By Lara Mills
Marketing Magazine
October 16, 2000

Associate editor Lara Mills explores the ins and outs of this year's hottest topic of discussion between marketers and their agencies 

On the evening of Sept. 13, anyone who happened to be passing by the offices of the Association of Canadian Advertisers on Toronto's Bloor Street might have seen a few unfamiliar faces trekking through the door. The ACA is keeping the identities of these people under wraps, but there are a few things we know for certain: None of them were marketing vice-presidents, packaged-goods company CEOs or advertising agency heads. Most of them weren't even ACA members. 

Rather, they came from areas of the business world far removed from marketing or advertising. Their particular areas of expertise may well have run from information technology and finance to product distribution, auto-parts sourcing and beyond. All the ACA will reveal about its guests is that they had one thing in common: all use some form of payment by results (PBR) in their supplier relationships. 

PBR, or pay for performance-whatever you choose to call it-is still rare in the marketing departments of Canadian companies. But the debate surrounding it has taken on a new urgency of late. The ACA's little information-gathering session-which was intended to further the association's understanding of performance-based compensation and how it works in other business functions-is just one facet of a new, in-depth study of PBR that promises to go far beyond the statistics of who's doing what. Susan Charles, the ACA's VP, member services and its resident expert on pay for performance, calls it an "intellectual analysis" that will be used to create a "roadmap" of sorts that its marketer-members and others can use to move forward on PBR. 

"Success will be measured on our ability to provide some insight and guidance to the clients in such a way that the understanding on the agency side is such that they will also embrace this concept," Charles says. "Not embrace it in the sense of 'We will therefore do it,' but embrace it in terms of investigating the opportunity for it and to determine if it is correct." 

The renewed buzz surrounding PBR stems partly from the fact that Procter & Gamble's much-discussed pay-for-performance plan took effect July 1. But there are other factors at play. For one thing, there's an increasing trend towards performance incentives at the level of individual employees, and with agencies viewed more and more as key partners, there's a desire to compensate all members of the marketing "team" in a similar fashion. Then there's the fact that marketers, in general, are becoming far better at financial cost-value analysis and quality management in areas like distribution. It's only natural they'd want to attempt to extend that to the marketing arena, too. 

It's no simple task, though. Marketers have a tendency to fall in love with the idea of pay for performance. But they're often at a loss when it comes to, first, putting it into practice, and second, making it work in a way that doesn't put their relationships with their agencies-which they increasingly view as crucial to their marketing success-in jeopardy. 

Hershey Canada, for instance, proposed the idea of PBR almost five years ago to its then-agency, Bozell Worldwide (which is now part of Harrod & Mirlin/FCB in Toronto). But it eventually gave up. Susan Skene, Hershey's VP marketing, recalls that Bozell was "really worried we'd be using it to hammer them. And it shouldn't be used that way. It should be an incentive... Finally, we thought, 'This is just terrorizing them too much.' " 

While Skene doesn't rule out giving PBR another go at some point, she says Hershey's current fee-based arrangement with Toronto's Ambrose Carr Linton Carroll is working fine. "We've got a great agency relationship," she says, "and it doesn't worry me that we're not performance-based." 

That statement probably applies to most Canadian marketers nowadays. Indeed, only one respondent to the ACA's 1999 agency-remuneration study indicated they were using a pay-for-performance system (while the names of the respondents aren't disclosed, chances are good this one uses the initials P and G). But there's no doubt there's growing interest. 

"Most customers are inquiring more and more about how it could be worked into their agreement," says Stéfan Danis, president of Mandrake Management Consultants, a Toronto-based company whose services include acting as a consultant to marketers during their agency searches. "But very few of them that I've observed are making it happen that way." 

There are a number of reasons for this. The most obvious one is agencies' nervousness about PBR, as illustrated in the Hershey case. But the essence of the debate surrounding PBR-and the central reason why more marketers aren't doing it-comes down to metrics. How do you measure performance, anyway? Is it brand awareness? Market share growth? The general state of the client-agency relationship? And how do you structure the agreement? How much should the reward be? 

It's fine to reward an agency for a job well done. But will you also punish them if your brand share doesn't do as well as you'd hoped, even though there may be factors at play-from product performance to customer service to, let's be honest here, bad decisions by a client-that are far beyond the agency's control? And when times are tough, will a pay-for-performance setup alienate your agency at a time when, arguably, you need them most? 

