Performance pays

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Crispin porter & Bogusky, Miami, won eight new accounts in the last year. And with each new account came the agency's compensation proposal offering a variation on a single theme: Pay for performance.

The agency's first pay-for-performance deal came in 1994 when it took a flat $40 for each car sold for Mercedes Dealers of South Florida.

"We did exceptionally well," boasts Chairman Chuck Porter.

The agency struck again with CKE Restaurant Group's Rally's Hamburgers and with Checkers Drive-Thru Restaurants in 1996, as well as the $200 million Florida Anti-Tobacco Pilot Program account in 1998. CP&B made a pay for performance deal with Planetoutdoors.com in late 1999 and in January with Internet shopping service iMandi.com.

"It really aligns incentives," he says. "Clients like to know that you have something at stake, too."

KLUES HAILS SYSTEM

Pay-for-performance models increasingly are replacing straight commission-based compensation agreements throughout the advertising community, says Starcom Worldwide CEO Jack Klues. He says pay-for-performance is a good way for media agencies to improve their bottom line, while clients get the best product possible.

"Incentives are one way that advertisers can encourage media specialist companies and agencies to reach over and above the agreed-upon definition of the assignment," Mr. Klues says.

Whether it is marketers' increasing demand that agencies share part of the risk for the work they create, or the Internet, which has created a marketing model all its own, many marketing executives believe the change that's come over the past decade will only grow.

In 1997, 53% of U.S. advertisers had supplanted traditional billing-based compensation agreements with labor-based programs, up from 35% in 1994, according to a "Trends in Agency Compensation" study by Association of National Advertisers.

During the three-year period covered by the study, use of billings-based programs, including both fixed-rate commissions and sliding-scale rates, declined from 61% to 35%. Other compensation programs, including fixed-fee or a variety of labor/billing combination programs, grew to 12% from 4%.

While ANA's next survey will not go out until late 2000, Exec VP Robin Webster expects more change is afoot.

"If we were to do another study today, we're going to find another sea change," Ms. Webster says. "The reason for that is the influence of the Internet."

The Internet has changed how marketing is measured. Compensation programs have emerged to suit the medium. In a January 1999 study of Internet advertising and compensation models, ANA found that 55% of members used a fixed-fee compensation model, with 30% basing compensation on labor, she says.

Another 23% was paying on commissions based on gross billings even though Internet advertising had not yet penetrated general media, she says. Another 2% of compensation models were commission based on e-commerce transacted.

NEW SPEED LEVELS

"Old habits die slowly, but time lines are at new speed levels with the Internet," she says. "We'll see some rather significant changes."

"The Internet and the measurements made possible by the new technologies will measure instantly how good we are," says DDB Worldwide Chairman-CEO Keith Reinhard. "We either get clicks or we don't. If we get lots of clicks, we should get lots of money. If we get no clicks, we shouldn't. It blows away the tired old `too many variables' argument that's always thrown at those who advocate better pay for better results."

For their part, executives with iMandi.com believe the performance-based compensation program will put the marketer and CP&B together to shoot for the same goal. The client is able to tap the agency's storehouse of knowledge, while still ensuring it can achieve its own results, says Blake Park, VP-marketing at iMandi.com.

"Such a program definitely brings the agency into a partnership relationship more than traditional compensation programs," he says. "Their success depends on our success."

Some agencies are being affected more slowly than others. At Emmerling Post, New York, fee-based agreements make up 80% of the agency's compensation models, with incentive agreements currently not part of the mix, says John Emmerling, chairman-chief creative officer. The executive also serves as chairman of American Association of Advertising Agencies' Agency Management Committee.

MOTIVATING FACTORS

With four prospective clients currently in negotiations, Mr. Emmerling says he's likely to propose hybrid performance- and fee-based agreements for all, if selected.

This is because, he says, he believes the agency will be "motivated to do a better job" and because that is the direction the industry is headed.

"I don't think it's end of [billings-based] contracts, but certainly we're moving toward incentives," he says.

The changes will be wide reaching throughout the industry, suspects Arthur Anderson, principal with Morgan Anderson Consulting, a New York compensation company. Activity-based compensation or an annual fixed fee will become a common model, says Mr. Anderson, especially as higher agency profit margins motivate clients to keep fees, costs, accountability, and ultimately billings, in check. Future agreements may not cover all of an agency's costs, Mr. Anderson predicts, though the "agency will be able to make much more on the upside if its advertising works."

CLOSELY WATCHED

Four A's is watching the trend closely. The group is calling for agencies to be paid "a fair return for their services" with a minimum 20% to 25% pretax profit margin derived from commission, fee, hourly wages or some other standard, says President-CEO O. Burtch Drake. "How an agency gets to that point we really don't care," says Mr. Drake.

Calling Procter & Gamble Co.'s moves in 1999 toward sales-based compensation models "a landmark event," Mr. Drake sees more change as others follow one of the marketing community's leaders.

Like Ms. Webster, Mr. Drake sees a trend toward more payment tied to results as database and Internet management of results grows stronger.

Still, Mr. Drake hopes agencies remain protected in their arrangements. Losses in profitability will result in ad shops' inability to attract and pay top talent, he laments.

"It's extremely important that an agency is covered on the basis of its expenses," Mr. Drake says. "[Agency executives] are willing to put some of their profit at risk, [but] agencies aren't going to work for nothing."

While his contracts vary from client to client, Mr. Porter sees performance as the model of tomorrow.

Besides, Mr. Porter never has been one to shy from a challenge. "We're pretty confident the work we're going to do is going to move whatever needle they need moved. It puts us on really good ground to do really good work," he says, adding, "I don't know if it's the industry's future. I know it's our future."

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