Your Questions: Answered - Written by Barry & Richard on Monday, April 23, 2012 21:37 - 0 Comments
Your questions answered: Peter Lloyd, CEO Mabey Group, looks at the tricky issue of commissions
I wonder if you can help me. I recently attended a session about the Bribery Act and the topic of commissions came up. My questions are these. First, I understand that the commissions need to be reasonable. How exactly do you work this out? In my industry commissions vary from market to market and often the exact percentage of commission is commercially sensitive information. How do you benchmark to see if the percentage proposed is reasonable?
Second, if after a contract is won and commission paid and on top I pay the agent a non contractual bonus – do you think the bonus is subject to the Bribery Act?
We have developed the concept of a ‘value for money’ check. What exactly is the representation doing for you and what might be a reasonable fee to pay for that work? Undoubtedly you will have to take account of the fact that a commission paid representative will have to do some initial work at risk, so you are not simply paying them for the work they have completed.
A good starting point for a cost evaluation would be the market value of professional services in that country, so if you did have to pay by the hour, then what would it cost? Add a factor for the commercial risk that the representative is taking and an assessment of the time that will be expended on your project and you have a ‘ball-park’ figure that would be your starting point on demonstrating ‘good value’.
All of these variables are to some extent subjective, but we have found that the Country Managers can make logical and reasonable assessments that allows our senior team to review and potentially approve commission payments in advance of any firm agreement to pay.
Benchmarking is difficult, 1% of £50k for doing very little might be easily justified, 1% of £50m might not. The purpose of the exercise is not to determine with decimal point accuracy what is an appropriate fee, but to enable the senior team to determine whether they feel comfortable to defend the commission payment, possibly in front of a courtroom!
On the subject of the bonus I am not a lawyer, but I do not see such a bonus as anything other than another form of reward and therefore the same rules apply. [Ed: we are, there isn't a difference!]