Performance based compensation agreements for ad agencies … Aligning goals and measuring outcomes.

cokeThe trade press is all a buzz about the new trend towards to pay for performance compensation. The recent article on Coke and their approach seems to have everyone watching to see what happens next. The reality is that this is nothing new and both clients and agencies alike have been wrestling with concept for as long as I can remember.

While many clients feel that they should pay only for results, and many agencies lament the fact that they are not compensated anywhere near where they should be for those brand building ideas, there is an old adage that comes to mind. “Be careful what you wish for because you might just get it!”

While the concept appears to have a lot of merit, the success or failure of such an approach relies on the ability of the two parties to align the goals and most importantly measure outcomes. The best scenario is one where both agency and client alike get bonused on the same outcomes or results.

My experience has taught me that a balanced compensation program that provides a measure of ongoing funding on a monthly basis combined with an incremental bonus program based on results is the best way to go. Almost none of our client marketing leaders are remunerated on results only so in my opinion it follows that why should we? That said, how do you go about agreeing on the goals and adequately measuring them?

Aligning Goals:

The first change that needs to happen is that the setting and aligning of goals must become a collaborative process and not an edict from the client. This often requires a big change in mindset, especially with large client companies who have been used to calling the shots.

With aligned goals comes aligned strategy and shared risk, which is accomplished once again through a collaborative process. This is often another big change for many client/agency relationships. The agency needs to have the ability to debate the go to market strategy and a certain amount of influence in the final outcome and implementation.

Measuring Outcomes:

One of the most difficult areas of agreement is the measurement of outcomes. In many instances the agency’s ability to impact final sales or results, diminishes fairly early on in the marketing/sales process. How can they be accountable for issues like; product out of stock, poor distribution, product quality issues, pricing, sales force inadequacies etc.

Add to the above measurement issues and verification of them, and you find yourselves with a complex matrix that is often hard to implement, and can cause unnecessary aggravation and strain on the relationship.

I am a big proponent of a balanced performance based compensation approach- however I am also cognizant of the problems that can result from it. My advice is:

  • Go in with a positive attitude
  • Be pragmatic, ask the tough questions up front
  • Make sure you are aligned on the shared goals and shared risk
  • Agree on the agency’s role and ability to influence strategic go to market decisions
  • Define expected results and how they will be measured. Benchmark current numbers whenever possible
  • Achieve bonus together or lose it together. Do not bet the whole farm on it.
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