Chief Purchasing Officer Compensation_ an Analysis of Organizational and Human Capital Effects

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Chief purchasing officer

compensationAn analysis of organizational and humancapital effects

George A. ZsidisinDepartment of Marketing and Supply Chain Management,Michigan State University, East Lansing, Michigan, USA

Jeffrey A. OgdenBrigham Young University, Provo, Utah, USA

Thomas E. HendrickDepartment of Supply Chain Management, Arizona State University,Tempe, Arizona, USA, and

Mark A. ClarkDepartment of Management, Kogod School of Business,

American University, Washington, DC, USA

Keywords Purchasing, Managers, Compensation, Organizational development, Human capital,Human resourcing

AbstractIt is increasingly accepted that the chief purchasing officer (CPO), as the highest ranking

member of the purchasing and supply management (PSM) function, is a resource that can addstrategic value to the firm. Delineating the organizational and human capital factors that determineCPO compensation packages can help firms maintain their competitive advantage by attracting andretaining talent in this position. Although an extensive literature base examines executivecompensation, such research at levels below the CEO is sparse. Based on the rich literature discussingexecutive compensation as well as a survey of Fortune 500 CPOs, examines the influence oforganizational and human capital on CPO compensation from a resource-based view of the firm.The organizational capital characteristics of annual sales, purchases as a percent of sales, and thenumber of reporting levels between the CPO and CEO were found to influence CPO compensation

significantly. Somewhat surprisingly, CPO age was the only human capital factor of those tested(years in PSM, education level, CPM certifications) that significantly influenced compensation.

IntroductionThe increasing reliance of firms on their purchasing function to offer a sourceof competitive market advantage (Carr and Pearson, 1999) results in thepositioning of the chief purchasing officer (CPO) as a valuable internal resourceof the firm (see Barney, 1991; Grant, 1995). As such, the ability to attract andretain highly-qualified CPOs becomes a strategic concern, and special attentionshould be given to the factors which determine their compensation packages.Executive compensation has been shown to be related to organizational

The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at

http://www.emeraldinsight.com/researchregister http://www.emeraldinsight.com/0960-0035.htm

Chief purchasingofficer

compensation

477

Received April 2002Revised September 2002,

December 2002

International Journal of PhysicalDistribution & Logistics Management

Vol. 33 No. 6, 2003pp. 477-499

q MCB UP Limited0960-0035

DOI 10.1108/09600030310492751


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performance (Wright et al., 2001; Zajac, 1990) and related outcomes of jobsatisfaction (Igalens and Roussel, 1999), individual performance (Gomez-Mejiaand Balkin, 1992), and turnover (Baysinger and Mobley, 1983). Further, a betterunderstanding of factors influencing CPO compensation can be useful toexecutives performing the CPO role including current and would-be CPOsand related managers such as logistics executives as they attempt todetermine equitable compensation levels for themselves, as well as to otherorganizational decision makers (such as CEOs) and as they assess their currentneeds and internal organization resources which may affect CPOcompensation.

This study tests the relative influence of two potential sources of variation inCPO compensation organizational and human capital as derived fromwork in the areas of compensation (e.g. Gerhart and Milkovich, 1990;Gomez-Mejia and Balkin, 1992) and strategic human resource management

(Schuler and Jackson, 1999; Wright et al., 2001). It engenders a view of the firmas a collection of tangible, intangible, and human resources (resource-basedview of the firm, or RBV) as proposed by Barney (1991), Grant (1995), andothers. Our focus is on one such resource, the CPO, which we define as the mostsenior or top-level executive in a firms corporate (executive level) office ormajor division, such as a strategic business unit (SBU), who has formalauthority and responsibility to manage his or her firms or the SBUspurchasing, buying, or sourcing functions for the procurement of goods andservices from external suppliers. Individuals in this position play a critical rolewithin logistics management by serving as the leader for a firms upstreamchannel activities (Lambert et al., 1998). Through attention to factors that

determine CPO compensation packages, we hope to assist organizations intheir ability to attract and retain services of the limited CPO talent available inthe labor market, and provide insights for future research that wouldinvestigate which factors influence logistics executives compensation.

Based on the literature in RBV and executive compensation, we present twohypotheses that test a hierarchical model of organizational and human capitalfor its effect on CPO compensation. In the tradition espoused by Simon (1957),we first look to the organizations structural characteristics, such as industry,annual sales and purchases as a percentage of sales, to determine their impacton CPO compensation. Although some structural factors, such as size or annual

corporate sales, are relatively resistant to strategic manipulation, other factorscan be managed to a degree by organizations or individual CPOs. For example,both the CPOs span of control and the percentage of the organizationspurchases that he or she manages may be adjusted.

