What is a Kickback in Business?

A kickback is an illegal commission paid to someone in exchange for preferential treatment. A kickback favors the individual receiving the commission, usually at the expense of the person's employer. It is considered a corrupt business practice, since it interferes with the decision-making process and may result in adverse outcomes for the employer.

How a Kickback Works

As an example of a kickback, a buyer receives a payment from a supplier in exchange for being issued a purchase order in preference over other suppliers whose goods or services may be of lower price or higher quality. In this case, the employer of the buyer suffers from the kickback arrangement, since it must then pay more for purchases or deal with lower-quality goods or services. As another example of a kickback arrangement, a supplier pays an accounting clerk to approve an inflated invoice for payment, and pays the clerk cash on the side in exchange for this fraudulent treatment.

Example of a Kickback

A construction company, Dude Constructors, wants to win a contract to build a new city bridge. To secure the contract, Dude’s manager offers the city official overseeing the contract decision an all-expenses-paid vacation to Hawaii. In exchange, the official ensures that Dude is awarded the contract, even if there are other companies offering better terms or lower prices.

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Conditions Favoring Kickbacks

Kickbacks are especially common in locations where staff are poorly paid, and especially where the culture has a permissive attitude towards corruption. Kickbacks may also be solicited within governments, especially where pay levels are low and a government has significant amounts of funds that it can allocate out to suppliers on various contracts. In these countries, it is difficult for a supplier to do business at all without offering kickbacks to the employees of customers.

How to Detect a Kickback

Kickbacks are difficult to detect, because assets or favors are being transferred to an employee, and so never appear on the books of the affected business. Consequently, you should observe employees to see if their lifestyles exceed their stated incomes. Other indicators of kickback schemes are unusually high prices being paid on acquired goods or services, an ongoing tendency to use suppliers despite their poor performance, and pressure from management to use certain suppliers.