Marketers Struggle to Pay Agencies by Results (but Here's How to Try)

Add-on Incentives Are Common, but Performance at the Core Is Rare

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Global marketers are increasingly tying agency compensation to results, but only a small proportion have managed to make it the core of their model, according to a new survey by the World Federation of Advertisers.

Performance is the primary criteria for paying agencies at 11% of marketers in the survey, up from 7% in 2011, the last time the federation conducted a similar survey. Performance-based remuneration forms the basis of agency contracts for around 15% of marketers in the U.S. and Europe, but just 5% in Asia, the survey found.

A majority of U.S. marketers incorporate a degree of performance based-pay in their agency contracts, according to recent research by the Association of National Advertisers, but the World Federation of Advertisers measured marketers who based their contracts on performance at the start rather than using performance measures as an add-on.

The World Federation of Advertisers' Steve Lightfoot
The World Federation of Advertisers' Steve Lightfoot

Some 66% of marketers in the federation survey said they wanted to link agency income more closely to their own performance, but the low percentage of those getting there shows how hard it is to implement.

"The slowness to adopt is for a number of different reasons," said Steve Lightfoot, senior manager-global marketing procurement at the World Federation of Advertisers. "Advertisers make it too complicated -- with some using up to 18 metrics, which is obviously way too many. You need to find sensible, achievable metrics that will motivate an agency, and agree on ways to measure them."

"Not all agencies are willing to adopt the performance-based model because they don't want to put too much of their earnings at risk," Mr. Lightfoot added.

Another issue is how to bundle roster agencies together and create performance measures that are relevant across the board. "If you want your agencies to work together, you should have performance compensation across the roster," Mr. Lightfoot said. "But how realistic is it for media to impact sales if the creative strategy is crap?"

Finding two or three joint metrics and one or two specific targets for individual agencies would be a better approach, he suggested.

The 2014 survey, which was carried out in conjunction with media management consultancy ID Comms, comprises data from 43 member companies operating in 12 different sectors and representing more than $100 billion in annual ad spend.

It found that the largest share of pay models, 49%, were still based on labor, although that figure fell from 55% in 2011. The second most popular model was fixed fees for a specific project or period, at 24%, followed by performance-based fees.

The federation laid out ten guidelines for marketers that want to try:

1. Begin with the basics. You have to start with competitive agency rates and transparency on cost before you can build other models.

2. Get senior marketing, procurement and finance support. Performance-based models can affect more than just the financial dynamics of your agency relationship.

3. Make the pay-based compensation component big enough to motivate the agency.

4. Develop relevant key performance indicators with the agency, make sure they're measurable -- and then make sure you measure them.

5. Link agency bonuses with your own key performance indicators. Aligning objectives brings agencies closer to your business, where they can do their best work.

6. Keep it simple so that you can get on with the business of creating great work.

7. Give agencies incentives for working well together.

8. Decide whether you should use the same model for all your agencies, or different ones.

9. Consider the what-ifs. What if the agency very nearly achieves the target, for example, but narrowly misses?

10. Understand that agencies need profits in order to run effectively and attract great talent.

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