The second set of predictors reflect aspects of a CPOs human capital, aterm describing an individuals worth or productive capabilities in terms oftraining, experience, judgment, intelligence and insight to a given profession ororganization (Barney, 1991; Becker, 1975). Again, while some aspects (i.e. age,

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professional tenure) of human capital defy manipulation, others may bemanaged by individuals and organizations (i.e. education level, certification).

We begin with a brief discussion of organizational and human capitalfactors that have been linked with executive compensation, followed by twohypotheses arising from the literature. A description of the research methodand data analysis is presented, as well as a discussion of the managerialimplications. The conclusion section summarizes the research findings,research limitations, and future research directions.

Linking organizational and human capital factors to executivecompensationA rich tradition of management literature aims to describe theories of executivecompensation practices, isolate predictors of salary levels, and connectresultant compensation packages to both personal and organizational

outcomes. Executive compensation is believed to be an important researchfocus due to its role in the firms strategic decisions, its use as a general modelfor the compensation system of the organization as a whole, and its visibility(Gomez-Mejia and Balkin, 1992). Furthermore, proper management ofcompensation practices based on the understanding gained through such anexamination may increase employee retention through increased jobsatisfaction, motivation and commitment to the organization (Lawler, 1990;Schuler and Jackson, 1999).

Theoretical perspectives of executive compensation have grown largelyfrom economic models of the firm and have been dominated by researchfocusing on the firms top executive, for the reasons presented above. The chiefexecutives compensation is determined by his or her productivity or added networth to the organization (Roberts, 1959), also characterized as his or hereffectiveness as an agent for the firms owners (Eisenhardt, 1989). Becauselower-level executives are not as directly responsible for the organizationsbottom line or to its owners, these perspectives may not be as successful inpredicting compensation levels of those other than chief executive officers(CEOs). However, there are aspects of organizational structure, such as size,sales revenue, span of control, and layers of management between a specificexecutive and the CEO that affect compensation from a structuralistperspective (e.g. Gerhart and Milkovich, 1990; Simon, 1957). While a strict

interpretation of the structuralist perspective calls for a somewhat mechanisticdetermination of salary levels, the theory may be used as a general guide todetermine a compensation range. Essentially, larger organizations, greaterspan of control, higher revenues, and closer proximity to CEOs will beassociated with higher compensation levels.

The organizational perspective has proven useful in accounting forsignificant variance in executive pay; however, it leaves a large portion ofvariance unexplained. The RBV instructs us to look inside the firm, such as to


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the recent studies that emphasize the predictive power of human capital factorswhen evaluating executive compensation (i.e. Judge et al., 1995). Individualassets such as knowledge of the job (Wayne et al., 1999), organizationalexperience (Cappelli and Cascio, 1991; Wayne et al., 1999), and personaldemographics have been positively linked to compensation levels. Thus, it maybe that these human capital factors play a role in explaining CPO compensationlevels.

RBV and CPO compensationThe central tenant of the RBV argues that an organization can obtain sustainedcompetitive advantage in the marketplace by implementing strategies whichexploit their internal strengths to respond to environmental opportunities whilereducing external threats and avoiding internal weaknesses (Barney, 1991;Barney et al., 2001; Wernerfelt, 1984). The method by which firms can obtain

that competitive advantage is by utilizing their firms unique allotment ofvaluable, rare, and imperfectly imitable resources to conceive of and implementstrategies that improve its efficiency and effectiveness (Daft, 1983; Barney,1991). Firm resources can include assets, capabilities, organizational processes,firm attributes, information, human talent and knowledge possessed by thefirm. Barney (1991) provides a categorization of three forms of assets:

(1) physical capital;

(2) human capital; and

(3) organizational capital.

Physical capital consists of the technology used in a firm, its plant andequipment, the geographic location, and accessibility to raw materials.Organizational capital resources include the firms reporting structure,planning, controlling and coordinating systems, and informal relationsamong groups within and external to the firm. Human capital resources includethe training, experience, judgment, intelligence, relationships and insight ofindividual personnel in a firm.

The RBV can provide theoretical insights into CPO compensation. First, theskill sets of CPOs can be classified as a human capital resource in which CPOsmay:

. have specific training in supply chain management;

.

gain experience in dealing with issues such as creating a supplymanagement strategy (Carr and Pearson, 1999), selecting and developingsuppliers (Krause, 1999; Sarkis and Talluri, 2002), and forming allianceswith firms in the supply chain (McCutcheon and Stuart, 2000);

. need to exercise judgment in aligning supplier objectives with their ownfirm;

. have insight into specific commodity markets.

