Vendor Incentives: Out of the Shadows and into the Sunlight

By Allen, Brandt R.; Farris, Paul W. et al. | The CPA Journal, June 2011 | Go to article overview

Vendor Incentives: Out of the Shadows and into the Sunlight


Allen, Brandt R., Farris, Paul W., Mills, David E., Sack, Robert J., The CPA Journal


Each year in the United States, manufacturers, distributors, and retailers exchange billions of dollars to win sales from resellers or promote the products of the sellers. These payments are an integral part of the marketing plans of many sellers and resellers, and in some industries they have become so ingrained in the business that the players cannot operate without them, regardless of how effective they might actually be. These payments go by many names: rebates, trade discounts, supplier funds, slotting fees, advertising allowances, dealer incentives, markdown money, bill backs, buy downs, off-invoice allowances, return privileges, lease incentives, charge backs, and others. More emotionally loaded names include push money, kickbacks, price protection, penalties, and pay-to-stay. Throughout this article, the term "vendor incentives" will be used.

The financial details of these programswho pays whom, how much, and what is given in exchange-are usually known only to the direct participants. That degree of confidentiality is understandable given the sensitive nature of the arrangements, but the failure to disclose how significant these programs have become for the sellers and resellers is problematic. At best, the failure to disclose carries the danger of misleading investors; at worst, it may shield graft and deceptive dealing. Because the payments involved often are contingent on future performance, estimates are required and the resulting accruals can be subject to the pressures of earnings management. It is time for investors to be given the information needed to assess the flow of these payments through the accounts of sellers and resellers.

Lurking in the Shadows

It is striking, in view of the prominence of vendor incentive programs, how little reporting there is of this activity. The little information available suggests that the sums are large. For example, PepsiCo reported net revenues of $43.2 billion in 2009. In the management's discussion and analysis (MD&A) segment of its Form 10-K, the company reported "sales incentives and discounts" of $12.9 billion, suggesting that these expenses were 30% of net revenues. Ten years prior, PepsiCo reported vendor incentives equal to only 19% of net revenues. These burgeoning discounts and allowances go to various distributors and retailers, but there is no way to know how much was paid in cash and how much was subject to a period-end accrual. Investors learn little more from the financial reports of PepsiCo's customers. Wal-Mart, one of PepsiCo's principal retail customers, acknowledges receiving "volume incentives" and other payments, but does not disclose their magnitude:

Wal-Mart receives money from suppliers for various programs, primarily volume incentives, warehouse allowances and reimbursements for specific programs such as markdowns, margin protection and advertising. Substantially all allowances are accounted for as a reduction of purchases and recognized in our Consolidated Statements of Income when the related inventory is sold. (Wal-Mart annual report, 2009)

Like Wal-Mart, many large U.S. manufacturers, distributors, and retailers acknowledge in their financial filings that they pay or receive incentive payments. But few details are provided for investors to assess. Target's 2008 balance sheet shows vendor receivables of $236 million, but there is no indication of how much the company received in total during the year. It is likely that the total was considerably more than $236 million.

In a 2007 study, "Shopper-Centric Trade," Cannondale Associates reported that vendor incentives accounted for more than half of the marketing budgets of many consumer goods manufacturers. In some cases, they were the largest expense after cost of goods sold. And in almost all sectors, vendor incentives were growing rapidly. PepsiCo's disclosure indicates that, during the past 10 years, vendor incentives tripled while net revenues did not quite double. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Vendor Incentives: Out of the Shadows and into the Sunlight
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.