Under a microscope: P&G reviews agency pay

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Procter & Gamble Co. is reviewing its five-year-old agency compensation system in a move that could have a significant bearing on how the world's biggest advertiser wields its $5.9 billion global ad budget.

P&G Global Marketing Officer Jim Stengel said the re-examination was prompted by P&G's $57 billion acquisition of Gillette Co., which operates under a compensation system based on fees and incentives rather than P&G's sales-based model. P&G is operating for now under both systems, with incoming Gillette shops, led by Omnicom Group's BBDO Worldwide, adhering to the Gillette system. P&G is also looking to adopt aspects of Gillette's agency-evaluation process.

P&G's compensation review is in its earliest stages; the committee, to be made up of Gillette, P&G and agency executives, is yet to be named. P&G's Global Strategic Relationship Optimization Manager Kim Kraus is expected to lead.

The Gillette compensation model was put in place in 2002 under Chairman-CEO Jim Kilts and is similar to a system he had used while CEO of Nabisco Foods. Its system gives agencies a guaranteed percentage of the media budget as planned at the outset of each year, plus incentives totaling as high as 3% to 4% of the media budget based on quantitative and qualitative review criteria agreed to in advance, according to an executive familiar with the plan.

P&G instituted its system about 18 months earlier.

In each case, sales of the companies soared and ad spending rose after the adoption, leading to gains for ad agencies that outstripped any impact from compensation systems.

Newfound clout

But the review comes as P&G slows spending growth. Its global ad outlay was up about 6% in its fiscal first quarter ended Sept. 30, to around $1.5 billion, but rose more slowly than sales, which were up 8% as P&G faced earnings and margin pressure from rising raw-material costs and the temporary closure of its Folgers plant in New Orleans.

With its newfound clout from Gillette, the company has been looking to squeeze cost savings out of its biggest acquisition ever, cutting a revised deal with Valassis Communications that forced the newspaper-insert vendor to lower earnings guidance and suffer a two-day, 18% plunge in its stock price. P&G's price concession came from seeking a deal similar to what Gillette was getting from Valassis' rival, News Corp.'s News America (AA, Oct. 24).

But executives close to P&G doubt it will take such a hard line with ad agencies, as it wants to be the preferred client within its networks and improve its advertising creative.

P&G traditionally has taken a harder line with media, marketing services and vendors of non-creative services than it has with ad agencies, consulting firms and others viewed as strategic partners, according to executives familiar with the company. "This is about going to market as one company and having a consistent process across the whole company," not about cutting costs, said a P&G spokeswoman.

The last time P&G revised compensation it dropped media commissions for a plan that guarantees a base level of compensation to maintain agency staffing in all countries, combined with a commission on sales above a target threshold, negotiated annually.

The original 2000 compensation program already has been revised to reflect such things as the move of media and communications planning out of creative agencies and into specialized communications planning agencies. In other cases, it has been revised for individual brands to account for work shifting from ad agencies to other marketing-services shops.

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