What Ad Agencies Can learn From Proctor and Gamble’s Sales-Based Compensation Model.

July 17, 2009

P&G 2The momentum towards performance or sales based compensation increases every day. The current economic environment is propelling it faster than ever. Every agency leader should be proactively considering what they can learn from P&G and others like them, and based on those learning’s, construct their own go to market model.

P&G’s Sales-Based Compensation and BAL model is built on 8 simple principles. For those of you who have not had the opportunity to take a look at them, I have taken the liberty of listing them for you:

  • Value Definition: focus on superior business results rather than advertising or execution. 
  • Degree of Unification: a single compensation budget and strategy planning process. 
  • Relationship Structure: long-term relationships and compensation based on value and results. 
  • Degree of Flexibility: ability to shift resources, funding and metrics among integrated disciplines. 
  • Holistic Brand Building: integrated master planning, a brief for each initiative. 
  • The Benefit of One: one check, one brief, one cohesive message. 
  • BAL (Brand Agency Leader): coordinates all agency partners, “seat at the table” for all agencies, shared rewards for brand success.
  • P&G Franchise Leader: approves BAL, partners and final creative, rewards all agencies based on brand revenue.

There are a number of key insights that immediately struck me the first time I read through them.

Firstly, the focus on superior business results and sales versus advertising or execution. I keep reinforcing in my posts just how important it is for agencies to focus on solving the client’s business problems. Our clients live or die based on results and sales and they want to know that what you are proposing has a high chance of success. Risk management is a critical part of their decision matrix. Actionable insights are key to success here.

Secondly, compensation that is based on value and results by definition has to be longer term in order to be measured and rewarded. This approach is the antithesis of the current short term, pay for hours or project work type clientrelationships that are most commonplace today. Who knows, It may even turn out to be part of the cure for the current alarming trend of diminishing client/agency loyalty.

Thirdly, in this model integration is more than a buzz word. It’s a core principle that binds all agency partners together whether they are from the same holding company or not. One brief, one plan, one leader, one set of goals and a common basis for determining success and subsequent reward. The term media neutral is no longer a throwaway line, and the focus truly becomes the target consumer, the optimum way to reach them and subsequently convince them to buy the product or service.

Performance or sales based compensation is without doubt a game changer for our industry. My suggestion is that you take the time to seriously consider this issue and start formulating how best to address this trend with your agency and clients in mind. I have found from experience that it is better to be proactive and lead rather than be reactive, and have to follow what has alreadybeen prescribed for you. I believe it goes someting like “Architect of your own destiny versus victim of circumstance”!

If you would like to read more about this subject and watch an archive of the AAAA’s webinar then click here.

 

 

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An agency Cinderella story about pay for performance compensation

June 5, 2009

CinderellaAs I have already stated in one of my previous posts, pay for performance compensation has been discussed for a long time. While it can be a frightening prospect for many, it can also have a silver lining too.

Over 14 years ago, while running my agency in South Africa, I found myself in a very challenging situation. One of my clients was a large insurance company who pursued a strategy of endorsed direct mail insurance mailings. We would approach various companies or organizations on their behalf, and negotiate an insurance product mailing to their customer base. Endorsed of course by the list owner in order to increase response rates.

Another of our clients was the largest clothing retail chain in Southern Africa, with over a million customers on their database. We put the two clients together and negotiated an insurance mailing to the retailer’s customer list. Our insurance clients would pay for the mailing costs and in return our retail client would endorse the mailing package. Thus providing added value products to their retail customer base.

 It was all but a done deal when our insurance client got cold feet due to the size of the mailing and the associated costs to produce and mail the packages. It was in fact the largest single mailing they had ever contemplated doing without an initial test pilot.

It was too late to turn back, and in our agencies opinion too good an opportunity to miss. My partner and I took the decision to fund the mailing costs ourselves, on the basis that we would receive the broker commission built into the monthly premium. The commission on this particular product is paid monthly for as long as the policy is in force.

The mailing went very well. Response to the offer was way over expectation. Persistency (expected length of time that the policyholder continues to pay the monthly premium) has been exceptional. We made all our hard costs back in less than 6 months, and both still continue to receive monthly commission checks to this day. Over 14 years later. Our ROI has been exceptional to say the least!

We offered to do the follow up mailing shortly afterwards on the same financial basis but surprise, surprise, our insurance declined the offer and paid for it themselves. What a pity.


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

May 26, 2009

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.

Performance based compensation the new trend for ad agencies?

May 12, 2009

6a00d83451db4269e201156f632c16970c-200wiThe 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.

Negotiating agency compensation in a “pay for performance” environment!

February 18, 2009

092Agency compensation, or perceived lack thereof, is a hot topic with most if not all agency executives. Add to this the growing momentum towards “pay for performance’ compensation and the increased involvement of purchasing departments, and the result is a flurry of activity ranging from panic to total frustration.

The agency compensation issue has for years now been a source of friction within the client – agency relationship. Each side being just as guilty as the other in compounding it. In my experience ,most of this can be attributed to a lack of alignment on the subject between the two parties, which in turn has created a noticeable lack of trust.

Agency compensation is currently based on a cost per hour system that rewards the agency for man hours expended against the account. It does not reward:

  • Great work  versus average
  • Breakthrough ideas and concepts
  • Completing the work in less time than expected
  • Increased efficiency in negotiating and buying media etc
  • Increased customer traffic and sales
  • Increased customer value

In essence, it is budgeted by the client and treated as an expense, as opposed to an investment. The client sees the agency being paid no matter whether they succeed or not, hence they cannot help but begrudge it. I was recently talking to Lisa Colantuono from AAR Partners, and she told me that one of the key reasons for a client putting their business up for review was a feeling on their part, that the agency did not care whether they succeeded of not. I have no doubt that our compensation basis helps fuel this perception.

Now in this post I am not going to go into all the types of compensation and their pro’s and con’s as that on its own deserves another posting. What I am going to suggest is that you consider these issues when you look to negotiate next time.

  • How can you better align your compensation to reflect the same measures that your client’s is being rewarded on?
  • Can you consider a mix between fee and performance based compensation?
  • Are you assigning resources to areas that are valued by the client or are you doing it based on your perceptions of value?
  • Is all your work on behalf of the client based on sound business objectives and have you done your part to prove that out? If it was your money would you risk it?

A close long term client – agency relationship is based upon trust and the knowledge that you win and lose together.  Are there some clients who believe in a win/lose approach? Sure there are. The only question in this case is do you want them as a client badly enough to accept that type of relationship?