Report to explore key issues around payment by results

The Association of Canadian Advertisers is putting the final touches on a new report said to be the most comprehensive study yet of the 'Payment By Results' method of agency compensation....

The Association of Canadian Advertisers is putting the final touches on a new report said to be the most comprehensive study yet of the ‘Payment By Results’ method of agency compensation.

While examples of PBR programs remain few and far between, it is an approach that has a growing list of devotees and is becoming a hot-button issue in client-agency relations.

Susan Charles, vice president, member services at the Toronto-based ACA, says the study’s intention was to delve into the issues surrounding PBR and cite successful programs as a means of providing ACA members with guidelines should they wish to set up their own such program.

While unwilling to divulge the specifics of the document – currently at the final editing stage and set for release in late April – Charles says the report goes well beyond a review of bonus plans between marketers and their agencies. Instead, the study investigates the process of developing PBR programs.

‘We are taking a step back because we are working towards a best practice scenario,’ she says. ‘It really is a whole philosophy. It’s a strategic decision that an organization needs to make.’

The paper also delves into the implications of putting a PBR program into place from the perspective of both clients and agencies. Charles says it’s precisely because the ACA has taken into consideration the agency’s point of view that she’s hoping they’ll come to embrace the PBR concept more freely.

To that end, the study addresses the issues of trust, goal alignment, and clarity of objectives. It also talks about how those objectives can be measured, whether they’re based on sales, delivery, execution of creative, or any number of things.

It is certainly the kind of approach Procter & Gamble has bought into. The packaged goods giant adopted a PBR compensation model back in July. While the specifics of the model vary by the company’s 40-plus brands, in general, agencies receive a bonus based on a percentage of sales, says Win Sakdinan, a spokesperson for P&G in Toronto.

‘We strongly believe it’s the right system for us,’ he says. ‘It’s made both our agencies and us more efficient and accountable in our decisions. When you are focused on the end result and building the business, you’re going to focus on the best opportunities.’

While it’s no surprise that clients would be willing to embrace a program that bases compensation on bottom-line criteria, agencies too are discovering that such programs can reap significant benefits.

John Clinton, president and CEO at Toronto-based Grey Worldwide, says his agency has what he calls ‘payment by incentive’ programs in place with most of its clients.

While such agreements mean the agency agrees to accept the risk of smaller profits, there can be a significant upside, he says.

‘In some cases, it’s been quite lucrative for us,’ Clinton says. ‘You have the potential to earn a much, much larger profit than you would otherwise. I’ve been involved in a few of those and they can work pretty well.’

Such a program has also been working well at Vancouver-based Rethink Communications. The agency, which prides itself on a creative approach, has developed an innovative arrangement called the ‘Rethink Rebate.’

Essentially the rebate works as follows: Rethink takes a percentage of its fees from all retainer clients and puts that into a bonus pool. At the end of the contract, the agency sits down with its clients and reviews its performance based on goals set out at the beginning of the contract period.

This list, says Tom Shepansky, founding partner at Rethink, can run more than a page of criteria, only a quarter of which might be based on sales or other quantitative results.

‘It’s similar to when you hire an employee. You have an evaluation. Most of it is subjective and qualitative,’ he says. ‘[But] we’ve got real incentive to deliver.’

Shepansky says a study such as the one being conducted by the ACA should help move other agencies in that direction, as well. ‘I think [PBR] will catch on. Will everyone do it? I think not. But we’ll see more agencies moving to it, for sure.’