ROLE OF PERFORMANCE GAINS IN AGENCY PAY

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Performance-based agency compensation is slowly gaining momentum even as ad shops keep fighting the move.

"I'm seeing an awful lot of interest in incentive compensation," said Stan Beals, managing partner at Jones-Lundin Associates, Chicago, a consultancy that writes the Association of National Advertisers' guidebook on compensation.

Other consultants echo Mr. Beals, and the ANA's 1995 compensation survey offers quantitative proof. Of 121 advertisers surveyed, 11% have added an incentive clause since 1992. Nearly 20% now include incentives as part of total compensation.

But the ANA study also shows that a majority of advertisers pay their agencies in commissions. A study just completed by Andersen Consulting reaches the same conclusion. According to the latter, most advertisers using agencies for full-service advertising pay commissions ranging from 8% to 15%, with larger advertisers paying an average of 13%. Andersen obtained its data through interviews with ad agencies around the country.

Some agencies surveyed by Andersen, such as Goldberg Moser O'Neill, San Francisco, said they continue to be paid almost exclusively 15% commissions, though lower percentages are the norm.

"Overwhelmingly, agencies did not like performance-based agreements unless they believed they could reasonably achieve their targets," said Lyle Kan, associate partner in the Los Angeles office of Andersen. "They weren't into taking big risks."

"We're not willing to take a pay cut in order to qualify for a bonus," said Philip Palazzo, exec VP-general manager and chief financial officer at Ammirati & Puris/Lintas, New York.

Consultants naturally talk up the benefits of performance-based pay, Mr. Palazzo said, because most of the time their clients are the advertisers.

"Some consultants feel that their role is to secure the most financially beneficial arrangement for the client, regardless of its effect on the agency's ability to perform," he said.

Arthur Anderson, principal at New York consultancy Morgan, Anderson & Co., agreed that incentive compensation used to be a cover-up.

"When incentives came in six or seven years ago, it was a way for clients to take money away from the agency," he said. "Now, it's more about increasing value and accountability. It doesn't matter if it's commission or fee. It's how you get there."

Compensation consulting has grown to 40% of Morgan Anderson's business; the company opened 10 years ago. In general, clients drive changes in compensation structure, but most agencies have been receptive and cooperative, Mr. Anderson said.

Added Mr. Beals: "Some agencies are even more pushy about it than we are."

Peter Georgescu, chairman-CEO of Young & Rubicam Inc., wants to see Y&R agencies sign more performance-based contracts. But he's no more willing than Mr. Palazzo to give away agency services.

The challenge is agreeing with clients on performance measures that reward real contributions by an agency but don't penalize it for someone else's mistakes, Mr. Georgescu said. And agencies have to be able to cover their costs.

Agencies and clients currently use many different methods for measuring performance, Mr. Beals said. Two basic methods are data-driven. One of these is measuring sales or market share gains. This is usually problematic, he said, because so many variables besides advertising can be factors. It can work well in retail or direct marketing situations, though.

Another option is measuring advertising effectiveness through copy testing or brand awareness and image studies.

Mr. Beals has also seen advertisers and agencies base compensation on more subjective criteria, including annual performance evaluations, media buying efficiency and effectiveness, responsiveness to client needs, and the introduction of new ideas.

Regardless of the criteria, Mr. Beals believes the best compensation contracts result from a four-step process.

First, the advertiser should think about an agency as it would an employee. Second, it should create a job description for the agency. Third, it should identify and list expected costs associated with the agency's assigned projects and responsibilities, then add a reasonable profit margin on top. Finally, it should add some kind of incentive clause.

That's not always easy, noted Alan Krinsky, a partner in ADvice & ADvisors, a New York consultancy. "Some agencies have no idea of their costs," he said.

Others balk at disclosing them, Mr. Anderson said. Of course, reluctance can come from the other side, too. Some advertisers, after insisting on a performance-based compensation system, balk at full disclosure of the data used to measure performance.

"The key question is how to make agency compensation a tool to [motivate] the agency to accomplish specific marketing or advertising goals," said Linda Fidelman, another partner in ADvice & ADvisors.

"If you want excellent work, don't ask for the low-price special," said Stephen Gardner, exec VP-account management at Ammirati.

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