A Modest Proposal: Stop Paying for Performance

March 23, 2009 5:54 AM | Categories: Spend Management

The thought occurred to me this weekend that perhaps we should stop paying -- or at least cap -- performance related bonuses in procurement and supply chain (hat-tip: Tim Minahan over on Linked-in). Over the past decade, it's not been uncommon for top CPOs in large companies to rake in over $250K when factoring in salary, bonus, options, restricted stock, etc. How crazy is this? Show me what they've done to justify that much remuneration. After all, the US is restricting or planning to tax bonuses at 90% in banking, regardless of individual performance. Maybe this makes sense in procurement as well. Since the procurement and supply chain employment base is more captive than that of finance, it would make it more difficult for them to bolt to other industries if we restrict compensation or tax top performers more highly.

Consider this article in the FT that suggests that top trading talent is already bolting from banks to industries where "commodity traders ...can make as much money as they used to" at companies such as BP. Fortunately, our top talent can't swap industries like that. Seriously, there is no reason to wait for the government to start legislating limits to our pay or put us in new tax classes. Let's take the initiative today and limit performance-based pay in procurement and supply chain before Washington forces us to. It might be a modest proposal, but I tell you, it's possible to develop a taste for eating corporate babies once you've downed a few glasses of red kool-aid first. Make mine extra tall and add a few shots of old Soviet potato vodka -- it goes down easier that way.

Ahhh.... Now that I'm loosened up, this whole business of bonuses looks like a problem of semantics. Staying a step ahead of paternalistic totalitarian legislation requires some double speak -- let's call "bonuses" "commission". After all -- and despite the fact that the Feds felt compelled to throw good money after bad -- we're talking about maintaining individual performance incentive here. Not from each according to ability and to each according to need. And besides, when it comes to the Spend Management world, perhaps a reverse "commission" on savings is not too far-fetched from an accounting standpoint.

- Jason Busch

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Jason,

Generally speaking the bonuses for the most senior executives in a firm are not "performance related", they are the rewards for winning the tournament. Or in other words, as the french would say, to "encourager les autres".

If you're interested in the differences between compensating marginal and relative performance here's a link to get started ... it's thin, but the links are worth pursuing, especially to Edward Lazear's page.

By the way, this is often the single biggest source of labour/management disputes. Management wants to recognize relative performance differences and labour wants to manage by marginal productivity. Let me provide an example.

We had a recent bus strike in Ottawa. There were several issues, but fundamentally the issue was that management wanted to have control over scheduling. They wanted this so they could recognize relative performance differences between drivers (they didn't articulate it that way). For example they wanted to assign the most reliable drivers (low abseenteeism, perfect safety record, etc) the most critical and demanding routes (for example morning rush hour in the city core). The union wanted to maintain the practice of seniority based bidding (unions typically want tenure to be the only recognizable difference within a bargaining unit).

http://en.wikipedia.org/wiki/Tournament_theory

# Posted By David Rotor | 3/23/09 4:58 AM

Changing the paradigm, eh? I think you're right, though. Reminds me of my father-in-law, an award winning retired high school English teacher (a Milken foundation award winner) who has completely drunk the teacher's union cool-aid about not paying teachers bonuses based on performance (he was a union rep at his school). I suppose when you have an $80K / year pension paid for and guaranteed by the state -- and thanks to collective bargaining -- you want to preserve what you've got at all cost. No need to rock the marginal productivity boat for fear of opening up other areas for negotiation.

# Posted By Jason Busch | 3/23/09 8:45 AM

Interesting article. I think you point out very well that too high packages are not totally deserved, however I would not touch procurement on that. I still believe procurement is not paid well. After all, even the maximum salary we have seen is I believe $800k, whereas all boards from public companies are making an average of a few millions, with top ones climbing to half of billion a year! Most of them are taking it anyway, often regardless of the performance of the company. I would agree for a max package of 500k, including for basket ball players, actors, singers, etc, the rest should be redistributed to healthcare, schools and poor countries ... Should we consider the C-level packages reduction in our next pipeline ? :) Heads it is a way to get a salary increase too, tales a way to stay home, in any case it should be the governments role to cap certain power abuse. When is this society will start to be socially responsible?

# Posted By Louis BERNARD | 3/25/09 4:57 AM

I think this idea or suggestion is the worst. Why should people who work hard be the same people who are punished. Here is an idea why don't we tax 90% the salaries of the Politicians who obviously can't do their own jobs isn't this the main reason we are in this mess. Maybe just maybe they will do what we have sent them to do.I believe if you work hard you should be rewarded and if you don't you should be fired or demoted.

# Posted By Mike | 3/25/09 5:35 AM

Agreed, a bone-headed idea. That's why it's a "Modest Proposal" ...

http://en.wikipedia.org/wiki/A_Modest_Proposal

# Posted By Jason Busch | 3/25/09 6:25 AM

Really...$250K a year is high for a CPO?? Where would you say the cap needs to be at? If there is a quantifiable way to measure performance, then individuals should strive to get the max amount of compensation possible. Especially considering the value, experiance, and savings that they bring to an organization. If you have a good individual that gets paid $250K but brings in $3-5 million a year in savings, it doesnt take a rocket scientist to realize that that person is more than paying for himself.

# Posted By Omar | 3/25/09 6:38 AM

Actually, I'd guess that the average compensation (base, bonus, options, equity grants, pension, etc.) for most Fortune 500 CPOs is $300-$400K -- in some cases significantly more. CAPs has got some more specific data on it.

# Posted By Jason Busch | 3/25/09 7:46 AM

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