Pay-for-performance starts to gain steam
Sophisticated measurement tools help model become reality at media shops such as Interpublic’s UM
■ BY ALEXANDRA BRUELL email@example.com
LAST YEAR, Interpublic Group of Cos.’
media agency, UM, hired consulting
giant McKinsey to analyze how other
industries are compensated. The objective was to change the antiquated
agency-fee model to a riskier but more
profitable pay-for-performance one.
What resulted was a revamped system
that more closely aligns the firm’s goals
with those of clients. It is tied to key
indicators such as sales or market share.
Pay-for-performance is like
an urban legend of media buying and planning. But with
increasingly sophisticated measurement and planning tools, the
concept is morphing into a reality that could in some cases
replace the traditional fee model,
under which shops make slim
margins from a percentage of
often low-balled budgets.
UM has experimented with
clients for the past few years.
After having some success with the
model, UM has become more aggressive with it.
Half of the firm’s clients, which
include Chrysler, are engaged in compensation in which at least 20% to
75% of each media-buying contract is
earned through pay-for-performance,
according to Guy Beach, chief operating
officer. Most of the remainder typically
goes to cover costs.
This model does not adhere to traditional performance compensation, said
Jacki Kelley, UM’s CEO. In that formula, agencies typically received a standard commission and a 10% to 20%
bonus based on a client’s qualitative
evaluation. The new approach is rooted
more in quantitative benchmarks than
in such evaluations.
Ms. Kelley, who before joining UM
in 2009 was exec VP-media sales at
Martha Stewart Living Omnimedia,
said the agency will make more money
“The current model is not sustainable when you think about the level of
analytics and investment that needs to
be made to deliver what clients want,”
Ms. Kelley said.
But the system also represents challenges for UM. As it looks to implement pay-for-performance agency-wide, the firm is asking senior employees about accepting “slightly reduced”
base salaries. Though the idea is just
being tested, the result would be that
they would take on personal risk but be
more invested, with the potential to
earn extra if the team meets goals.
“The result of being tied to performance and having skin in the
game—we want the managing directors to share in that for the purpose of
total alignment,” said Ms. Kelley.
For all the talk about these structures, they have not been broadly
adopted. A 2010 study by the
Association of National Advertisers
found that pay-for-performance
accounted for less than 1% of compensation agreements. Reporting on the
PRESIDENT-CEO, JONES LUNDIN BEALS
“I’ve been in situations where agencies
proposed zero compensation, defining it as
getting compensated to cover costs without
earning a margin unless you deliver.”
CHIEF OPERATING OFFICER, UM
Half of UM’s clients, which include Chrysler, are
engaged in compensation in which at least 20%
to 75% of each media-buying contract is earned
through pay-for-performance, according to Mr.
“The current model
is not sustainable
when you think
about the level of
needs to be made
to deliver what
study, Ad Age said that performance
incentives had dropped slightly but that
fee-based models (which during the
1990s replaced commissions as the
main compensation method) had
soared to an all-time high of 75%, vs.
63% in 2006, when the previous study
David Beals, president-CEO of con-sultancy Jones Lundin Beals, said those
numbers still hold but that he has
noticed a push for such pay models
during media-agency reviews.
“I’ve been in situations where agencies proposed zero compensation, defining it as getting compensated to cover
costs without earning a margin unless
you deliver,” Mr. Beals said.
He attributes the shift to heightened
pressure on marketers—which are
increasingly involving procurement
departments in negotiations—to cut
expenses globally. Often, Mr. Beals
noted, agencies’ pay-for-performance
proposals will tout the savings for marketers.
According to Chrysler, value and
savings were key factors in its discus-
sions with UM about a performance-
based plan. But aside from fixed costs,
the marketer compensates its agency
largely through variable compensation
dependent on results or key perform-
ance indicators (KPIs).
ultimately do well when we do
Such partnerships are made
possible by sophisticated track-
ing tools and a complex media
environment that lets agencies
go beyond securing costs-per-
thousand, Mr. Hernowitz said.
“Toy industry [marketing]
was 95% TV, and now, with the
digital world, it’s expanding,”
While more agencies experiment
with evolving pay models, most industry executives remain skeptical and
believe a wholesale shift to pay-for-performance is a long way off.
“[Agencies that are part of] public
companies are limited by the fact that
in a paid-for-performance agreement
with a client they could be carrying all
the agency starting costs with no revenue against them,” said Phil Cowdell,
the outgoing chairman of Mindshare
Many marketers took the opportu-
nity of the recession to renegotiate
terms, and the times most likely
inspired agencies’ creativity in drafting
compensation plans, Mr. Cowdell said.
But in “the old days,” an agency would
resist taking a zero-margin contract for
fear that it would lead to a “sinking
These models are doubtlessly on
everyone’s radar, and their establish-
ment depends on how much risk media
agencies are willing to shoulder.
They’re also a work-in-progress for
marketers, as well.
George Debolt, senior VP-media,
promotions and partnership marketing
at Showtime Networks, said that even
with new technologies, pay-for-performance is difficult to implement
without imposing uncertainty.
“If we tie performance to sales or
business metrics, we don’t want to
unfairly [penalize] the partner if our
metrics are down for some reason that’s
out of their control,” Mr. Debolt said.
As a result, a lot of brands have paid for
performance based on softer evaluations and metrics.
Moving beyond that could help
bridge the marketing-procurement
divide that many have complained
about. With proven results, procurement is beginning to align its objectives
with those of the marketing department and agencies.
Brett Colbert, chief procurement
officer at MDC Partners, said that when
he was global manager of procurement,
advertising and market research at
Anheuser-Busch InBev, the objective
was defined more by the quality and
value of the buy than by cost-savings.
“We invested more to get a better
return,” said Mr. Colbert, though he
admits that assigning measures to that
are still difficult. “The biggest challenge
is that most clients don’t have the ability to define metrics that matter and are
measurable. The agencies are defining