Now NetApp sued by its own veep over claims of broken sales commission promises
I was screwed out my cut, alleges exec in fraud, discrimination lawsuit
NetApp and its executive team were sued on Tuesday by a former sales exec who claims the enterprise storage-and-everything-else biz conspired to deny contracted commission payments and discriminated against him.
The complaint [PDF] was filed in federal court in San Jose, California, on behalf of Neil McGowan, who served as NetApp's Vice President and General Manager of American sales from September 2017 until late August 2022 when his employment was terminated.
McGowan was hired with a salary of $270,000 plus potential matching sales commissions. This would have brought his compensation to $540,000 annually if he hit performance targets, in addition to any merit-based based increases.
However, according to the complaint, around early May 2018, NetApp circulated its FY19 Incentive Compensation Plan Terms and Conditions and subsequently provided McGowan with his FY19 Goal Sheet that laid out his salary and commission plan for the fiscal year.
McGowan, it's claimed, saw from the documents that the IT supplier did not intend to pay all the commissions due and misrepresented what he and other sales executives would be paid.
"The misrepresentation/concealment existed because under his FY19 commission plan, the plan obligated [McGowan] and other VP/GMs to sell a certain dollar percentage of product but the client account contract include a client discount which reduced the sales amount, and therefore, intrinsically diminished the commissions [McGowan] and other VPs could earn," the complaint says. "As written, [McGowan] and other VPs would never earn the incentive commission as promised."
In effect, the plan paid customer discounts from sales commissions.
McGowan, it's claimed, went to his manager who raised the issue with his superior and both acknowledged that the plan diminished the commission payments for staff. They nonetheless urged McGowan to sign the agreement, telling him, "[i]f we change it for you, we will have to change it for all other VP/GMs."
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According to the complaint, McGowan refused to sign and his managers retaliated, denying him and other VPs their earned commissions for August 2018 though August 2019 period. It further alleges that company executives "misrepresented NetApp's regulatory filings to the SEC concerning its expenses and obligations regarding the 15 month period."
NetApp, in its Form 10-K for the fiscal year that ended April 28, 2023, notes that a securities class action lawsuit was filed against the company and executive officers on August 14, 2019.
"The complaint alleged that the defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and SEC Rule 10b-5, by making materially false or misleading statements with respect to our financial guidance for fiscal 2020, as provided on May 22, 2019, and further alleged unspecified damages based on the decline in the market price of our shares following the issuance of the revised guidance on August 1, 2019," the NetApp financial filing says.
NetApp agreed to settle that claim for about $2 million and the court hearing the case approved the deal on September 1, 2022.
McGowan's legal filing cites a May 23, 2019 email from his manager as evidence of a company-wide plan to shortchange staff by capping sales commissions. The email, sent to more than 300 employees, announced that NetApp was invoking the commission plan's "windfall" provision and would not pay "further commission above 200 percent goal attainment" based on FY19 sales.
Claims of capped or withheld sales commissions are relatively common in the IT industry.
In response to objections by McGowan and other affected sales staff, NetApp allegedly agreed to pay the commissions, but in the form of retention bonuses spread out over several years. Employees who left before then would not be paid.
The legal filing goes on to describe how McGowan's managers reorganized his accounts and sales teams, but the organizational changes and the underpaid commissions, indicating this contributed to high turnover.
"Defendants represented to the general public that these changes to the data-centric software leader’s sales organization were to better meet customer needs and power the company’s next stage of growth," the complaint says. "However, not all changes were proactive, but rather, were by dissension of the sales team because of management’s ongoing misrepresentations regarding full payment of earned commissions."
In FY22, the complaint says, NetApp's bookings exceeded $1.5 billion, 27 percent of which was attributable to McGowan's work. Yet he was terminated on August 23, 2022.
The lawsuit contends that NetApp and its executive team conspired to deny commissions, in violation of laws on racketeering, contracts, fraud, labor, and employee rights. McGowan, who is an African American, also accuses the IT supplier of racially discriminating against him.
The Register understands that this lawsuit may be expanded at a later date if other NetApp sales staff choose to seek redress.
NetApp declined to comment. ®