The plan already has been a factor in one agency's withdrawal from the marketer's ongoing account review.
Driver's Mart is building a national network of used-car dealerships to compete with other startup chains, including AutoNation USA, owned in part by Blockbuster Entertainment Corp. founder H. Wayne Huizenga, and CarMax, owned by Circuit City Stores. It plans to spend up to $40 million on advertising next year, according to agencies that have pitched the account.
ROYALTIES PER CAR SOLD
"To align the interests of the agency with the interests of Driver's Mart, we would pay a royalty per vehicle sold," said Tom Eggleston, president-CEO and co-owner.
There would be some additional compensation for expenses, but the plan calls for the bulk of the agency's revenue to come from those royalties. Final terms have not been resolved.
The plan scares some ad executives and intrigues others. While a movement to link agency pay to client results has been gaining momentum, using sales as the only variable is rare.
"That's obviously pushing it to the limit," said Jack McBride, a compensation consultant. "Advertising can only influence a certain portion of the marketing process. The pricing and the product can be much more important."
But the plan is tantalizing to Ellis Verdi, president of CarMax agency DeVito/Verdi, New York. "If I had that arrangement, we could be a lot bigger agency," he said.
Mr. Verdi declined to comment on his agency's pay package with CarMax. AutoNation would not disclose details of its compensation plan but said it doesn't include pay for performance to its agency, Hill, Holliday, Connors, Cosmopulos, Boston.
FREEMAN DROPS OUT
After being named one of three finalists vying to become Driver's Mart's first agency, Cliff Freeman & Partners, New York, withdrew from the review two weeks ago.
The shop's official line was that it dropped out because of other new-business priorities; indeed, it did pick up a small Cherry Coke project from Coca-Cola Co. last week. But executives familiar with the decision said discomfort with the compensation plan was a big factor.
"Driver's Mart essentially wants its agency to invest in the business," said one.
Asked to comment about performance-based pay in general, Freeman Senior VP-Group Director Peter Minnium said: "Performance-based profit is always of interest to us. Performance-based cost recovery is not."
Driver's Mart hasn't carved its plan in stone. It has asked the agencies still vying for the account to present a compensation plan that starts with the idea of per-car royalties. But they're free to recommend changes or additions to that idea. Agencies in the review are Carmichael Lynch and Campbell Mithun Esty, both Minneapolis, and Warwick Baker & Fiore, New York, which took Freeman's place. A winner should be named later this month.
While Driver's Mart has big ad spending plans, success is far from guaranteed. With competitors such as CarMax already well ahead of it and more on the way, the market is expected to get crowded quickly. Also, existing new- and used-car dealers, with help from automakers, are aggressively defending their turf.
A recent study by CNW Marketing Research showed established dealers in Atlanta closed a gap in customer-service ratings with CarMax's two dealerships there in the past year.
General Motors Corp.'s Chevrolet, Cadillac and Saturn divisions have tested quality-certification programs for used cars. Ford Motor Co.'s Lincoln division plans to start its own test this spring, while Ford plans a national program for this fall.
MAZDA SALES FALL
Performance-based pay isn't new to automobile advertising. Foote, Cone & Belding, Santa Ana, Calif., pitched an incentive compensation plan to help save its $175 million Mazda Motor of America account last summer. In that arrangement, compensation is tied to several variables, including increases in Mazda sales, market share, dealer traffic and consumer purchase intent.
At the time, FCB Exec VP-Managing Director Welton Mansfield said the only way FCB could make a profit on the account would be if Mazda sales went up. "If you believe that an advertising agency can make a significant contribution, why shouldn't it be that way?" Mr. Mansfield asked.
So far this year, however, Mazda sales are down 17%.
Some other car marketers, including American Honda Motor Co.'s Acura division and General Motors Corp.'s Saturn division, use similar measures to assess agency performance.
What makes those deals work, if in fact they do, is the extra variables, Mr. McBride said.
"Incentives should be based on some kind of advertising-induced effect like purchase intent, or possibly store traffic," he said.
Critics and supporters of pay for performance tend to agree the concept is easier to execute on retail accounts.
"In retail, you can put an ad on TV and then wait to see how loud the cash registers ring," said Stan Beals, managing partner of consultancy Jones-Lundin Associates.
Mr. Eggleston said Driver's Mart will give its agency significant control over marketing.
"We are entertaining the idea of outsourcing much of our marketing department to the agency," he said, including ads, point-of-purchase materials, collateral and other forms of correspondence.
The winning shop will handle media buys in local markets. But if an individual dealer in the system wants to advertise a special sale, it will be permitted to use its own agency for a local buy using national creative.
Contributing: Alice Z. Cuneo, Jean Halliday, Bradley Johnson, Jeffery D. Zbar.