Developing a Taste for Incentive-Based Agency Compensation

June 2, 2020 | Lorraine Stewart

They are Good for You!

Performance-based Agency Compensation Programs are like carrots, healthy for you, but polarizing.  You either like them or you pass on them. The better prepared they are, however, the more likely they will be palatable for advertiser and agency alike.

Back On the Menu

Marketing expenses and agency fees are under great scrutiny. Having an updated performance-based agency compensation agreement can go a long way to ensure marketing accountability, transparency and team collaboration. The topic is sure to resonate with C-Suite leaders seeking to reduce expenses, stabilize teams and determine innovative solutions for brand recovery. Most execs participate in variable pay as a component of their own compensation and are acutely aware of achieving KPIs.

Advertising agencies now facing budget cuts from long-standing clients can proactively create new incentive-based performance programs to recover fee revenue; doing so may off-set loss resulting from factors beyond their control. Agencies can be rewarded for their contributions to brand marketing and sales success. 

The ANA reports that over 82% of companies’ regular review the performance of their marketing and advertising agencies. Models for rewarding positive performance financially however, vary in complexity and in stickiness. A well-designed performance-based compensation program will not only contribute to a culture of collaboration and accountability but reveal continuous improvement opportunities for client- agency team performance. Incentives align client and agency teams with laser focus on the most important goals in times of change.

Easier said than Done?

Here are our insights and proven strategies to design a fresh incentive-based agency compensation program that will impact team performance and improve marketing outcomes.

Mise en Place

Start with a discussion of the purpose of the incentive compensation model among key decision-makers. Affirming the business relationship goes a long way in figuring out how to weather short-term storms together. A shared understanding of the client’s value creation indicators will inform related decisions on what are the most important markers to measure.

The ANA advises clients that “Executive level client and agency management should discuss strategies for aligning the agency’s and client economic interests.”

Following agreement to program intent and strategic objectives, successful incentive comp models are anchored by a set of SMART goals. These statements provide the marching orders for client-agency efforts. Goals that are truly measurable will require an audit of available data that the parties can agree will serve as the basis of reviewing and reporting progress over time.

Hundreds of options for marketing, advertising and media KPI’s exist. Clients favor business and brand metrics while agency partners favor service quality and advertising data metrics that they most closely control. A program with a mix of 50/50 measurable metrics each party identifies as important creates shared ownership and buy-in to the changes an incentive compensation-based system will likely require.

In addition to the overall design of the comp system and SMART goal setting, clients will need to plan financial scenarios; they will need to adjust budgets and accrue funds to be in a position to distribute earned compensation and reward positive performance for full or partial achievement of specific performance goals.  

Bite-Size Servings

We advise client companies to pilot new incentive-based compensation program for a period of time before formal activation; this provides the opportunity for marketing leaders to solicit team feedback, make process adjustments and refine the economic modeling associated with the potential pay-outs. It can also reveal what additional or better sources of data should be captured to measure impacts and define success.

A trial period without financial implication for the agency will increase confidence that the eventual launch of the incentive-based compensation model will work. During this practice period the agency team has the opportunity to adjust their ways of working to align with the SMART goals the client organization highly values.

Appetites Vary

It’s not too hard to agree to a conceptual model of shared opportunity, but applying the economics can pose problems. For those starting afresh with incentive-based comp programs, one strategy is to plan for equal parts of at risk, or earned compensation, tied to achieving agreed-upon goals, commensurate with an upside bonus potential for exceeding stretch goals. This balance reflects the spirit of partnership that characterizes healthy creative and media agency partnerships, even during recessionary times.

Of note, some clients prorate goal achievement and compensation across all measures, while others prefer weighting some goals with higher values than others.

KPIs vary considerably by vertical industry but most can be represented in goal statements designed to identify the top priorities. Working remotely has put a focus on emerging performance measures; efficient personnel hour utilization and flexible staffing models, cost controls and near term digital performance indicators.  Examples of short-term reward incentives include scope or project-based bonuses, retention bonuses, or team/small group focused incentives.

Sometimes third party data resources like media audits, or tools like Net Promoter Scores, provide additive sources of measurement data that can be incorporated into agency performance programs.

Periodic client-agency evaluations are critical tools to efficient marketing supplier and agency resource management. These performance evaluations can happen in full, with overall scores or selective measures pulled into in the incentive comp model. In other words, the one does not replace the other.

Rooted

Confidence in an incentive-based agency compensation system increases when the agreed-upon terms are formally captured and well-defined in legal agreements with agency partners. To be efficient, this understanding is most easily executed as a stand-alone Addendum to the MSA. Any form of the contractual agreement should specify the verification process for performance assessment and pay out calculations.

After goal-setting is completed and contracts updated, client-agency teams will benefit from a visual Performance Scorecard that captures the KPIs to track. These tools can be updated and used to communicate with clarity across cross functional teams.

The best carrot recipes I enjoy include a dose of brown sugar! Don’t forget to include a fun celebration to sweeten the reward and celebrate the client-agency team effort; it’s equally important to thank people who come together and do the hard work required for success in marketing today.

You Can Do It

Did you know one carrot gives you enough energy to walk a mile?

Compensation is a critical cornerstone of effective business practices. If moving to incentive-based compensation programs with your marketing and advertising agencies seems challenging, contact ROJEK Consulting. As leading industry experts and trusted advisors, we offer the experience, tools and insights to help leaders find and engage their best advertising industry and agency resources and get the marketer’s job done.

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