Masterclass Notes: Performance-related pay for agencies no incentive
by Johanna McDowell (@jomcdowell) Should marketers be trying to incentivise agencies as part of their remuneration structures so that agencies might gain additional revenue based on the performance of their campaigns and other work for their clients? Is it practical? Is it possible? This topic is very much in the news at present in the UK and certainly is being debated here.
In the recent SCOPEN agencyScope 2017/2018 study, it was discovered that South Africa has the lowest incidence of incentive payments or performance-related pay (PRP) within their remuneration structures; less than 10% of the 217 leading marketers interviewed in the study had incentives for their agencies built into their contracts with them. Why?
[Full disclosure: Scopen Global and Mazole Holdings (the company that owns IAS 100%) have formed a company in South Africa called Scopen Africa. Scopen Global holds the majority of the shares; Mazole is a minority shareholder. Johanna McDowell is a director of Scopen Africa, as is Cesar Vacchiano, Global CEO of Scopen.]
Part of the answer was contained in an article from the AAR Group’s 2018 annual PULSE report to marketers: Performance Related Pay is not an incentive – Paul Phillips. [Full disclosure: The Independent Agency Search and Selection Company (IAS) is partnered with the AAR Group in the UK.]
Three important aspects
The AAR agreed that agencies already work very hard for their clients and that a PRP will not make them work any harder. Although agencies might welcome the idea as a validation of their efforts, there are three important aspects that have to be considered:
- Measurement: both parties need to agree what is going to be measured — sales, market share, awareness, predisposition to the brand, share price or some other meaningful metric
- Attribution: ensure that, whatever metrics are being used, they can be directly attributed to the agency’s contribution. This can be really hard for an agency trying to separate its contribution from others eg the brand marketer who might have arranged increased distribution, gondola ends etc. Econometrics can help with this. To put this in context, was more ice cream sold because of the advertising or because the sun came out?
- The right baseline: establishing the right base measurement to start from is important and marketers must be careful not to start this too soon in a new relationship with an agency, as that agency will need 6–12 months to establish itself on the brands and business. In addition, if comparisons are made to what might have been achieved by a previous agency, this, too, might be setting too low a benchmark.
No-one likes an open-ended financial agreement. An agency’s remuneration needs to be capped in order for a marketer to get their budget signed off, and PRP schemes that aren’t won’t get signed off. PRP schemes are often used to make a competitive bid more attractive to a client and/or as a mechanic to enable agency to claw back margin to a desired level closer to the agency’s desire profit targets.
Nothing is wrong with either of these approaches but many marketers and agencies agree that it’s much simpler — and more desirable — to have a good contract in place with agreed-upon fee structures and no incentives. There are often much more pressing challenges than having to work out a complex scheme which might award an agency a bonus.
Johanna McDowell (@jomcdowell) is managing director of the Independent Agency Search and Selection Company (IAS), which is partnered with the AAR Group in the UK. Johanna is one of the few experts driving this mediation and advisory service in SA and globally. Currently she is running the IAS Marketers Masterclass, a programme consisting of masterclasses held in Cape Town and in Johannesburg. Twice a year she attends AdForum Worldwide Summits.
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