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Second, these skills are considered rare. Firms often pay a premium for hiringand retaining individuals that can provide significant bottom-line financialcontributions by shifting their firms supply management focus from a tacticalto strategic orientation (Anderson and Katz, 1998). These skills can arise fromsources such as age and experience, education, purchasing-specific experience,and knowledge evidenced by certifications such as the certified purchasingmanager (CPM) designation. Human capital resources are also partially mobile.Individuals can move from one firm to another. However, organizations canprovide incentives, such as generous compensation packages, which canprovide CPOs enough enticement to stay with their current firm. From aresource perspective, several of these human capital resources are measured inthis study for their effect on CPO compensation.

Hypotheses

As we have demonstrated through the discussion above, understanding thedeterminants of CPO compensation may help to achieve desired outcomes forCPOs, organizations and other executives such as vice-presidents of logistics.Based on the extant literature through an RBV lens, we believe that two classesof factors will significantly affect CPO compensation organizational andhuman capital. From this premise, we develop two hypotheses to predict theorganizational and human capital characteristics that influence compensation,as measured by annual salary and bonus levels.

Organizational capitalThe organizational characteristics examined for their influence on CPOcompensation are: the size of the organization as measured by total annualsales; annual purchases as a percentage of sales; the total number of employeesdirectly and indirectly reporting to the CPO; and the levels of managementbetween the CPO and CEO.

H1. Organizational capital has a significant positive influence on corporateCPO compensation.

Organization size. Prior studies have shown that the salaries of purchasingprofessionals increase in relation to company size (Fitzgerald, 1998). This maybe true for purchasing professionals in general, but this relationship has not

been examined at the CPO level. Munificence, which is defined as the extent towhich an organizations environment can support sustained growth (Starbuck,1976), represents one argument for a relationship between organization sizeand CPO compensation. An organizations annual sales represent one of theprimary factors used to assess munificence (Dess and Beard, 1984).Organizations operating in highly munificent environments will have greateropportunities for generating slack resources (Cyert and March, 1963). Theseslack resources, in turn, can then be utilized to increase the compensation levels


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of strategically important positions within the organization, such as the CPO.In order to examine the effect of sales on compensation, survey respondent datawas collected by self-reported corporate annual sales.

Purchases as a percent of sales. Purchasing and supply management (PSM)can potentially increase organizational success and performance bystrategically serving a greater role within the organization. CPOs will havemuch more influence in organizations that spend a large percentage of theirannual sales on the procurement of goods and services than in organizationsthat spend a relatively small percentage of their annual sales on such items.This increased influence should result in higher CPO compensation levels.Previous studies of the salaries of purchasing professionals indicate that asdollar volume and supervisory duties increase, compensation levels likewiseincrease (Morgan, 1997; Fitzgerald, 1998). Therefore, as spend increases as apercentage of sales, CPO compensation should likewise increase.

Number of employees reporting to the CPO. The number of employees thatreport to the CPO is a measure of the CPOs span of control and influence withinthe organization. The more resources, to include human resources, that the CPOhas responsibility for, the greater that individuals compensation.

The CPO can have a large span of control, but only a few employees thatdirectly and indirectly report to the position. Therefore, this study examinesboth the number of employees that directly and indirectly report to the CPO.

Reporting levels to CEO. PSM has shifted from a tactical to a strategic rolewithin organizations in recent years (Fitzgerald, 1999; Nolan, 1999; Pearson etal.,1996). As part of this shift, CPOs are reporting to executives at much higherlevels within their organizations, which can result in greater compensation.

Certainly, it could be perceived that those individuals that report directly to theCEO would be valued and paid more than those reporting at lower levels. Beingcloser to the CEO gives PSM greater credence and influence. When the CPO hasthe ear of the CEO, it is considered a critical executive function and mayreceive compensation appropriate to its organizational status.

Human capitalThere are four human capital characteristics examined for their effect on CPOcompensation. The factors are:

(1) age;

(2) years of experience in PSM;(3) whether or not the CPO is a CPM; and

(4) whether or not the CPO has obtained a Masters degree.

Each of these factors is discussed below in relation to the following hypothesis:

H2. Human capital has a significant positive influence on corporate CPOcompensation.

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Age. Age is a surrogate measure for business and life experience. With greaterexperience comes greater potential for increased compensation. Previousstudies indicate that age has a positive relationship with purchasing salaries.Morgan (1997), in a study of purchasing professional salaries, found that theaverage salary among respondents 41-50 years old was $2,200 greater than theprofessions overall average. This could be due to the respondents experience,employment longevity, or a combination of the two. Age is thereforehypothesized to influence CPO compensation positively.

