P&G pushes more performance pay

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In an unprecedented move likely to be watched closely by the marketing industry, Procter & Gamble Co. is considering extending its incentive-based compensation system for advertising agencies to media agencies and other marketing-services shops.

P&G executives have yet to decide to launch a test and its parameters remain under discussion, including which brands and marketing services to start with and what incentives work for different types of agencies. One option under discussion is to tie agency compensation to sales, much as P&G does now with creative shops. A decision won't likely come for another six months, a spokeswoman said.

But rumors of the impending test already have reached several P&G marketing-services shops, some of which welcome it. "I think this is the way of the future," said Jon Kramer, president of Grey Global Group's J. Brown Agency, New York, which handles retail marketing for P&G. "Procter is getting evaluated by Wall Street based on how much they drop to the bottom line, and their [marketing-services] providers need to be evaluated the same way."

trendsetter

Kim Kraus, director of corporate marketing-strategic relationship optimization at P&G, who began work about 18 months ago as the first purchasing manager to cover P&G agency relations, mentioned the interest in expanding incentive compensation during the Association of National Advertisers' Advertising Financial Management Conference last week in Scottsdale, Ariz. There, several attendees described P&G's agency pay system as a trendsetter and benchmark.

But P&G's 5-year-old plan, in which creative agencies get a straight commission on sales rather than fees, remains largely unduplicated, and extension of it to other marketing-services shops would likely be unprecedented outside direct marketing, said David Beals, president of the consulting firm Jones Lundin Beals and author of several ANA compensation studies.

The ANA's latest triennial survey shows fee-based compensation remains common across all marketing services, with various supplemental incentive plans gaining ground, he said. But most incentive plans mix fees with a bonus formula more complex than P&G's commission.

One advantage of P&G's system, said Mr. Beals, is that it bypasses billing issues some marketers and agencies have come to see as costly and cumbersome-not to mention susceptible to disputes that led to indictments in January of two former executives at WPP Group's Ogilvy & Mather Worldwide on charges of overbilling the White House Drug Office.

Mr. Beals said many other marketers are looking more closely at how they compensate below-the-line shops as their work becomes more important.

P&G rival Unilever, for instance, last year placed PR agencies on retainer for the first time after years of paying on a project basis in order to "maintain a core group of strategists" on such brands as Axe and Dove where PR plays a key role in marketing, said Allison Harmon, Unilever marketing communications manager.

"We love how the sales-based compensation is working with our roster agencies," P&G Global Marketing Officer Jim Stengel said in a January interview. "I would like us to innovate more in how other agencies are rewarded." While creative shops remain "our most central agencies," Mr. Stengel said other types of agencies are growing in importance, citing media, entertainment and public relations shops as examples.

Ms. Kraus said P&G will pick brands for a test, then identify their strategic agency partners and then figure out what incentives would make sense. Using sales-based compensation is one option, she said.

Extending incentives could be complicated given P&G's range of agencies. "We have over 25 different agency types," including creative, media, direct and in-store agencies, Ms. Kraus said.

other agencies

"We want to be valued based on our results," said John Yengo, partner with Barefoot Advertising, Cincinnati, which has handled everything from TV ads to direct-mail for various P&G brands. But he said Barefoot plays a much bigger role on some brands than others and would hope any sales-based formula varies accordingly.

Kevin Roberts, CEO of Publicis Groupe's Saatchi & Saatchi, praised P&G's compensation system in a speech to the American Association of Advertising Agencies last month. But one former agency executive said "everyone got squeezed a little" in the transition.

As P&G shifted from media-based to sales-based commission with ad agencies in 1999, it based the rate for each brand on the average of media commissions paid the prior three years.

Shortly after P&G rolled out the system, it missed earnings forecasts for two quarters in early 2000 and Chairman-CEO Durk Jager resigned. Under new CEO A.G. Lafley, P&G rolled back prices on several brands to be more competitive, and both sales and agency compensation rose modestly at best for two years, even as unit volumes increased.

Of late, sales and agency billings have fared far better-with P&G global sales up 20% last quarter to $13 billion (9% excluding acquisitions and currency effects).

With P&G doing better, interest in how it does things is on the rise, too. "P&G is an innovative company," Mr. Beals said, "and people often look to see what they're doing."

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