Wednesday, 27 April 2011

Kickbacks, Referral Commissions, Finder's Fees, and Bribes

Bribes - or their euphemistic relatives kickbacks, referral commissions, and finder's fees - exist in the special event industry. Like pornography, they are everywhere but nobody wants to admit they participate in them. There are lots of self-righteous planners that I have read on the web and heard at conferences who claim they do not, but without taking a survey, I would be hard-pressed to believe they are in the majority.

Yes, there are many definitions for bribes but they all boil down to the same thing. They involve the giving of some favor in return for business. That favor more often than not is money, and in the case of planners or producers, a percentage of a given contract.

Several cases come to mind from my own experience. One that has been prevalent for a long time is the "requirement" to kick back a percentage of the gross value of a referred contract to hotels. I have even been sent letters by hotel managers stipulating the exact minimum amount that this kickback should be, usually 10 or 15%. I also know for a fact that in-house suppliers (e.g. A-V companies) to hotels are often required to kick back as much as 30% of contract values or higher. There are also hundreds of cases where a planner asks for a referral commission for sending a client to a supplier. Basically, in most cities, because of intense competition, if you don't participate, you lose.

These different forms of bribery pose ethical concerns for many business owners in special events. I know they certainly did for me. However, there are three key questions to be asked about them before taking a moral high ground:

1. Who is being paid? As long as a payment goes to a company or organization and not to an individual, there should be no problem with it. For example, if a kickback goes to XYZ Hotel and not to Mr. Smith the Catering Director, then theoretically there is nothing unethical about the transaction.

2. Is it transparent? Is the payment disclosed or is the supplier willing to disclose it if asked? If not, then there may be cause for concern. I personally don't believe that every such transaction must be completely open since that is not the way business works nor should it be. For example, I did not specifically state in my invoices how much a kickback or referral commission was, but I did make an open statement that whenever a client wished to review my fees he/she was welcome to do so. In the course of over nineteen years not one client asked me to explain my fees.

3. Exactly what is a kickback and why is it needed? To answer this, let's consider you, the middleman. You are offering a service, whether it be expertise in entertainment, wedding planning, lighting, or whatever. For this, you have spent uncountable hours and years building a unique body of knowledge and a highly sought-after catalogue of your own suppliers. This knowledge is worth something to clients. Sure they can get it on their own searching the Internet but without any guarantees that what they are getting is reputable, or without the kinds of thoughtful choices you can provide. The people who are referring you should understand this and have comparable faith in your abilities. Otherwise, they risk damaging their own reputation. The other consideration is that you as a small businessperson do not have a huge sales force and therefore such a kickback can indeed be considered a "sales commission." As such it makes perfect sense, especially since the absolute best kind of client for a small service business is a referred client.

Now, the real problem comes with accounting. Again, from my own experience, I knew exactly what margin I had to maintain and how much business I had to gross each month on average in order to continue to be a going concern. If I had to lop 10% or more off the top of every referred contract, I would not make enough money to continue existence. Therefore, I had to add that percentage to my own margin, thus essentially decreasing the value of the service or tangible goods supplied to the client. Was this the "right" way to do it? I don't know. What I do know is that many others did - and do - the same. Fortunately, sometimes a middleman can get around it by lowering the rental price of some goods or re-negotiating with suppliers. However, when there is only a service, then something has to suffer. But I must ask again. Is this bad? The client gets the expertise of you, the middleman, without having to do a lot of legwork on his or her own. That in itself is a valuable service.

If this still sounds like an obnoxious practice to you and hurts your ethical sensibilities, then maybe we as an industry must take steps to stop it. Perhaps it should be specifically written into codes of conduct or included in all contracts. I doubt, though, that it will ever disappear completely. Keep in mind that for most other cultures in our world, this way of doing business is the norm and is very acceptable.

I must caution that I am only discussing the practices of private business and not public or government contracts.

I would welcome comments and experiences on this always touchy subject.

1 comment:

  1. This is absolutely the most horrendous thing that I have ever heard! I was sickened when I learned this sort of thing actually went on! I have been in the wedding planning industry for some time, and me has NEVER occurred to me to take or pay a commission to anyone, nor would I EVER! I just recently read this and some other articles on this deplorable practice after a client asked me about a venue who they unfortunately learned (after the fact) was taking a 10% commission off both their caterer and the linen vendor. Appalled, I decided to do research on the topic. More painful to learn was the vast number of articles that spent more time pointing the finger at WEDDING & EVENT PLANNERS! Okay, I get that they may be mentioned among the lot of offenders, but it seems that most of this sort of behavior is placed squarely on the planners. I find it misleading and offensive. I know many honest wedding planners who also do not practice such behavior. I have always prided my work on the success of the event and the satisfaction of my client. I only recommend vendors that I know will do an outstanding job for my clients. How the entire event turns out is a direct reflection on me! If I wanted to be respected artist, who was renowned for my paintings, I certainly would have no claim or pride if I was painting by number and in between the lines! I completely agree that we as an industry must take steps to stop this practice of gouging the clients, and making decisions solely by how it much more it benefits the offender, and not the CLIENT! I went to bed last night thinking the same thing you mentioned about adding a code of conduct to my contracts. I feel that as an industry, we should utilize contract verbiage that not only weeds out those who create price hikes to their clients, but also holds legal merit sustainable in a court law that would require restitution of kickbacks, and commissions, should a client find that a vendor LIED about such practices.