The following article appeared in AdAge and we acknowledge the author’s consent to repurpose it for AdLaw By Request.

Much has been presented and written about the increasing use and success of performance incentives in the Client/Agency relationship. Industry bellwethers P&G and Coca-Cola, and more recently Intel, are all touting and branding their own versions of “value-based” compensation. Regardless of what you may call it, be it pay-for-performance, enhanced profitability, or just plain incentive compensation, these are all just words meaning different things to different people. What is clear is that beyond the major creative and media advertising relationships, the use of performance incentives of any type is paltry, at best. Results from the ANA’s triennial Trends in Agency Compensation Survey, published last year, indicate that other marketing services, such as Interactive / Internet / Digital show a 14% utilization of Agency performance incentives, going all the way down to merely 2% for Public Relations firms. (Other marketing disciplines falling between these lows are Promotion / Event Marketing, Multicultural, and Direct Marketing.)

So what are the reasons for the disparity in the adoption of these much publicized arrangements that marketers profess are leading to Agency performance and overall relationship improvements? Many of them can be traced to a reluctance by the service provider community — in particular executive management and that “new” Agency stakeholder, the CFO — to embrace placing any compensation at risk in categories where results are difficult to measure and an Agency’s impact on marketers’ key performance indicators is suspect. All too often, and mainly due to insufficient trust in the relationship, Agency management view these arrangements as marketers’ way (and Client Procurement) to gain unnecessary transparency, to give them a “haircut,” or to make promises which they may or may not choose to fulfill. This situation is most acute in the Public Relations discipline, where firms of all sizes, whether independent or part of a holding company, are stubbornly refusing to play and/or clinging to a remuneration model which Client Procurement and Strategic Sourcing are scratching their collective heads to logically understand.

Allow me to suggest a new type of “value-based” compensation with which all sides and marketing services disciplines can agree and ultimately embrace. And for a welcome change, one in which the seller, NOT the buyer, needs to take the initiative. After all, we are one of the only industries where we have allowed the buyer, and a bevy of “credit-taking” consultants, to determine appropriate compensation and billing practices. The concept is that of Performance-Based Revenue (PBR).

The premise of PBR, at its core, is that agencies and marketing services providers begin treating their existing Client relationships, especially their most important ones, as their best source of new business and increased revenue. Over and over again, agencies of all types chase elusive new business “wins” through an often flawed process that can result in inordinate use of precious resources (time, talent, treasure), only to see their ideas and intellectual property forsaken in mostly losing efforts. Alternatively, what if agencies chose to “invest” strategic resources in existing relationships for an agreed and guaranteed pay-out?

As we all very well know, sound Client/Agency relationships fundamentally revolve around a disciplined and well-articulated Scope of Work (SOW). Let’s refer to this as the service provider’s “Must Do’s” and “Should Do’s” for the mutually agreed time period. Regardless of the marketing services discipline or prevalent billing model, these are properly scoped, staffed, priced and agreed-upon by the parties. That is the basic blocking and tackling which any Agency must execute to maintain a satisfied Client and keep the business. Now, let’s set this aside; here comes the most important and interesting part.

Agency executive / account management then truly begin to think strategically about their most critical Client relationships and develop a list of “Could Do’s;” real outside-of-the-box deliverables with which the Client would be thrilled, but is not willing to fund upfront in a SOW. Each item on the list carries a price tag, if achieved, and the list is then shared with the Client for discussion and consensus. The key is that the Agency is taking all of the risk. Any items on the “risk list” which are not achieved yield no compensation; however, any home runs hit by the Agency are appropriately rewarded. (In an evolved form, one could incorporate partial, graduated pay-outs for clearly identified singles, doubles and triples.)

PBR, like its “value-based” compensation siblings, is all about aligning Clients and their Agency-partners on defining value in a relationship, attaining a shared view of success, and finding new ways to work at mining and fishing together. It’s about turning incentive compensation into risk compensation and tying “new” dollars to “new” risk. So, it all begs the question: “What’s your risk list?”

J. Francisco Escobar, President of JFE International Consultants, Inc., is the ONLY consultant in the marketing communications industry that effectively works with both Clients and Agencies, providing services to ALL disciplines and categories of marketing services spend, AND that comes from a professional background and experience in Client Marketing Procurement and Client Finance.

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