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Coca-Cola has revamped its compensation system to pay agencies more for work in newer and groundbreaking areas, the executive responsible for overseeing the program said Tuesday at ANA's Advertising Financial Management Conference.
The beverage giant is applying a "70-20-10" rule, still providing standard performance-based compensation for the 70% of work that agencies are most used to doing. But the company is providing a guaranteed minimum bonus for the 20% of projects labeled "evolved" or the 10% of projects that agencies are tackling for the first time. Plus, there's the opportunity to earn another 5% of the guaranteed minimum in Coca-Cola's new agency bonus structure, said Sarah Armstrong, Coca-Cola's, director of worldwide agency operations..
The revamped system is the third iteration of a program dubbed Value-Based Compensation, first adopted widely at the company in 2009. That same year, Ms. Armstrong was named an Ad Age Woman to Watch for her work on the compensation scheme. Under the plan, agencies are paid a guaranteed fee based on the "value" of each project as established by Coca-Cola. Then, they can earn a bonus -- essentially a profit margin -- of up to 30% above that based on meeting a variety of performance criteria.
For newer or leading-edge work, that bonus now can range from no less than 17.65% to as high as 22.65%..
Even under the old system, agencies fared well on average, as Ms. Armstrong described it, delving deep into details for a crowd of mostly marketer procurement and agency finance and operations executives, who watched closely and photographed tables and charts vigorously.
Coca-Cola's agencies averaged an 18.3% bonus on their projects last year, Ms. Armstrong said. That was down from 19.3% in 2012, but up from 17.6% in 2009, the first year of the program. Media agencies have fared better, which she attributed to their more "disciplined" operations.
"All of this is rooted in fairness," Ms. Armstrong said, though what's fair isn't defined. "I don't think you need to write that down. I think you know if you're being fair or not being fair." The goal, she said, isn't to cut fees but to improve performance.
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Coca-Cola unilaterally defines the value, she said, based on such things as how strategically important the work is to the brand, how strategically important the brand is to the company and even what she termed "industry dynamics," which she defined as: "Is this agency uniquely qualified to deliver this work?
"To be unique in this industry is to be able to charge a premium for what you're offering," Ms. Armstrong said. "If you're not unique, we're not saying we're going to go move to another agency. …What we're saying is the market will set what we need to invest in this work."
The system isn't based on labor, she added, and it's all on a project basis, even for longstanding agencies of record.
Performance incentives are based on qualitative agency evaluations, metrics related to the specific work of the agency, metrics based on changes in brand equity and perception, and sometimes on improvements in volume or sales. Those latter metrics are optional, Ms. Armstrong said, because in markets where "our bottling relationship with the company is not as strong or as healthy as we want it to be, we would not want our agency's profitability tied to our dysfunction."
In a question-and-answer period, Francisco Escobar, founder of JFE International Consultants, said: "I have to argue with you that value, fairness and equity is not something that can be determined by one party alone, which in my mind is still the premise of the Coke model."
In response to a question of his, Ms. Armstrong said agencies can make bonuses of more than 30% if they're consistently "knocking it out of the park" by scoring at the top end of the metrics, but said none of the company's agencies have yet done so.
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CORRECTION: An earlier version of the story said the 5% additional bonus Coca-Cola agencies can earn on more ground-breaking work was in addition to the top end of the company's 30% bonus. It's actually 5% on top of the 17.65% guaranteed minimum bonus.