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What key measures do you recommend when determining the bonus structure for the company's procurement manager?

Kevin Rutter's Profile

Procurement Manager CompensationWe are a small company with one procurement manager.  We would like to implement a bonus structure for this manager, but would like to get some thoughts on the best way to set it up and evaluate at year end.

Answers

(Agent, JKS Solutions, Inc.) |

You might try to find a salary survey. What are your goals for that position? Are they responsible for improved margins? What are their relationship management duties? Are they responsible for contract negotiations that achieve a specific financial result? Until you determine what the financial drivers are that you want that position to impact, then its very hard to establish an incentive based bonus plan for an administrative position.

For example in retail, the category managers establish pricing of complementary goods that are merchandised together, part of their role is to manage the vendor relationships as well and negotiate vendor pricing, discounts, volume purchasing, etc across many locations. The category manager does not manage the purchasing function, but has a large part to play in profit margin. They must select the products with the higher margins and make them attractive to the customer, either by recommending products in combination with others or working with the display of the goods. They play a role on the cost side, in marketing, shelving, and pricing.

What does your purchasing manager do that contributes to the bottom line? that is what you want to incentivise otherwise a normal share of a bonus pool already in place makes sense. Are they driving profit or are they merely facilitating the procurement and AP coding process?

If you have government contracts there will be other factors, many times the purchasing teams are quite important.

Beyond the basic question you have not really given us much to work with.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

A bonus should be composed of a few pieces. I am going to assume your looking to set a 2013 target level. In the area of procurement you should break it into atleast two pieces - the process and the outcome, I.e. what is being purchased today, when are contracts up, how is purchase data reaching accounting, do all orders have the proper approval, do you pay below market negotiated rates, do you pay less than your competitor... It can't only be about the outcome because the procurement manager may not have total control of the outcome. Seeking market total compensation makes tremendous sense. If you can't easily find Procurement Manager, also look for Vendor Manager. In smaller companies they are the same,.

Topic Expert
Linda Wright
Title: Consultant
Company: Wright Consulting
(Consultant, Wright Consulting) |

I agree with Regis that you should establish market first. Organizations like the Institute for Supply Management should make that task easy.

Then I also agree with both prior commentators that both process and spend results should be measured. If you are just beginning to tighten this process, you may have to declare "contract or vendor management amnesty" to pull together what you have. In a large financial services company where I was first asked to establish a best in class sourcing function, this step took us almost a year--to catalog, read and understand and renegotiate or terminate existing deals. At the same time, we had to scrub the general ledger to establish spend analytics.

Then--at last--, we could prioritize, measure and reward the contracting outcomes. Establishing the goals with the manager's involvement would be the way to go.

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