When we ask our procurement members each year what challenges they feel deserve the greatest focus for the next 12 months, the No 1 answer for the past four years has been agency compensation.

Putting terminology to one side (some prefer to call it remuneration, because of the former’s connotation of financial “reward”, rather than the latter’s sense of paying back to cover a loss), it clearly is an area that many advertisers and agencies struggle with.

Recently The Coca-Cola Company shared their updated Value Based Compensation 3.0 model. Paying agencies for their performance is not new news, but the VBC model is a step beyond just rewarding agencies for their outputs in that it seeks to reward them for the relative value that their work has brought to Coca-Cola. This allows them to earn a bonus on top of their fee that can be as much as 30% of total income.

Despite the industry being almost unanimous in its advocacy for the need to reward agencies for performance, there are some who voice concerns that VBC is a complex model that requires agencies to invest additional resources simply to manage the metrics.

That requirement is deemed counter-productive to creativity, an oft-cited complaint from agencies against the trend from clients to focus ever more tightly on efficiency.

What VBC gets right, however, is the importance of clearly defining the ways that performance is going to be assessed. Good performance can be defined as a situation where an agency supplier adds value to an advertiser’s business by delivering against a set of metrics.

The metrics you choose to measure agency performance are therefore very important. If your agency performance metrics are wrong then the results won’t drive business performance, no matter how great the rewards on offer.

Performance, ultimately determined by advertisers’ business success, can be defined in many ways. As we have explored in the latest Global Agency Remuneration Trends 2014 report, it is not sufficient to rely on anecdotal or informal performance measures. Similarly, loading up all the things that can be measured and calling them metrics creates unnecessary complexity.

Reaching agreement on the right metrics will improve both short-term business performance and the long-term productivity of the relationship you have with an agency.

WFA members tend to use three different types of metrics: soft, medium and hard, the former assesses the way the agency works with the client, the medium measures assess their ability to influence their area of specialism, e.g. efficient media buying, while the latter is directly tied to sales or market share.

WFA members most often focus on the softer metrics around agency account management. “Agency service delivery” is the most popular metric used, and has an average weighting of 18% of the total performance component.

Medium metrics like “brand image shifts” or “ad awareness” tend to be the least frequently used metrics, but their average weighting is amongst the highest. This is because of the slightly specialist nature of many of these measures. “Ad scores” is one example where, when it is used with creative agencies, has an average weighting of 26% of the total performance incentive. This highlights the overall trend for up-weighting the specialist metrics according to the type of agency.

Harder metrics like “sales volume” or “volume growth” are less popular, and when used have slightly lower average weightings of 11% and 15% respectively.

Some clients use up to as many as 17 different metrics within a performance component, while others use as few as five. What all this points to is confusion within the area of what clients should be measuring and how they should do it.

Best practice is for a client to link the agency bonus with its own key business performance indicators (i.e. market share). The idea being that aligning agencies to your company objectives can only bring them closer to your business, which is where they need to be to do their best work.

However, many WFA members have voiced concerns that not all agencies are willing to put skin in the game and agree to be measured on another company’s share price / market share / sales targets in today’s precarious economy.

This is understandable, and is partly where some of the tension in the remuneration discussion creeps in, as both sides want to have a system that works, is easy to understand and doesn’t create additional financial risk.

The prevalence of dashboards, measurement tools and data, coupled with the exponential increase in media consumption means measuring marketing ROI is trickier than ever. Without stating the obvious, WFA has encouraged members to ask their agencies what they want to be measured on and make sure they are fully bought-in so that both sides feel aligned.

If you believe that using a variable pricing model to pay for agency resource is appropriate for your business (compared to paying a fixed price such as a fee for a given deliverable or a fixed commission) then the variable element of that model must include some assessment of an agency’s performance.

The challenge for the marketer is to ensure all your agencies are performing to their best ability and are aligned properly with your business’s success metrics.

Once both sides agree on that last aspect then the discussions about which compensation or remuneration model become moot; so long as it is rewarding the outcomes rather than the outputs.

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