The Hidden Cost of Events

February 15, 2006, 1:32 PM EST

An independent event planner who has just been given a very large budget to plan an event for a corporate client has a laundry list of decisions to make about the best venue, qualified vendors and miscellaneous expenses for the job. Of course, some planners find it easier to simply pick the subcontractors willing to give a little something back as a way of saying thank you, with the client none the wiser.

Is the practice unethical? Many would say yes. Illegal? Quite possibly. And picking favorites on the basis of financial incentive rather than ability can easily hurt the quality of an event. But these factors don't prevent what many event planners and vendors describe as a commonly accepted practice. “Seventy-five percent of the business is done on a referral basis,” says Steve Frost, president of Stamford Tent. “As a vendor, we have no choice. We have to play by the rules. I would love to see it dismantled.”

The issue of paying referrals and commissions is thorny enough—when does a planner or venue or vendor deserve one for passing along new business?—but commissions can quickly turn into outright kickbacks when planners or hotels or whomever have confidential agreements. The scenarios vary widely, but here's one example: A lighting company might give a 10 percent discount—a common industry number—to independent planners who hire them for corporate jobs. So for a job that would normally cost $10,000, the planner can either pass on the savings and a bill for $9,000 to the client, or charge the full $10,000 and keep the $1,000 as a commission. Sometimes the third party—the lighting company in this case—is in on the situation; sometimes it isn't.

Some planners—particularly individual practitioners and the smallest shops, some say—will tack on an additional markup on that list rate when they submit a bill to the client. So if they're also charging a planning fee, they can be making money in three different ways (the fee, the commission and the markup), and the client only knows about one of them. “If you get a bill on a small company's letterhead, it's probably been marked up,” says one event designer.

It might be considered a small-time practice, but in the last few years, alarming evidence has come to light that kickbacks are a dangerous problem for big businesses as well. Several of the country's largest accounting firms are in the midst of settling a class action lawsuit brought by clients who were incensed to learn that their auditors, including KPMG and PricewaterhouseCoopers, were billing them for millions of dollars' worth of reimbursable plane tickets and hotel rooms while receiving rebates that were never disclosed. The total settlement in the case, which is ongoing, will easily top $100 million.

The legal principle that applies in these cases is the law of agency, which requires that the planner (or vendor, or accounting firm) represent the interests of only one side of a transaction. Receiving payment from both a client and a subcontractor is an act of dual agency, something that is generally verboten.

“If you're an independent planner, and you're taking a commission from both the hotel and the client, the question becomes: Who is your principal?” says Jonathan Howe, a senior partner at the legal firm Howe & Hutton and a leading lawyer for the event planning industry. Disclosing to the client beforehand that a commission will be paid will free planners from any legal entanglements, Howe says, adding that ethical planners would either lower the fee paid by the client (with the commission making up the difference) or pass along the commission as a discount.

Those who choose the third option—taking all the money on the table—open themselves up to legal repercussions, but “if what the client got was a fair deal, even if there was a commission paid, the damages would likely be zero,” Howe says.

But just how prevalent is this practice, really? Only a few planners contacted for this story were willing to contemplate the question. They universally claimed to have never played double agent (not that it would be in anyone's best interest to admit to the practice). Several did volunteer, however, that they have been given discounts by vendors that they passed along to clients. Others avoid the issue by having subcontractors bill the client directly. Still others wondered whether if they were the ones responsible for their vendors' rates.

“When we give a [budget] number to the client at the beginning, we have no idea what the vendor will say to us [later],” explains Mark Steele of Wizard Studios. If the vendor elects to underbid the original estimate—for whatever reason—that simply translates to a profit for Steele and fellow planners. But it can also create some ambiguities regarding who deserves what. “If we're bringing someone into the job, we're adding value,” he says. “I think the whole kickback thing puts a damper on everything. It makes this look seedy, and part of it's not. Although part of it is.”

Robert Hulsmeyer, a senior partner at Empire Force Events, has run panel discussions of these issues at International Special Events Society meetings, inviting his peers to chew over the topic. “When people do this as a normal course of business, clients are standing up and saying, 'This isn't the way to do things.' I've been in situations where the corporate client is aghast.”

Historically, kickbacks are common in some segments of the industry, particularly in wedding planning, and Stamford Tent's Frost traces it back to the late 70's and early 80's, when individuals known as social secretaries would seek out the best vendors for society events and take 10 percent of the fees in exchange for the referrals.

But the practice isn't limited to just planners. Several planners and vendors contacted for this story complained about venues that demand kickbacks as a matter of course, or exclusively use vendors who have earned that status by routinely paying commissions. Lighting designer Bentley Meeker had a very public falling out with the Cipriani Group several years ago after he claimed he refused to pay a 20 percent commission to be the preferred lighting designer at Cipriani 42nd Street. “They asked me for it, and I said no,” Meeker says. “I thought it was expected of me, and I thought it was ridiculous. I don't even think that was representative of Cipriani. I think it was sort of a rogue request.” (The Cipriani Group declined to comment for this story.)

The people who can really suffer in these situations are the client and his or her guests. Independent planner Tony Richards was recently forced to work with the exclusive audiovisual vendor in a venue his client had chosen for an event. “They not only overcharged me for equipment, but they also did not do a good job,” Richards says. “It wasn't so much a cost issue as an accountability issue. They didn't necessarily have to be competitive in their price. I'm at the point nowadays where when I'm looking at potential venues, with the ones that require I use certain vendors I will recommend to my client to look elsewhere.” Now, not all vendors with special relationships with venues get them for unseemly reasons—but those who do may not be the most qualified vendors, and they add a not-so-professional quality to an industry that doesn't always get much respect from the outside world.

Unfortunately, it appears that in some segments of the event planning industry the practice is firmly entrenched. Many wedding planners have undisclosed relationships as a matter of course—helped by the fact their clients rarely think to ask about them. But the in-house planners who are ostensibly the victims aren't necessarily worried. As the industry has matured in recent years, corporate event planners have become more experienced and educated. And those with an ever-larger system of professional relationships can check up on new vendors with their friends in the industry as a hedge against kickbacks and other unsavory practices growing worse.

“Anybody that we're going to hire is going to have to go through the wringer to get our business,” says Erica Morris, special events manager for People magazine. We can do enough of a background check to make sure they're not bringing in their friends. There's definitely a concern it can happen, but since we consider ourselves professionals, we make sure we know who it is we're doing business with.”

Greg Lindsay

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