Performance-related pay: good for transparency but bad for creativity?

Performance-related pay deals tie agencies to profit and loss, but creativity could be at risk.

Brands’ working relationships with agencies have come under intense scrutiny recently, with performance-related pay (PRP) in particular rising up the agenda in the past month.

In late August McDonald’s announced it was working with a new integrated agency in North America, set up specifically by Omnicom to help the fast food heavyweight become “customer obsessed”. The deal stipulated that the 200-strong team would operate at cost and that any profit the agency makes will come from PRP, measured by a combination of market and brand-specific metrics.

McDonald’s is by no means the first company to introduce an element of PRP, with the likes of Coca-Cola, Unilever, Procter & Gamble and Mumsnet all shaking up the agency model previously. However, combining this zero-margin payment model with the integration of all marketing services in a single-client agency sets a striking new precedent.

Removing media bias

While there is no ‘one size fits all’ solution, Aviva brand communications and marketing director Pete Markey sees advantages in the PRP model as it aligns both client and agency to the same objectives, helping to focus the mind and remove any bias in terms of media buying decision.

“If the teams are completely aligned then it could work, but that is always a challenge. The Omnicom/McDonald’s deal means the agency won’t be able to simply buy media that favours the agency, so it removes that bias.”

READ MORE: Mark Ritson – McDonald’s zero-margin Omnicom deal sets welcome precedents for agency contracts

Kerry Foods CMO April Adams-Redmond agrees that the PRP model can promote transparency in terms of media buying, where agreements can be “fuzzy” and marketers need to learn to ask the right questions.

“On the media side there is a requirement for transparency that we haven’t nailed yet and understanding the media costs is something we need to do more work on. Sometimes there can be an unintended bias for a certain channel as the agency might make higher margins to help meet the overall business objectives,” she says.

“Often clients change the agency without understanding the root cause only to find the same problem occur with a new agency. Often the root cause is on the client side [and comes down to] how they manage the agency.”

Creativity at risk?

While taking an integrated approach to appointing a media and creative agency can help bring clarity to the media buy, finding a yardstick to forensically measure the return on investment of channels such as social media or content is far harder.

“You could liken PRP to managing a football team. If the KPI is scoring goals then the team will only contain strikers and you will lose every match.”

Michael Moszynski, CEO, London Advertising

“I worry the [PRP model] removes the opportunity for test-and-learn,” Markey warns. “Who will take the risk to do [something] special on Instagram if it is hard to measure the result? Where does the creativity and innovation come in? This approach doesn’t favour the brave, it favours the safe.

“Ultimately this could take the edge off what you’re doing and overall lessen the tension in the client-agency relationship. I think there should be a healthy tension between client and agency, as it pushes the brand on.”

For CEO of London Advertising Michael Moszynski, PRP can represent a good element of the client-agency relationship, although there is a risk that if both sides fail to look beyond simply hitting KPIs, investment could be focused on tactics that deliver short-term, highly measurable results.

READ MORE: How to balance short-term impact with long-term results

“You could liken PRP to managing a football team. If the KPI is scoring goals then the team will only contain strikers and you will lose every match. If I use the analogy of digital communications where you can get real-time results, the tendency could be to put more investment into measurable metrics,” Moszynski adds.

“PRP is there to encourage the agency to align to the business objectives, which is positive. The negative could be if PRP is used as a tool by procurement to squeeze costs down, which could be demotivating and not get the best talent.”

Collaborating on KPIs

Addison Lee chief commercial officer Peter Boucher is an advocate of incorporating performance-related metrics. He believes the days of simply briefing an agency are gone, replaced instead by a much more collaborative approach, especially as marketing moves into social channels.

“So much of marketing is measurable and the idea that an agency is not tied to that is nonsense,” says Boucher. “There should always be a performance element, as it makes sure we get the best team at the agency to give them an extra lift.”

