Procurement Compensation Plans as Barrier or Enabler of Success
This week’s eSourcing Wiki-Wednesday topic is barriers to success – and those barriers are specific to strategic sourcing organizations. Broken down into the main categories of leadership, team and project issues, these nine barriers are a who’s-who list of worst case scenarios that should help you diagnose the root cause of the challenges you are facing in your organization.
One of the barriers, listed with leadership issues like managerial invisibility and contradictory organizational goals is ineffective incentives. Here is the excerpt:
Motivated people are successful people - and financial incentives can be very effective, but only if they make sense. If a significant part of the Sourcing Team's compensation package is a bonus based on PPU or TCA reduction, chances are she will be attracted to the absolute lowest cost award, which might be inconsistent with overall corporate goals. To ensure goals are aligned, incentives should be tied to the individual, the team's success and the company's success.
We’re all interested in our compensation plans – particularly ways to increase them. The challenges associated with financial incentives directly tied to the objectives of a procurement or sourcing group are many:
- Danger of encouraging lowest cost deals (rather than highest value)
- Separating the contribution of the individual from market dynamics
- How to recognise cost avoidance or increases
- Should bonuses tied to savings be distributed as they are recognized by the company (typically following the depreciation schedule for the item purchased)
The topic is not a simple one, and there is probably no one right answer. One good example of a discussion on the topic is a post from the Procurement Leaders blog on June 10, 2011: The Big Debate: If sales earn commission, so should procurement. One of the distinguishing things about this post is that it got 23 comments, representing as many sides and perspectives.
Most (not all, to be sure) of the respondents agreed that awarding individual bonuses based on savings was a dangerous motivation to set in motion. Even those that advocated group or department bonuses believed they should be based on company performance. Some of the more interesting responses highlighted additional concerns, such as costs being pushed into other parts of the organization through poor terms/quality or fights breaking out in procurement about who gets to work an untouched spend category rather than handing a contract re-negotiation.
Getting a Better Understanding
Of all the comments made, I agree with one in particular, submitted by “Ken”: “I think this question goes to the crux of the Procurement profession in that perhaps why many in the profession seek bonuses linked to savings is because they perceive themselves to be underpaid.”
On first reading the response, the idea seems simple enough. Bonuses appeal to us because we perceive them as a way to quickly increase our income, justifying commissions/bonuses by tying them directly to the savings we are able to report. But increasing our base salary, although more work, is both more likely to happen and more sustainable through good economic times and bad.
And how do we justify increasing our base salary? We take classes, get certifications, and/or pursue degrees that make us better qualified to handle our jobs and increase our individual/group performance. We take on more responsibility by formally stepping up to handle things like risk management, and market intelligence (not that we aren’t doing that work already – but if it isn’t formally assigned to us, our efforts are unlikely to be recognized).
For other ideas, I looked back at one of the procurement/purchasing salary surveys we covered last year, run by the Next Level Purchasing association. The survey was conducted in late 2010, and 2,100 procurement professionals from around the globe participated. Based on their findings:
- You get a 31% increase in salary for becoming a supervisor.
- The best jump in salary as your position improves is from buyer (a.k.a. purchasing agent or procurement specialist) to purchasing manager at 29%. Usually that involves some kind of acquired expertise in a specific category or industry.
Interested in more? You can also read Procurement Leaders’ follow up post by guest blogger Scott Forest, director of procurement, Kuehne & Nagel who said, “Bottom line - if a procurement leader can bring in big business by leveraging an account or generating tremendous savings vis-à-vis their own hand, it’s up to the individual on how they want to be compensated. Think about it. Why did this person choose procurement? If their interest was in contract management, they could have been a lawyer. If their interest was in spend analysis, they could easily become an accountant or programmer.
Senior sales (business development) positions have a place around the board room table and now procurement has an opportunity. Each company denotes value and defines worth in its own way. So, similar to sales, the sky’s the limit for the procurement professional!”