By Published on .

Linking advertising agency pay to performance is far from original, but Procter & Gamble Co.'s new system for doing it is rare -- if only for its simplicity.

Instead of the traditional percentage commission on media spending, P&G agencies will receive a percentage of global sales for brands they handle, starting July 1.

In contrast to growing numbers of commission-plus-incentive and fee-plus-incentive deals -- and incentives based on everything from client profits to agency performance reviews -- P&G's system is basically as simple as the commission system it replaces.

"For all of the flaws of the commission system, its beauty is simplicity, and we were trying to come as close to that as we could," said Bob Wehling, P&G's global marketing officer.


The other major objective was alignment of agency and P&G marketing executives on the same goals: Sales growth and support for "integrated or holistic marketing."

"We want the agencies to be rewarded based on giving us the best ideas to build our business, whether that means traditional media or some other form of consumer communication," Mr. Wehling said.

Complexity arises, however, because the new compensation system is meant to have no effect either on agency revenues or P&G costs the first year.

Because ad spending as a percentage of sales varies among brands and categories, Mr. Wehling estimates P&G will need 12 to 30 different rates on various brands to ensure agencies make roughly the same on their first year of sales-incentive compensation as they do in their final year of commissions.

"We're engaged in work between our finance people, marketing personnel and agency finance and marketing people to find the minimum number of rates that will make sense and not cause undue transaction time," he said.

Mr. Wehling, who did extensive benchmarking of agency compensation plans in package-goods and other industries, said he found no others quite like this.


Mr. Wehling said P&G and the agencies went into the compensation evaluation in January expecting to test several fee- and performance-based systems.

"But the more we got into it, all of us concluded that this was such a better option for both of us that we discarded all the other contenders," he said.

Testing that started in July on such brands as Bounty and Nyquil was really aimed at discovering whether the new system was practical from an accounting standpoint. Nevertheless, Mr. Wehling is confident it will work from a marketing standpoint, too.

"The only thing I haven't seen yet is hard evidence that the behavioral changes and the other things that go along with this will in fact result in better copy, faster, and better communication plans . . . that will in fact drive sales faster," he said. "But I'm convinced that will happen and don't feel we need to linger in a test market to learn that."


Most performance-based compensation programs are somewhat more complex and include tiers for agency profits based on how well the company meets its performance goals, said Robert Lundin, president of Jones-Lundin Associates, a Chicago consultancy that works on agency compensation.

A 1991 survey by Salz Consulting, New York, found most clients with performance-based plans had at least three criteria for measuring performance, with the most common ones being sales growth, meeting advertising goals, and performance evaluations. But P&G's plan to tie compensation only to sales is consistent with its key goal of doubling sales to more than $70 billion in the next five years, Mr. Lundin said, adding that performance-based agency pay has become the norm.

"I can't think of anybody with whom we've worked in the past three years who hasn't given strong consideration, if not adopted, incentive compensation programs because it makes so much sense," he said. "P&G . . . doesn't get into anything until they're damn well sure it's going to be sound. They're not always necessarily first in the marketplace, but they're solid when they go in."


In a prepared joint statement, executives at P&G's agencies, including Leo Burnett Co., D'Arcy Masius Benton & Bowles, Grey Advertising and Saatchi & Saatchi, were uniformly upbeat in their appraisals of the new policy.

One agency executive, however, said privately the new policy is at odds with the "mantra of agencies for years that image and equity are something that builds over time" and sets a dangerous precedent for agencies, particularly in the slow-growth package-goods business.

"The whole package-goods industry is in trouble," he said, "so at best you're

Most Popular
In this article: