DDB Needham won't give a precise accounting of which clients are on board for the compensation system and which are not (it claims to service 20 advertisers in such a manner, including Discover Card), but the agency currently is working out a new contract to accommodate its recently won McDonald's Corp. account and pay-for-performance is expected to be one proposal.
Advertising Age reporter Laura Petrecca interviewed Mr. Reinhard and Young & Rubicam Chairman-CEO Peter Georgescu on pay-for-performance.
Advertising Age: What is wrong with the traditional method of agency compensation?
Mr. Reinhard: Many of the traditional compensation plans are based on buying media, which is ridiculous. If I'm getting paid for results, I may negotiate with 30 different vehicles to find the most strategic [answers] and get increased results.
Peter's agency and ours, in different ways, have put tremendous investments of money and talent in this understanding of the consumer. But we don't get paid for that. So somebody else down the street who invests zero in this gets the same compensation.
AA: Why is pay-for-results the better alternative to commissions?
Mr. Georgescu: At the end of the day, our reason for being here is a simple one: to generate results. It has always been implied; now we're making it plain and simple. Greater value to the client. In general, the industry will benefit enormously from moving away from a subjective evaluation. . . .
In essence, performance has always been a factor in part-some form of compensation or this or that. But the real revolution here is about results, tangible results.
Mr. Reinhard: What we're saying is, if we can come up with an idea, a business strategy, a brand strategy, an advertising campaign that multiplies your sales results, distribution, whatever the objective is, then the compensation ought to be related to that, as opposed to related to how many hours I spend or how much media I can talk you into buying.
Because that's an obsolete idea. . . . Does it matter whether [clients] get advertising from good agencies or bad agencies? No. Same price, one price-it's a commodity.
AA: So while advertisers are getting better results, what is the benefit to the agency using this system?
Mr. Georgescu: The whole point of this exercise is for agencies to make more money. We have to make more profits, and you just can't raise your prices. To be able to earn greater profits-in order for the industry to satisfy what the client needs, we have to be more profitable. . . .
AA: What criteria should an agency look for in a marketer before deciding to use a pay-for-results plan with that client?
Mr. Reinhard: Receptiveness to the concept that compensation should be related to achievement of objectives. A belief that advertising and marketing can affect behavior and achieve objectives. And a simple organizational structure with short lines between the advertising manager and the decision maker.
Mr. Georgescu: You look for the client that you want to play for the long-term relationship. It's really [all about] deep partnerships, fundamental commitment, beliefs.
AA: What initial factors are vital in setting up a successful pay-for-results system?
Mr. Georgescu: The most important thing to be clarified is objectives [to be achieved] for the client's business.
AA: How do you define those objectives?
Mr. Georgescu: [By asking] a specific, "What are we trying to do here?" Measurement can be sales, share . . .
Mr. Reinhard: . . . Distribution.
Mr. Georgescu: The objective can be set to build a brand and build its value, in which case then we use all the instruments at hand.
What if the objective is, as some clients say, "I want my advertising to be the most favorite, [to be] on top of every poll." Well, that's a different objective. Now we don't think about direct marketing and telemarketing. . . .
So it depends on the objective.
AA: What are some reasons agencies and clients are resistant to such a system?
Mr. Reinhard: Some people buy into the "too many variables" list and just dismiss it. They don't stop to realize these are the same variables that effect their business every day. [Some advertisers] don't want to give the agencies too much control in the marketing orchestra. You have to hand the baton to the lead agency, and there is reluctance to do that.
Mr. Georgescu: Dramatic changes in behavior are always difficult. There are situations where clients have multiple agencies, and some are excited [about pay-for-results] while others are not.
AA: How do you get past the initial resistance?
Mr. Georgescu: Well, we're going to just keep at it and hope that some day the client will see the merit and the value. The commission system was a wonderful system; for a while it worked. It was never fair-it was either too fair to the agencies or too fair to the clients.
Mr. Reinhard: It takes a while to get people to think differently. Receptiveness is greatest at the top and lessens as you go down the organization. It's the control factor again-an assistant brand manager hasn't got as much control as they like and they are threatened by this.
AA: Do you incorporate pay-for-results in your new-business pitches?
Mr. Georgescu: Oh, absolutely. Every large, significant [pitch].
Mr. Reinhard: We write a results-based clause into every new contract. Some clients modify it and some accept it, and some throw it out.
AA: Should services like direct marketing, sales promotion and event marketing be included in the pay-for-results mix? Or should it just be traditional advertising?
Mr. Georgescu: We have always believed it's so important to have all these various avenues to the consumer, so multiple services has been our approach to the marketplace. Over the long-term future, you would want to have as much as you possibly can so you can bring synergy and symbiosis to solve a brand's problem, to solve the brand's needs.