Years in PSM. Expertise within the PSM function may influence CPOcompensation levels. CPOs with many years of PSM experience could receivegreater compensation than CPOs with relatively little PSM experience.

Attaining the CPM. The CPM is the designation for purchasing and supplymanagers who attain the certification offered by the Institute for SupplyManagement (ISM). Prior studies have shown that, in general, CPMs have

higher average salaries than purchasing professionals who are not certified(Morgan, 1997; Fitzgerald, 1998). Lumpkin and Tudor (1991), in a randomsample of 1,000 ISM members, found that becoming a CPM enhances both jobperformance and job satisfaction. Ciancarelli (1999) discussed how certificationand accreditation can be beneficial for those looking to advance theirpurchasing careers. Attainment of the CPM certification is included as a humancapital characteristic for its potential influence on CPO compensation.

Attaining advanced degrees. Previous studies of purchasing professionalssalaries indicate that individuals with masters degrees receive highercompensation than those with bachelors degrees (Morgan, 1997). Thiscompensation disparity may be due to the additional knowledge and skills

obtained through education.

Control variablesTwo control variables, gender and industry effects, were entered in the firstblock of the regression model. These control variables are discussed below.

(1) Gender effects. Prior studies indicate that there is a substantial gapbetween the average compensation earned by males and females in thepurchasing profession (Morgan, 1997; Fitzgerald, 1998). According toMorgan (1997), possible reasons for this gap are that women in PSMhave typically been younger, less experienced, not as educated, and haveheld fewer supervisory positions. Consequently, in the current study,gender was inserted as a control variable.

(2) Industry effects. Effective PSM practices can provide significantfinancial benefits to most firms (Carr and Pearson, 1999). However, theimpact of PSM activities may differ by industry mainly due todifferences in the types of items purchased (Leenders et al., 2002). Asdiscussed by Hendrick (1994), three industry classifications(high-technology, general manufacturing, and general service) were


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used as controls in this study. Examples of high-technology firmsinclude aerospace, software development, and electronics firms. Generalmanufacturing firms include organizations in the automotive, textile,and food production industries. Banks, transportation providers, andhealth care firms are examples of service industry organizations.

Research methodA preliminary survey questionnaire was developed and sent to 21 CPOs whoattended the 1999 International Executive Purchasing Roundtable: NorthAmerican Venue. These CPOs indicated that compensation research should bea high priority for the Center for Advanced Purchasing Studies (CAPS). A highreturn rate (76 percent) from this group provided several usefulrecommendations that were incorporated into the final version of the surveyquestionnaire.

CPOs in Fortune 500 firms were the target audience for this study. Surveyquestionnaires were sent to 645 CPOs of Fortune 500 companies (multiplequestionnaires were sent to firms that were identified as having bothcentralized and decentralized CPO functions). The first item on the surveyasked if the respondent was the CPO for the entire firm, corporate (centralized)purchasing group, a major division or strategic business unit (SBU), or notconsidered a CPO for the firm. If the targeted respondent was not the CPO, thesurvey asked the respondent to pass the questionnaire to the CPO of theirorganization (see Appendix 1). For purposes of this study, only the responsesfrom CPOs of the entire firm or from a corporate (centralized) group were usedin the analysis in order to control for organization scope. Of the 152

questionnaires collected, 125 respondents had a corporate scope and wereretained in this analysis. The return rate of 19 percent (125/645) was achievedthrough a series of follow-up letters, faxes, e-mails, and telephone calls(Dillman, 2000).

Non-response bias is always a threat to survey research, even with highresponse rates. One common test for non-response bias is to compare theresponses of early and late respondents. As discussed by Armstrong andOverton (1997), late respondents are more likely to provide responses toquestions that mirror the answers of non-respondents. Three distinctmultivariate t-tests were computed for the items that measure the followingvariables:

(1) firm size, as measured by annual sales and purchases;

(2) purchasing organization size, as measured by the number of employeesthat directly and indirectly report to the CPO; and

(3) current CPO base salary.

These tests compared the first wave of respondents with the second wave ofsurveys (respondents from follow-up letters, faxes, e-mails, and phone calls).

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The Hotelling-Lawley Trace for the three tests had values of 0.009 (p= 0.516),0.000 (p= 0.989), and 0.000 (p= 0.998), respectively, strongly suggesting thatearly respondents were not different than late respondents and thatnon-response bias was not a significant factor in the research.

Data analysisThe data analysis will begin with a description of the survey respondents.Then, regression results will be discussed.

