"The current model is not sustainable when you think about the
level of analytics and investment that needs to be made to deliver
what clients want," Ms. Kelley said.
But the system also represents challenges for UM. As it looks to
implement pay-for-performance agency-wide, the firm is asking
senior employees about accepting "slightly reduced" base salaries.
Though the idea is just being tested, the result would be that they
would take on personal risk but be more invested, with the
potential to earn extra if the team meets goals.
"The result of being tied to performance and having skin in the
game -- we want the managing directors to share in that for the
purpose of total alignment," said Ms. Kelley.
For all the talk about these structures, they have not been
broadly adopted. A 2010 study by the Association of National
Advertisers found that pay-for-performance accounted for less than
1% of compensation agreements. Reporting on the study, Ad Age said
that performance incentives had dropped slightly but that fee-based
models (which during the 1990s replaced commissions as the main
compensation method) had soared to an all-time high of 75%, vs. 63%
in 2006, when the previous study was conducted.
David Beals, president-CEO of consultancy Jones Lundin Beals,
said those numbers still hold but that he has noticed a push for
such pay models during media-agency reviews.
"I've been in situations where agencies proposed zero
compensation, defining it as getting compensated to cover costs
without earning a margin unless you deliver," Mr. Beals said.
He attributes the shift to heightened pressure on marketers --
which are increasingly involving procurement departments in
negotiations -- to cut expenses globally. Often, Mr. Beals noted,
agencies' pay-for-performance proposals will tout the savings for
marketers.
According to Chrysler, value and savings were key factors in its
discussions with UM about a performance-based plan. But aside from
fixed costs, the marketer compensates its agency largely through
variable compensation dependent on results or key performance
indicators (KPIs).
"It's working," said Susan Thomson, head of media at Chrysler
Group, adding that investment in the model contributed to a 26%
sales gain in 2011. "It ties them to some objectives that we're
held accountable to, such as sales, share, brand perception --
those types of metrics that our management team looks to us to
increase year-over-year," she said.
For example, a firm such as UM might track the effect of a media
plan by linking it to a KPI such as test drives, which can be
converted to sales or market share. And the ability to optimize
media plans through digital tools and channels enables the team to
meet KPIs.
Ira Hernowitz, senior VP-marketing at Hasbro, said that when the
company brought on Initiative last spring, it wasn't just to make
more-efficient ad buys but to achieve better performance.
"One thing we talked about was that it was easy to ask agencies
about how well they buy media," Mr. Hernowitz said. "That's
tactical. What we were looking for was a partner who would
ultimately do well when we do well."
Such partnerships are made possible by sophisticated tracking
tools and a complex media environment that lets agencies go beyond
securing costs-per-thousand, Mr. Hernowitz said.
"Toy industry [marketing] was 95% TV, and now, with the digital
world, it's expanding," said Mr. Hernowitz. "The landscape of TV
and the landscape of entertainment is changing so much that we ask
our partners to be strategic and make difficult decisions."
While more agencies experiment with evolving pay models, most
industry executives remain skeptical and believe a wholesale shift
to pay-for-performance is a long way off.
"[Agencies that are part of ] public companies are limited by
the fact that in a paid-for-performance agreement with a client
they could be carrying all the agency starting costs with no
revenue against them," said Phil Cowdell, the outgoing chairman of
Mindshare North
America.
Many marketers took the opportunity of the recession to
renegotiate terms, and the times most likely inspired agencies'
creativity in drafting compensation plans, Mr. Cowdell said. But in
"the old days," an agency would resist taking a zero-margin
contract for fear that it would lead to a "sinking deal."
These models are doubtlessly on everyone's radar, and their
establishment depends on how much risk media agencies are willing
to shoulder.
They're also a work-in-progress for marketers.
George Debolt, senior VP-media, promotions and partnership
marketing at Showtime Networks, said that even with new
technologies, pay-for-performance is difficult to implement without
imposing uncertainty.
"If we tie performance to sales or business metrics, we don't
want to unfairly [penalize] the partner if our metrics are down for
some reason that 's out of their control," Mr. Debolt said. As a
result, a lot of brands have paid for performance based on softer
evaluations and metrics.
Moving beyond that could help bridge the marketing-procurement
divide that many have complained about. With proven results,
procurement is beginning to align its objectives with those of the
marketing department and agencies.
Brett Colbert, chief procurement officer at MDC Partners, said
that when he was global manager of procurement, advertising and
market research at Anheuser-Busch
InBev, the objective was defined more by the quality and value
of the buy than by cost-savings.
"We invested more to get a better return," said Mr. Colbert,
though he admits that assigning measures to that are still
difficult. "The biggest challenge is that most clients don't have
the ability to define metrics that matter and are measurable. The
agencies are defining it, though."
