A Vision for Procurement Compensation Structures
Note: This post by Kelly Barner originally appeared in the March 2012 PSD Group Procurement & Supply Chain Newsletter.
In this week's eSourcing Wiki-Wednesday excerpt on Seven Facets of Cost Reduction and Avoidance, compensation structures are brought into question as they incent procurement professionals to behave a certain way, 'Like all employees, a supply manager will engage in behaviors rewarded by the company. This will create a problem if cost avoidance or cost reduction efforts beyond hard savings do not count toward a supply manager’s compensation and performance.'
As organizational expectations of procurement increase, many practitioners are questioning the structure of their compensation plans. Traditionally, procurement professionals received a straight salary. If there was a bonus structure in place, the bonus was typically based on corporate performance against stated goals and qualitative individual performance rather than savings targets.
More recently, procurement has started questioning this compensation structure, pointing in particular to the salary plus commission structure earned by the supplier reps they sit across the table from in negotiations. Why not incent procurement to save more by giving them a cut of the savings?
There is no question that procurement has the ability to rise above transactional spend management, the kind that is ripe for outsourcing, to create real and lasting value. Many of us also probably deserve a raise for the additional responsibility we have taken on through category management and risk management initiatives. The best approach is going about it the ‘old-fashioned way’: making a case to management that represents our expanded scope of responsibility, newly acquired expertise, and continued education/certification. In that way, the straight salary approach can set us free to pursue value creation, collaboration, and innovation wherever we see them rather than to focus on savings alone as a measure of our performance.