Respondent demographics and characteristicsThere were several questions on the survey asking for demographic andbackground data from the respondents, as well as questions regarding CPOcompensation, as measured by salary and bonus levels (see Appendix 2).The mean age of CPOs is 47 years; the youngest CPO at the corporate levelis 30 years, and the oldest is 63 years. In addition, the length of service atthe current organization also greatly varies. Some CPOs had been with theircurrent organization less than one year, while others had worked at thecurrent organization for more than 34 years. The average CPO tenure attheir current organization was almost 15 years. Combined salary and bonuslevels, the variable of interest in this study, also varied considerably between$63,500 and $800,000 per year. Overall, the CPO positions in Fortune 500organizations are held by people of various ages and experience levels.

Hierarchical multiple linear regressionA hierarchical multiple linear regression was done to determine the influence of

organizational and human capital on CPO compensation, as discussed in thehypotheses. First, a correlation matrix, as found in Table I, was constructed toexamine the relationships among the variables in this study. The first block putin the regression model consisted of the control variables, gender and industry.As Table II indicates, the block was significant, accounting for slightly over 15percent of the variation in CPO compensation. However, none of the individualcontrol variables were significant.

The second block included in the regression model consisted of the fourorganizational characteristics of annual sales, purchases as a percent of sales,the total number of employees that report to the CPO, and the managementlevels between the CPO and CEO. As a block, these variables increased the

compensation models explanatory/predictive power as measured by thechange in r2 values (Table II). In addition, three of these four factors (annualsales, purchases as a percent of sales, and reporting levels to the CEO) werefound to have a significant influence on CPO salary and bonus levels. Details ofthese research findings are provided next in the discussion section. A summaryof the empirical findings can be found in Table III.

The third block of variables in the regression model consisted of the humancapital characteristics of age, years in purchasing, and two indicator variables


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Salaryan

d

bo

nus

Gen

der

High

tec

h

Gen.m

fg.

Serv

ice

Sa

les

Pur.

%

sales

No.

report

Leve

ls

Age

Years

CPM

Sa

laryan

dbonus

1.000

Gen

der

0.195

1.0

00

Hightec

h

0.138

0.1

32

1.0

00

Gen.

mfg

.

0.270*

0.0

00

20

.305**

1.00

0

Serv

ice

20.355**

20

.087

20

.357**2

0.78

1**

1.0

00

Sa

les

0.372**

20

.082

0.0

73

2

0.11

8

0.0

68

1.0

00

Pur.

%

sales

0.391**

0.1

92

0.2

37*

0.30

9**2

0.4

59**2

0.1

11

1.0

00

No.

report

0.315**

0.0

86

0.1

34

20

.050

20

.039

0.3

53**

0.2

25*

1.0

00

Levels

20.347**

20

.004

0.0

27

20

.248

0.2

25*

20

.004

20

.315**

20

.141

1.0

00

Age

0.399**

0.2

65*

0.1

18

0.28

4**2

0.3

56**

0.1

16

0.2

25*

0.1

80

20

.232*

1.0

00

Years

0.027

0.0

68

0.2

12*

20

.017

20

.123

20

.001

0.0

83

0.1

63

20

.115

0.3

86**

1.00

0

CPM

20.138

20

.056

0.0

35

20

.075

0.0

51

20

.106

20

.017

20

.039

20

.033

20

.010

0.38

3**

1.0

00

Degree

0.050

0.0

55

20

.017

20

.009

0.0

20

0.0

84

0.1

65

20

.033

20

.139

20

.068

20

.13

3

20

.107

Notes:Listwisen

=90

;*p,

0.0

5;

**p,

0.0

1

Table I.Correlation matrix

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representing CPM certification and the achievement of a masters degree.Table II shows that this block added little to the models explanatory/predictiveabilities. Age was the only significant predictor of salary and bonus levelswithin this group.

The existence of high correlations among the independent variables in aregression model, otherwise known as multicollinearity, may impair theusefulness of a regression analysis by making it difficult to interpret theregression coefficients (Freund and Wilson, 1998). Multicollinearity does notaffect the overall predictive capabilities of the model, but can make theinterpretation of the effects of the various independent variables difficult.

A formal method for detecting the presence of multicollinearity involvesexamining the means of variance inflation factors (VIF), which measure howmuch the variances of estimated regression coefficients are inflated whencompared to a situation in which the predictor variables are not linearly related(Neter et al., 1996). As discussed by Neter et al. (1996), VIF means larger than 10indicate that multicollinearity exists. Consequently, variance inflation factorsand interaction effects were examined in order to determine whether

Variable Std coefficient VIF N R2 F DR2 F

Gender (male) 0.119 1.16 90 0.154 5.201***

High technology 0.087 1.37General manufacturing 0.159 1.54Annual sales 0.373*** 1.29 90 0.443 9.300*** 0.289 10.627***Purchases as % sales 0.234** 1.57Reporting employees 0.069 1.33Levels to CEO 20.201** 1.22Age 0.198* 1.56 90 0.479 6.510*** 0.036 1.350Years in purchasing 20.118 1.52Certification (CPM) 20.042 1.25Degree (Masters) 20.056 1.12