Despite being in favour of bringing an element of PRP to the agency relationship, Boucher argues KPIs should be set that tie directly to profit and loss, while also taking into account “softer metrics”.

“Brand marketing builds a halo effect, but it is hard to have a KPI to reflect brand equity growth. Successful brands like Apple and John Lewis seem to win from these intangible factors, so that is what an agency should still try to build up.”

“So much of marketing is measurable and the idea that an agency is not tied to that is nonsense.”

Peter Boucher, chief commercial officer, Addison Lee

The value of integration

UK CEO of MediaCom Josh Krichefski, argues that the decision by McDonald’s to opt for Omnicom holding company suggests integration is its number one priority.

“They want that arrangement under one roof and one point of contact, and simplicity is key to thatOther clients like to work with separate specialist agencies and be the person who is responsible for integrating all those elements. This means all groups need to have specialist expertise, so they are equipped if a client wants to work in that way,” he says.

“PRP can be a good thing as long as the commercial agreement is fair and agencies are remunerated. As an agency you have to be confident that you can deliver growth as long as the KPIs are things you can control,” he adds.

Placing the burden of integration onto the agency is positive from the brand point of view, says Kerry Foods’ April Adams-Redmond. “That is good for the client as the last thing they want to do is sort out friction between agencies.

“When it comes to PRP, as long as brand performance metrics are jointly agreed and aligned it can be an efficient way of working as the work being done really matters for the business.”

However, the model only works if metrics are set by the agency and client together, she adds, arguing that there is nothing to be gained by imposing objectives on an agency, as it will create a “toxic environment”. She also believes agencies should feel able to challenge the client and hold them to account without fear of losing the business, as this creates the best work.

This opinion is shared by Shann Biglione, chief strategy officer at Publicis Media Greater China. From a client perspective, he can see why having the right people working on the account is essential. “And if the holding company model helps facilitate this then great,” he says.

“One of the key desires from the client is to make sure they can get their agencies to integrate. Having integration on the agency side is beneficial, although that doesn’t mean it is going to work.”

Biglione believes that for the PRP model to succeed the objectives must be set together, while also giving the agency space to question the rationale.   

“This model cannot work without closeness and mutual respect between the two parties. There needs to be an understanding of the KPIs. If the agency has its eyes set on short-term KPIs, you don’t want them to be subservient in order to achieve certain metrics. It’s good to have partners who say what they think is right. That’s the best way to work.”

Closer relationships needed

Across the board, client and agency relationships are becoming closer and more collaborative.

Aviva’s Markey sees his agency partners as part of a wider ecosystem, having recently seconded an agency-side person for seven months to take on the role of marketing transformation within Aviva.

“I’m seeing more examples of people wanting to bring the agency closer, from secondments to getting them to sit in the business with you.”

Pete Markey, brand communications and marketing director, Aviva

“I view our agencies as an extension of the team. I like the model of working closely with agencies to get an understanding of each other’s businesses,” says Markey. “I’m seeing more examples of people wanting to bring the agency closer, from secondments to getting them to sit in the business with you. But you have to stay objective on both sides.”

From the agency perspective, MediaCom regularly seconds people to work for months at its clients’ offices or invites them to join their teams, in order to build up a greater level of understanding. “We enjoy really strong relationships and partnerships that are more open, trusting and collaborative. We make sure it feels like one team,” says Krichefski, who believes this helps forge longstanding relationships.

Publicis’s Biglione, however, warns that the CMO must resist the temptation to run the agency as part of their internal head count and appreciate that while a close, trusted working relationship is beneficial, agencies need to bring a point of difference to ensure both sides produce their best work.

Adams-Redmond  at Kerry Foods is pushing for change in the agency-client relationship to react to a need within marketing teams to become more dynamic and tap into a wider range of skills in order to keep pace with the market.

She suggests spending time with the agency to get to the root cause of what works and what doesn’t, which requires an “open dialogue” and feeling comfortable enough on both sides to challenge the status quo.

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