The drawbacks of performance-based fees

Two industry experts weigh in on the potential downside of the industry-wide trend.

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Earlier this month, a survey by the World Federation of Advertisers revealed that 71% of large companies believe incorporating performance-based fees could “improve” their relationships with their agencies.

More importantly, this appears to be part of a larger industry-wide trend, with 81% of respondents indicating they plan to move towards that model in the future. In one case, a company said its payments are 100% contingent on incremental sales generated.

Many large businesses declare being satisfied with this arrangement. And agencies stand to profit when the work leads to a huge lift in sales. However, some have expressed scepticism about the approach. Here’s what two industry experts have to say.

Graham Robertson, brand advisor and author of Beloved Brands

Graham RobertsonAs a brand, the danger of a performance-based fees is that 100% of your advertising will shift to a fixation on short-term transactional ads.

We need agencies to challenge us to build a pent-up desire for our brand, with messaging that adds a touch of magic that will make consumers love us. If you are after profit, I believe the tighter the bond you generate with your most cherished consumers, the more power, growth and profit your brand will realize. Marketing research experts suggest the right balance between brand-building and transactional advertising should be a 60/40 split that favours building your brand first.

Let me use the analogy of the jar we keep at our front door, where we put our loose coins. Brand building is like adding a few coins for when you need it, whereas transactional ads are like taking a few coins from the jar. If all you do is trigger sales transactions, eventually you will have no coins left in the jar. Same for your brand. If all you do is keep telling consumers to buy your brand now, eventually they will forget why they should ever buy your brand.

Ron Tite, founder & CEO, Church+State

RonTitePerformance-based fees have always sounded great and I’m all for having a little bit of skin in the game. But defining agencies’ compensation by the decisions made by people outside the organization isn’t a smart way to run a business.

Besides, agreeing to performance metrics must be difficult. Agencies are motivated to chase the numbers instead of being inspired to build the client’s business, and “make the logo bigger” conversations can trigger a grievance process that could threaten the cancellation of Thirsty Thursdays. More venting. More top-to-top conversations. Everyone is likely to spend more time debating compensation algorithms than creating great work.

I respect our clients and I respect the hierarchy and the decision process that it dictates. I want nothing more than to grow our clients’ business, and our team creates and recommends what we think will help achieve that. But we don’t do it alone. Nor should we. Relationships are based on trust and respect for what each brings to the table. If we don’t bring the talent and expertise to help drive results, it’s not our fees that should be at risk. It’s our relationship.