Notes: *p , 0.10; **p , 0.05; ***p , 0.01

Table II.Results of

hierarchicalregression analysis

for compensation

Independent variable Direction Supported

Organizational capital Annual sales + YesSpend as % sales + YesTotal employees reporting n.s. NoLevels to CEO Yes

Human capital Age + YesYears in purchasing n.s. NoCPM n.s. NoEducation level n.s. No

Note: n.s. = not significant

Table III.Summary of

findings


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multicollinearity was an issue in this model. All VIF values were well below 10,as shown in Table II, indicating that multicollinearity was not a threat to theresearch model.

DiscussionThe following section provides a discussion of the research findings.Organizational characteristics are discussed first, followed by the humancapital characteristics. We then provide an example of how a Fortune 500CPOs compensation package can be estimated.

Organizational characteristicsThe analysis revealed that three of the four organizational factors significantlyinfluenced CPO compensation levels, thus providing support for H1, whichstates that organizational factors significantly influence corporate CPO salary

and bonus levels. These significant factors were:. annual sales;. the percentage of sales purchased; and. the number of reporting levels between the CPO and CEO.

Annual sales. Annual sales were identified as a key factor influencing corporateCPO compensation. In order for a CPO to garner higher salary and bonuslevels, the organization must first have the resources to provide greatercompensation. The annual sales figure for the organization is a measure oforganization size. As firms become larger, there is a tendency for them toobtain additional organizational slack (Cyert and March, 1963), which allowsfor the accumulation of resources. One way in which those resources can beredistributed is through salaries and annual bonuses. As shown in Table II,annual sales were the most significant driver of CPO salary and bonus levels,as reflected in the large standardized coefficient.

Purchases as a percentage of sales. The second significant organizationalcharacteristic found to influence CPO compensation was annual purchases as apercentage of sales. When an organizations purchases are a high percentage ofsales, the purchasing organization is often increasingly responsible forthe organizations success, since the organization is more reliant on theperformance of its supplier firms. The finding is also congruent with the

industry effects discovered in this research. As discussed by Heberling et al.(1992), service-focused organizations, on average, have much lower purchasesas a percentage of sales than their manufacturing-based counterparts.

Number of reporting employees. The total number of employees that directlyand indirectly report to the CPO was not found to significantly influence CPOcompensation. Under some circumstances, the total number of employees canserve as a proxy measure for organization size. However, even very largeorganizations can have a small group reporting directly or indirectly to the

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CPO. It is possible that the CPOs span of control, as measured by factors suchas spend and the external relationships formed with supplier organizations, ismore germane than the number of people that report to the CPO.

Reporting levels to the CEO. The third significant organizationalcharacteristics found to significantly influence CPO compensation is thenumber of reporting levels between the CPO and the CEO. Having the ear ofthe CEO seems to be a key factor that influences compensation. When the CPOis part of the top management team, that individual may be more likely toreceive proportional compensation to his or her peers in areas such asmarketing, operations and finance. On the other hand, when CPOs are furtherremoved from their CEOs and top management team, they may not commandequivalent compensation.

Human capital factors

There were four human capital factors examined, each representing to somedegree a qualifying ability or experience that might contribute to CPOeffectiveness:

(1) the years the individual has worked in PSM;

(2) whether or not the CPO has attained the CPM;

(3) the CPOs education level; and

(4) the CPOs age.

Only the last, the age of the CPO, was found to influence compensationsignificantly. Therefore, there is minimal support for H2, which states thathuman capital factors have a significant influence on corporate CPOcompensation. This result is somewhat surprising, in that it may begenerally supposed that such qualifiers would be related, over a large sample,to compensation level. It could be concluded that compensation of CPOs istherefore largely based on organizational factors rather than human capital.However, considering the large proportion of variance remaining unaccountedfor, it is likely that further investigation will reveal more explanatory factors.For instance, assuming that there is a rational basis for the variation in CPOcompensation beyond organizational effects, there may be large performancedifferences among practitioners, or perhaps better proxies will be found for thequalifications needed to be an effective CPO.

Age. There was a significant positive relationship between the age of theCPO and compensation. Older CPOs are more likely to garner greatercompensation. This finding may be due to experience, since experience is oftenequated with expertise and conceivably enhances performance. It is alsointeresting to note that, because organizational factors (sales, purchasing sales,span of control) have been previously accounted for and the level of the positionis constant, older CPOs are not being paid more due to their ability to securebetter positions in better organizations. One possible explanation for this is in


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common salary practice while salaries tend to increase over time formembers of an organization, rarely are they reduced. Therefore, it may not beso surprising that older CPOs are paid more than younger CPOs.

