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Commissions Have No Part In Our Pay

September 7, 2009 2:58 am

The idea of commission-based pay structures for those involved in negotiating and managing trading relationships certainly is not new. Indeed, there are examples within the contracts and commercial community where deal-based bonuses have been introduced (though I believe most were subsequently abandoned).

I find the timing of the call by Procurement Leaders for more commission-based incentives quite remarkable – and the antithesis of the direction that any group aspiring to status and leadership should be taking (“Taking A Fair Cut”, Procurement Leaders magazine, 2009). At a time when there is such public and political hostility to the distortions that are created by a bonus-based culture, why would anyone wish to emulate such compensation systems?

The article in Procurement Leaders magazine makes comparisons with Sales and argues that if they can achieve bonuses for closing deals, Procurement (as their opposite number) should be bonused for savings. One of the key reasons advanced for such a shift is that ‘Procurement will finally get the salary it deserves, the kudos in the business and a presence on the board’. 

Fortunately, not all those interviewed for the article share this muddled thinking. Among the difficulties highlighted are those which apply generally to deal-based bonuses for the contracts and commercial community – the difficulty of accurate measurement, the threat to objectivity and ethics, the negative reaction by other business functions.

There are several fundamental points that I would add to these:

• Commercially astute, high-value groups are rewarded for their objectivity. That means they must make judgments over the desirability of a deal, not just its closure. Sales are frequently divorced from this level of judgment; Procurement and Contracts groups should not be.  
• Driving savings, just like driving sales, is indeed a critical aspect of business. However, it is not typically a high-status professional talent. Indeed, it is interesting to note that Sales is one of the few unprofessionalized fields of business activity.  To the extent that their is status for Sales people, it tends to apply to those in senior account management roles – people whose rewards tend to be based more on performance over time and whose skills are directed at sustaining relationships and ensuring growth. If it really wants status and influence, this is the direction that Procurement should be taking (yet interestingly in many organizations is being denied).
• Given the debates within the G20 over bonuses and corporate risk, together with continued examples of the ethical challenges in Sales motivation (see Ethics Take The fiz Out Of Pfizer), any leadership function should be engaging in the debate over how to rebalance motivation systems and drive more collaborative business structures – not how to grab its share from the feeding trough.

Performance-based bonuses remain a legitimate component of any pay structure and the IACCM community (Lawyers, contract managers and procurement) all benefit from some form of incentive. Interestingly, (based on our annual salary surveys), the levels of those incentives were similar, but in the last two years there has been a trend for larger bonuses within procurement. However, in the majority of cases the basis for the bonuses remains a mix of overall company performance plus functional or group achievement of specific KPIs.

The subject of salaries and incentives is certainly important and it is one in which our community should be much more actively engaged. But where we should be spending time is in devising an approach that supports honesty, integrity, ethics and good business judgment. High-status professionals and business leaders are those that build value and reputation, not those who place it at risk.

Posted by tcummins

Categories: Commercial Management, Contract / Commercial Management, Legal & Regulatory, Organization, Procurement, Relationship Management, Risk, Sourcing

Tags: bonus, commission, etics, Procurement Leaders

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