Exploring Performance-Based Compensation: Agency Friend or Foe?
For decades, traditional advertising agencies have been compensated for their efforts through fee-based billing models and commission on media buys. Today, the old guard is being challenged by a variety of renumeration models. The biggest factor at play is performance measurement and the desire for clients to pay based on performance. Is performance-based compensation fair to all parties involved?
Some of the most recent developments in alternative payment models can be seen with major brands such as Coca-Cola. A year ago, Coca-Cola announced they wanted to spearhead the movement of performance-based compensation for advertising agencies. The basic model allows agencies to just recoup their costs unless the measurable results from the campaign meet or exceed pre-defined success targets, at which point the agency receives a bonus - as much as 30% in some cases. Proctor and Gamble has been pushing this model with a variety of its brands. Intense debates for and against performance-based compensation are taking place within the industry. Let’s explore both sides of the argument a little.
On the client side, the concern is deriving value from the relationship with their agency. In other words, what additional revenue, cost-savings and ultimately profits can be realized from agency efforts. On the agency side, the big concern is being compensated fairly for their efforts, which at the end of the day is mostly based on time. For both sides, it comes down to essentially a risk vs. reward equation. Both sides need empathy for the other party in order to come to a happy medium. Agencies need to realize that they do need to deliver true value to their clients. Meaning the work they perform actually helps their client’s bottom line. We’re not in the business of fine art, we’re in the business to produce positive results. On the client side, an understanding of the time and expense required to produce strategic plans and execute a variety of communication tactics is needed. Quite often, projects can experience scope creep, extended project durations due to lack of timely reviews and approvals and other issues that increase costs. Quite often these costs do not end up not being billed and chip away at an agencies bottom line. The first step is for both sides to reach an understanding through clear communication. Both sides need to express their desires and concerns and everything is negotiable at the end of the day. A win-win scenario needs to be created in order for any form of performance-based compensation model to work.
In order to create value in the marketplace, strategic planning is a necessity. Agencies and their clients must hold the strategic planning process in high regard. Unfortunately, many marketers and companies fail to plan. Last year I was a speaker at a major email marketing conference. In one of my sessions, I asked the audience (mostly marketing executives of medium to large brands) how many of them had an email marketing plan in place. Only approximately 20% of the audience raised their hand even though practically 100% of them were conducting email marketing for their brands. Optimal value cannot be achieved when marketing tactics are deployed via guesswork. People may experience lucky hits from time to time but consistent results can only be created through sound planning and solid execution according to plans. If one side is not willing to participate in the planning process, performance-based compensation is not a possibility.
Another factor to consider is creative control. If an agency is going to take on more risk for a greater reward, then the agency needs to be empowered with a higher level of authority. I’m referring to issues that tend to be more subjective but end up costing an agency a significant amount of time going back and forth such as color and positioning changes. As long as the creative is on strategy and is of a high quality, clients should trust their agency with the subjective decisions.
When performance-based compensation is not managed correctly, it hurts both sides. Agency staff will feel as if they are spinning their wheels and getting nowhere. Eventually, time and attention spent on client work will diminish. The agency ends up with no forward moving progress in organizational well-being. The client ends up with sub-par work that does not meet goals and objectives and risks sacrificing a competitive position in their industry.
So the answer to the question poised at the beginning of this article is that performance-based compensation can be both a friend and foe for agencies and clients alike. The emphasis really needs to be placed on setting clear expectations on both sides. The only way to accomplish this is through open and honest communication that creates a win-win scenario. It will be interesting to see how far this renumeration model penetrates the industry. With all the access to data available through technology, I feel this model is here to stay. I personally welcome opportunities for performance-based compensation as long as it is fair and equitable for both sides. It will be interesting nonetheless to see what the future holds for agency and client relationships with this new movement in our industry.