Years in PSM. The second human capital factor studied, years of workexperience in PSM, was not found to significantly influence CPO compensation.It may be that PSM experience is not the only valuable functional experiencefor a CPO to gain, especially considering the relatively recent specialization ofthe PSM function. Additional experience in areas such as logistics, marketing,operations, and finance/accounting can provide the individual with a broaderview of critical corporate activities and issues. This wealth of experience maybe a better predictor of compensation. Future research is necessary to examinethese relationships more closely.

CPM. The attainment of the CPM did not have a significant influence oncompensation at the CPO level. This finding contradicts previous research

examining the effects of having the CPM on salary levels. There are twopossible reasons for this finding. First, prior research has relied on randomsamples of purchasing professionals to examine the relationship between theCPM and salary levels. These surveys, while informative in a general sense,cannot be used to predict the effects of receiving a CPM on specific sub-groupswithin the purchasing profession. Therefore, it is not surprising that the resultsof this research contradict previous studies, since this research looks only atCPOs in Fortune 500 firms.

Second, the individuals who are CPOs do not necessarily come from a PSMbackground. The trend toward formal studies in PSM has been a relativelyrecent one. For many years, PSM was viewed as a tactical or administrative

function. Since many of the responding CPOs had work experience in areassuch as operations, engineering, accounting and finance, they would not havefelt compelled to achieve the CPM status. The CPM has, and continues to be, animportant certification for purchasing professionals, but may not be seen asimportant for those individuals outside of PSM. The designation of CPM maybe much more important for those at lower levels within the purchasingorganization or for those individuals without a college degree or purchasingexperience (Reich, 1989). Table I shows that there is a positive correlationbetween the CPM and years of purchasing experience. It appears that the CPOsthat have worked their way up within PSM to achieve their current position

will likely have the CPM. However, those with experience outside of PSM willnot necessarily pursue a CPM. This is not to say that having a CPM isdetrimental to CPO compensation. Instead, it may be the experience attained bythe individual that is a stronger predictor of compensation.

Degree attained. The fourth human capital factor examined in this study,whether or not the respondent had achieved a masters degree, was not found toinfluence CPO compensation. It may be that performance at the CPO level is agreater predictor of compensation than having achieved an advanced degree.

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However, CPOs with bachelors degrees had significantly more purchasingexperience than CPOs with masters degrees. In other words, having a mastersdegree allows would-be CPOs to secure positions closer to the top and to attainthe positions in less time. It appears that education can be a substitute for timeand experience.

Managerial applications of the dataThe findings from this research can be used by current and future CPOs, aswell as organization decision makers, in making initial estimates ofcompensation levels (salary and bonus) for purchasing executives. Appendix2 contains the unstandardized coefficients (to include the intercept value), forthe hierarchical regression used in this study, as well as a brief description ofhow an individual can estimate the CPOs compensation. Individuals whodesire to derive a mean value of compensation according to her or his specific

organizational and individual demographic characteristics can apply thismodel. However, two notes of caution should be mentioned concerning thismodel. First, the data used in this study came from survey data from Fortune500 CPOs in 1999. Hence, the model may not be applicable for individuals infirms that are not classified Fortune 500. In addition, compensation packagesmay have changed since 1999, due to factors such as the current recessionmany firms are facing or the level changes in the way that purchasingexecutives are viewed today. Additional information, such as compensationlevels according to specific organizational and human capital factors, can befound in Hendrick et al. (2000). Organizational decision makers and CPOs canuse this model as a base for their calculations, adding idiosyncratic factors thatbetter represent their own organizations or situations.

ConclusionsThe following section will first discuss research limitations, then move to asummary of our research findings. We conclude with some suggestions forfuture work along this research stream.

Research limitations and suggestions for future researchThere are several limitations to the research. First, even though there was a

high level of variance explained in the research model, 52 percent of thevariance is still unexplained. We believe that there are three variables, notspecifically examined in this research, which may explain a large portion of theremaining variance. These variables are:

(1) job performance;

(2) corporate performance; and

(3) salary negotiations.


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The performance of corporate CPOs may have a significant influence on theirsalaries, and an even greater influence on bonus levels. The human resourcemanagement literature is replete with studies on performance measurement(e.g. Huselid, 1995; Noe et al., 1994; Welbourne et al., 1998). However, individualperformance is difficult to assess with any degree of accuracy and is even morechallenging to standardize.

