An in-depth look at the modern CPO

Today's Chief Purchasing Officers are well-paid, well-educated, and well on their way to finally earning CEO respect, according to a new report from the W. P. Carey School's CAPS Research. Thomas Hendrick, Ph.D., professor emeritus of supply chain management at the W. P. Carey School, examines these and other attributes of today's CPOs to better understand the men and women at the top of the corporate procurement field.

When asked what they want to be when they grow up, not too many kids respond, "Chief Purchasing Officer." But with an average annual compensation package of $366,000, and gaining prominence in corporate America, the CPO position is one that should not be overlooked. While it may never rival baseball players or movie stars for drama and romance, commanding a purchasing department has rewards of its own.

"Chief Purchasing Officers' Mobility, Compensation Benchmarks, and Demographics: A Study of Fortune 500 Firms," a new report from the W. P. Carey School's CAPS Research, details these and other attributes of today's CPOs to better understand the men and women at the top of the corporate procurement field — who they are, what they make, where they come from, and why they leave their posts.

The study, culled from data obtained from 56 CPOs in a more than 20 different industries, examines the three main components of the CPO position: demographics, compensation, and mobility. It also compares the results to a 1997 CAPS Research study ("The Making of the CPO: the Mobility Patterns of Chief Procurement Officers" by Aaron Buchko, PhD); and offers a benchmark for estimating current CPO salaries.

Who is the modern CPO?

The picture painted of today's CPO is an impressive one: on average, they are male, 49 years old, manage a staff of 247 associates, are responsible for a $3.5-billion annual spend, boast 19 years of purchasing experience, and have earned B.S. and M.B.A. degrees, the study finds. They are also a group that is newly in demand.

"As companies increase their amount of outsourcing — both domestically and internationally — CPOs are becoming more and more important to their organizations," says Thomas Hendrick, Ph.D., professor emeritus of supply chain management at the W. P. Carey School of Business, and author of the study.

The simplified version of the CPO job is that they are responsible for "basically anything that their organization cuts a purchase order for," says Hendrick. That includes overseeing the procurement of all goods and services from outside sources, and in many cases, managing the resultant supplier contracts. Eighty-two percent of respondents list themselves as CPO of the entire firm or for their firm's corporate purchasing group. The remaining respondents act as CPO for one or more of their company's major divisions, or head up one specific procurement component such as strategic sourcing or indirect spend.

While the old-fashioned vision of the CPO job is that anyone can purchase goods and services, the reality is that the role has become highly technical, says Hendrick. As such, it did not surprise him to find that the proportion of CPOs with graduate degrees in engineering has nearly doubled since 1999. "Technical people are going into procurement more often now because of the nature of things being bought. CPOs need to be technologically capable," he says.

In tandem with becoming high-tech, CPOs have also become more diverse: they are not all cut from the same purchasing cloth. Those at the pinnacle of the procurement world today come from varied career backgrounds, in everything from human resources to sales/marketing, manufacturing, and global supply chain management, finds the study. This diversity dovetails nicely with recent changes in enterprise structure, as silos break down and internal departments are expected to work more closely together to impact the bottom line.

More responsibility = More money

Fittingly, as the complexity and importance of the CPO position continue to increase, so too have compensation packages, Hendrick notes. In the 1997 CAPS study, annual CPO salary plus bonus averaged $211,854. Ten years later, that figure has risen to $368,704 (not adjusted for inflation). The five major variables impacting the CPO salary figure have remained mostly the same, however.

They include: (1) the firm's annual spend in billions; (2) years employed by the firm; (3) gender; (4) type of firm; and (5) the number of levels between the CPO and the firm's CEO. Generally, the higher the numbers, the greater the pay scale. A CPO working for a firm with $10 billion in annual spend, who has been with the firm for 10 years, and reports directly to the CEO, for example, will earn a higher salary than a CPO employed for 5 years by a firm with $1 billion in annual spend and two levels of management between himself and the CEO.

In keeping with the idea that the more complex a job the CPO has, the higher the pay he or she earns, Hendrick's research also shows that manufacturing firms tend to maintain the highest paid CPOs. This is likely due to the larger amount of annual spend as a percent of sales revenue as well as the large number and the technological nature of parts that manufacturing firms must purchase and assemble. One salary trend that seems highly newsworthy at first glance, however, turns out to be a statistical anomaly: female CPOs in the study received higher average compensation packages than their male counterparts.

Hendrick speculates that this is a response error. "It is probably because female CPOs who are paid very well responded to the survey, and those that don't earn as much did not," he explains. (So much for discovering the first industry to break the traditional glass ceiling.) Regardless, today's CPOs seem to be satisfied with their earning power when compared to their boardroom peers. More than 72 percent of respondents believe their compensation packages are equal or better than their C-title counterparts in finance and marketing, notes Hendrick.

In addition, they are gaining respect among executive officers as valued members of the corporation — a significant change from years past. "CPOs have come a long way in that regard in the last 10 to 15 years," Hendrick says. Though they are still less likely than other C-title employees to have a direct channel to the CEO, CPOs are making advances there as well, as "more and more CPOs report directly to the CEO than they did five or six years ago," he adds.

Not so upwardly mobile?

Though the CAPS Research report shows many positive trends for CPOs, one concern is the reported lack of mobility — only 5 percent of respondents became CPO when their predecessor was promoted to a higher position. It is far more common for CPOs to start their role as a brand new position for the company (30 percent), or because their predecessor retired (27 percent), or left the company (16 percent), explains Hendrick. "There does seem to be a bit of a glass ceiling above the CPO," he admits.

Does this mean the CPO position is a dead end? Not so, says Hendrick. He believes the research serves as confirmation of the CPOs importance, and a wake-up call to corporate executives who may underestimate the CPO function. "Businesspeople need to spend more time to see what CPOs do, and understand how important their job is to the overall organization. It's a very technical job and they have a huge impact on the company. Because of that, CEOs are taking greater interest in the purchasing sector," says Hendrick.

Taking all these demographic and corporate variables into consideration, the study finally offers a predictive model of current CPO compensation, starting with a base annual salary of $252,296 and adding and subtracting amounts for the aforementioned five variables that have been shown to have a statistically significant impact on pay.

Rather than treat it as a glorified salary calculator, however, Hendrick recommends purchasing professionals use this new research to "learn more about what your boss is like — his characteristics, where he came from, what position he left to become CPO, and what the CPO position means to the overall world of business."

Bottom Line:

• Who is the modern CPO? On average, they are male, 49 years old, manage a staff of 247 associates, are responsible for a $3.5-billion annual spend, boast 19 years of purchasing experience, and have earned B.S. and M.B.A. degrees.
• As companies increase their amount of outsourcing, the demand for CPOs has increased. The CPO role also has become more diverse and more technical.
• As the complexity and importance of the CPO position continue to increase, so too have compensation packages. In the 1997 CAPS study, annual CPO salary plus bonus averaged $211,854. Ten years later, that figure has risen to 368,704 (not adjusted for inflation).
• Though the report shows many positive trends for CPOs, one concern is the reported lack of mobility — only 5 percent of respondents became CPO when their predecessor was promoted to a higher position.