skill improvement (including internal test scores); compliance; and whether "the work each member has undertaken as a professional truly contributes to a brighter society" and "whether they are doing work they can be proud of without shame in their own lives."

This decision is a question of, and a challenge to, industry standards.

We believe that this step is the right choice for our clients, for our working members, and for the future of the M&A consulting industry.

<Author Profile>
Tsuneo Watanabe, President and CEO, Spica Consulting Inc.