Corporate performance can also affect the level of salary and, moreimportantly, the bonuses that CPOs receive. However, it is not just thecorporate performance itself, but how that performance is financially rewardedthroughout the organization. In a separate part of the questionnaire, we askedthe respondents how their bonus levels were determined. Many of therespondents indicated that their bonuses were tied to overall corporateperformance, department performance, individual performance, and/or acombination of all of these measures. Contract performance incentives can be

based on performance criteria such as spend reduction.From a RBV, there may only be a limited number of individuals with theskills and experience to understand the nuances of corporate spend, supplierrelationships, and make the drastic changes to elicit improved performance ofthe PSM function. This can result in CPOs becoming itinerants at firms,making these drastic changes over several years, and then moving to adifferent firm to make similar changes. Compensation, especially in terms ofbonuses, can provide a significant motivator for these CPOs to either remain intheir current positions or move to other firms where similar changes can bemade. Therefore, corporate performance may play a large role in determiningCPO bonus levels.

Salary levels can be affected by negotiations prior to accepting the positionand after the position has been accepted. The researchers were unable to assessCPO compensation negotiation skills. However, these skills may be asignificant predictor of salary and bonus levels and should be investigated infuture research.

One additional research limitation involves the role that supply chainphilosophy has on the compensation structures of CPOs. A firm with aphilosophy of aggressively managing suppliers may have a positive effect onthe compensation levels of CPOs. The skill sets of CPOs with the ability toaggressively manage their supply chains upstream may be a rare and difficultresource to imitate and, hence, the compensation necessary for attracting and

retaining those CPOs may be substantially greater. Future research shouldinvestigate the corporate philosophies of CEOs in terms of supply chainmanagement with how it affects overall CPO compensation.

Summary of the research findingsIn this research, we have examined several organizational and human capitalcharacteristics that can influence CPO compensation. Using hierarchical linear

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regression, we found that organizational characteristics were a strongerpredictor of corporate CPO salary and bonus levels than human characteristics.The three organizational factors empirically found to influence compensationlevels are the corporations annual sales, purchases as a percent of sales, andnumber of management levels between the CPO and CEO. Only one humancapital factor, age, had a significant impact on CPO compensation.

The empirical findings in this research are congruent with prior research inhuman resource management on executive compensation. Several prior studieshave argued that organizational factors are the strongest predictors ofcompensation (Simon, 1957; Gerhart and Milkovich, 1990). The predictors ofcorporate CPO compensation studied in this research provide similar findings.

These findings have several managerial implications for purchasing andlogistics professionals. First, most of these characteristics are controllable.Purchasing professionals who aspire to achieve the level of CPO will want to be

appropriately compensated. It would be in the best interest of individuals thatprioritize compensation highly to work for large organizations where PSM hasa strong influence on overall firm performance. In addition, when theseindividuals achieve the level of CPO, they need to provide evidence as to howcritical their responsibilities are for corporate success. The best way to do thatis to get the attention of the CEO, and report directly to him or her, if possible.

Age was also a significant factor influencing compensation. This may meanthat it takes time to achieve the breadth and depth of experience that isfinancially rewarded. Gathering that expertise is critical for the success of theCPO and that individuals compensation.

Future research directionsFuture researchers may want to incorporate measures for individual andcorporate performance. These studies may look into the human resourcepractices of the firms to better understand the processes used to determineexecutive compensation levels. In addition, the findings from this study need tobe compared with information dealing with how other corporate executives arecompensated. Are PSM executives compensated similarly to their peers inmarketing, finance, logistics and operations?

Another research direction would be to look at elements of social capitalwithin and outside firms for their effects on individual CPO compensation. For

example, Seibert et al. (2001) examined the influence of access to information,access to resources, and career sponsorship on salary levels from a diversesample of alumni from a midwestern university. Future researchers may wantto examine whether CPO compensation is also influenced by these socialcapital factors.

A third area for future research would consist of determining organizationaland human capital factors that influence executive logisticians compensationlevels. Daugherty et al. (2000) have found that the impact of education,


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responsibility, and skill level have an effect on logistics managerscompensation. The findings from this study of CPO compensation, inconjunction with that of Daugherty et al. (2000), can be used as a catalyst fordetermining and contrasting the factors that affect logistics executivecompensation. Research in this area can provide insight useful fordetermining appropriate salary and bonus levels for logistics executivesbased on their organizational position and individual characteristics.

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Appendix 1

Figure A1.Excerpts of survey

instrument


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Figure A1.

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Appendix 2

Figure A2.Predictive model of CPOcompensation


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Documents

Chief Purchasing Officer Compensation_ an Analysis of Organizational and Human Capital Effects