Unfortunately for marketers, there are no easy answers to these questions. Unlike the 15% commission system of old, there's no one standardized model for PBR. Procter & Gamble's new system ties agency compensation to each brand's total annual sales, but this won't necessarily work in every situation. 

As Jonathan Lace, the Allied Domecq Associate Professor in Advertising at Southampton Business School in the U.K. and the founder of the Advertising Research Consortium, wrote in the Aug. 21 issue of Marketing (p. 6), "with PBR tied solely to advertiser performance, P&G appears to be out of step with its peers." He noted that over half the PBR arrangements in the U.K. also take into account the performance of the advertising itself (in terms of brand awareness and so on) and the performance of the agency in the context of the client-agency relationship. 

Meanwhile, earlier this year there were reports that Kraft-which already uses an incentive program to reward agencies for work that produces results, though their primary compensation comes from a flat media commission-was also considering a PBR plan. Given the obvious interest shown by these major packaged-goods marketers, it does appear that pay for performance is an unstoppable force that will eventually overtake the business. 

In Canada, it isn't just marketers who are preparing for it. In addition to the study by the ACA-which hopes to have a preliminary report by the end of October, and follow that up with seminars on the subject-the Institute of Canadian Advertising, working with the U.K.'s Lace, has also recently wrapped up its own study on best practices in PBR. Citing the members-only nature of the effort, ICA president Rupert Brendon declined to offer any details. 

One of the things the ACA says it is trying to change is the perception of pay for performance as a sort of "carrot" that can be held in front of an agency's face and jerked back at will. "We look at it very much as a strategic way of doing business," says ACA president and CEO Ron Lund. "Philosophically, there has to be an incredible amount of (trust). There's got to be a fundamental respect for each other. If that's not there, PBR is never going to work. You've fundamentally got to believe these guys are your partners." 

That certainly seems to be the case with Enbridge Services and its agency of record, Grey Canada of Toronto. Ever since Markham, Ont.-based Enbridge hired Grey early this year, the two have been working with a compensation agreement that includes pay for performance, which is tied to the number of sales leads and brand awareness generated. 

"If you're a member of the team, then you get compensated the way every other member of the team gets compensated," says David Strickland, who until late September was VP marketing at Enbridge (he's just taken the same position at Zellers). "You get a base that covers what it takes to keep you interested and, obviously, committed to the business enough to cover your costs and make a profit...and then you bonus (the agency) as you would bonus anybody else based on performance." 

As with its individual employees, Strickland says Enbridge also sets objectives for Grey up front that are specific and measurable. It also sets checkpoints along the way in case anything changes that could drastically affect results or the resources the agency has to allocate to the business. In Enbridge's line of work, that could even mean a change in the weather: a warm winter, for instance, will almost certainly mean lower sales of heating fuel. 

It's because of factors like the weather-and, for that matter, anything else beyond the control of ad agencies-that Strickland argues against using a 100% PBR plan. "I don't think moving people towards what might be called desperation when they're on a full performance plan is necessarily going to result in the right behaviour," he says. "That may result in very short-term thinking." 

"Some of the extreme elements of pay for performance can set up an adversarial, almost, position," Strickland continues. "When times are tough is when you need to be the most together, and I think when you go too far on a pay-for-performance-type philosophy you start to actually see the relationship erode when the performance isn't where it needs to be." And that, he notes, "is exactly opposite to what you need to do in order to get yourself back on track." 

John Clinton, president and CEO of Grey Canada, declines to discuss any specific PBR-type arrangements it has with its clients (in addition to Enbridge, Grey also does work for P&G). But it's clear he welcomes some form of PBR. "I think you have to go into this with a good-faith mentality that says, 'We're about helping build brands, and if we can find a way of measuring on that, then we'll both be successful,' " Clinton says. 

Grey has no standard PBR model, negotiating each one on a case-by-case basis. And while Clinton expects that incentive-based pay for performance will grow dramatically, the punitive variety may prove "a lot trickier. Agencies, at the end of the day, still have to get paid for what they do. All you're in a position to gamble on is a percentage of your profit... Otherwise you're running the risk of going out of business." 

He points out that you wouldn't sit down with an employee and tell them their salary is $50,000, but if they don't deliver they'll only get $30,000. Turn that around and offer an extra bit over and above the base in return for a stellar performance, and chances are they'll reach for the ring. 

Ultimately, Clinton feels clients and agencies do want to develop incentive-based systems that work. "It makes sense to motivate people towards the same thing," he says. "It allows agencies more financial flexibility. It allows the clients to get more heavy lifting done. And I think it will help generate more ideas for clients."

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