Thursday, November 08, 2012

Sotheby’s New Performance Commission

Today during my update USPAP class I heard about the last ploy by Sothebys to juice up the bottom line. This is only now beginning to hit the internet, but it will be big news. See also my article in this issue of the Newsletter on private sales and the potential for abuse in that area. Performance commissions are a more serious matter. If the auction house talks you into a lower reserve and presale estimate and the subsequent sale is higher than expected you get to pay Sothebys more. Now if it is bought in  (fails to sell) Sothebys will not be sharing your pain. How the auction house can serve as an appraiser and not only have the conflict of interest of selling the property but also have clear incentives to appraise low is mind blowing. To date we have not heard that Christies plans to follow this model. But maybe if they had it would appear to be a re-run of the price fixing scandal of 2000 - 2002. We will keep you posted. And thanks to Art Market Monitor for bringing it to our attention.

Here’s an interesting new performance commission that has begun to appear in Sotheby’s consignor’s contracts:

“a performance-related commission for each lot calculated as set out below will be charged in the event that the hammer price for the lot exceeds its final high presale estimate. Sotheby’s performance related commission will be equal to the lower of (i) 2.00% of the hammer price achieved for that lot and (ii) the difference between the hammer price achieved for the lot and its final high presale estimate”.
Sotheby’s says
This season, we formalized an existing practice which reflects our philosophy that when we exceed the expectations of our consignors, we should receive additional, incremental compensation which reflects that success.

What’s happening here is that Sotheby’s is trying to improve its position on commissions by making something out of the fact that in 2011 nearly 40% of Sotheby’s sold lots achieved a hammer price above the high estimate. Of course, estimates are set by an interplay between buyer’s and sellers. Auction houses would prefer estimates to be as low as possible to entice buyers. Consignors want high estimates that confirm their own expectations.

Curiously, this new fee increases the auction house’s incentive to lower estimates.


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