The brand is impervious to our designation of above-, below-the-line promotion-all these wonderful separations that we have created. The brand doesn't care.
AA: How do you make up for variable factors like the economy, quality of the sales force. All of those affect a client's business?
Mr. Reinhard: There are so many uncertainties but clients take those risks all the time. [Marketers] can't predict what the weather's going to be, what the economic situation is going to be; they're taking risks. We should be willing to take those risks, as long as we are locked together in one single-minded objective, which is important, measurable and committed to in terms of resources.
You can't commit to an objective and then cut your budget in half.
AA: So does there have to be a stipulation in there in case an unforeseen, non-advertising related factor affects the marketer?
Mr. Georgescu: No stipulations.
Mr. Reinhard: I'll take any risk about competitive activity, economic cycles, weather, any of that stuff.
Mr. Georgescu: That's just life. At the end of the day, the only thing that can matter for our clients is results: Either [you] get them or you don't get them.
AA: How many times during the year should pay-for-results be evaluated, and how?
Mr. Reinhard: It really depends. If you said we're going to increase sales or store traffic X% over the next 12 months, I'd want to check at every month, at least every month. Because, if it's not moving in the right way and I'm going to get paid based on achieving this, I'm going to make some midcourse corrections.
AA: How should a client budget for the variable factors?
Mr. Reinhard: The question that has come up a lot in our conversations with clients is: "Well, we have a certain budget, and we want that to be a fixed cost." Again, cost as opposed to investment. "And so, you know, if we do this, then we don't know what our cost is going to be, because it's based on results."
My advice is "Bet on the best result. If it doesn't happen, you get change in your pocket. So let's have faith. Let's budget for the best result, and if it doesn't happen, if we fail to meet that, well, then you've got some savings at the end of the year."
AA: Then how do agencies budget under this system?
Mr. Georgescu: You're always at risk.
AA: But every business needs to be fairly sure of some percentage of that risk.
Mr. Georgescu: No, the clients have no idea what in the end-what's the demand for cars or trucks? They deal with these kinds of issues all the time, and so must we.
Mr. Reinhard: And we do deal with uncertainty all the time. We don't know when a client's going to cut [advertising] midway through the year, when a client's going to fire us. We can't predict those things.
So we've learned to budget with uncertainty as long as we've been in business.
AA: So let's say your client says, "OK, I'll go under a system where I pay for the best results, or nothing?"
Mr. Georgescu: It's not or nothing. Our business is not capitalized. It's what we can afford to take risk with. We can put a fair degree of our profit at risk, and that's what we do in essence.
Mr. Reinhard: Yes. Exactly.
Mr. Georgescu: We're just not capitalized to be able to withstand those kind of risks. But we put a lot of our profits in, and that's what at the end of the day motivates everybody. Nobody makes money out of cost, you know; you've got to have profit.
AA: How much of your profit is worth the risk?
Mr. Georgescu: This is part of the discussion, the negotiation with the clients all the time. . . . You can't make a general rule like the commission system. The right number varies by client, by the type of business and what you hope to do.
Mr. Reinhard: We have tried to orient our entire organization to the idea of customizing [our] service-that every client requires a different combination of services, and we need to customize our service structures.
And just as we need to customize structure, we need to customize the plan. So in some cases, I think I can envision a case where I would risk all the profit because I'm so sure this is a sure thing. I know I'm going to win. In another case, I would say I'm not that sure-I'm going to risk some profit, but not all.
AA: Who makes the decision on how much to put at risk?
Mr. Georgescu: We sit down with the folks at Sears [Roebuck & Co.] or any of our clients, and we discuss that every year. . . . The objectives do change, and we have to be sensitive to that.
AA: At each of your agencies, who makes the decision of how much profit to risk?
Mr. Georgescu: Well, it goes all the way to the top, the Management Committee would deal with those issues.
Mr. Reinhard: And our structure is very federal in its approach, and each of our office heads has a profit plan. We encourage them to negotiate results-based compen-sation arrangements. . . . It's up to the local in our case.
AA: Do you expect use of this kind of system to expand in the agency business generally?
Mr. Georgescu: I think our industry has to .*.*. have faith in its ability to create and build brands and develop big ideas, so that clients look at our industry as an investment and not a cost. . . . We have to be looked upon as an investment, because that's what we are.
And I believe that the good agencies are going to see longer and deeper relationships with clients as a result of this, because there is mutual commitment and mutual trust. We're going to see a renaissance of the true partnership between client and agency based on the willingness to go along and