“Fine in theory but flawed in execution”

The jury’s still out. Is it possible for ad agencies and their marketing clients to find a remuneration approach which may create risk, but also genuinely reward success? Can the classic “win-win” goal be attained with the adoption of a ‘bonus scheme’?

Since the slow death of commission and the rise of fees as a method of agency remuneration, agencies and clients have looked to find ways of rewarding success. After all, flat fees can be, well, flat, and do not incentivise agencies to develop effective advertising campaigns. An increasing number of marketing services contracts have a percentage of the agreed remuneration linked to performance. In the UK over 50 per cent of ad agencies’ deals have a bonus element and this is rising steadily. Referred to as PBR (payment by results), or performance-based remuneration, these schemes have an obvious appeal for marketing directors, but seem to find fewer fans from within the agency world.

Marketing will talk about “skin in the game”, “shared risk, shared reward” and a desire to find mechanisms that promote shared business objectives. Advertising chiefs, on the other hand, cynically tell tales of bonuses achieved but never paid as they were not budgeted for, of those introduced simply as a tactic to drive down fees, or of targets so unattainable that they disincentivised the agency’s effort instead of encouraging it.

So, not many schemes work in the way they are meant to. In time clients realise that what they hoped would be the outcome -- a focussed agency, motivated to work efficiently and effectively on their business -- does not materialise.

So what makes a good incentive scheme? What can both agencies and marketing companies work towards? Here are five tips:

1. Follow accepted practices. Most schemes tie the payments to three types of performance, and put an agreed percentage against each one:

Hard: What the company/brand has to achieve commercially. This means sales volume/value, market share.

Intermediate: What the communication has to deliver. Tracking study findings -- brand awareness, brand image, ad awareness.

Soft: How the agency has to behave. Agency performance evaluation.

Do not re-invent the wheel -- work within this frame. It is a framework more and more understood which means there are case histories, accepted ways of calculating and setting criteria. Put in place measures that will track the above criteria and ensure transparency in how they will be assessed.

2. Keep It Simple. It should be easily understood by all, not just the finance directors. For example, hit this target and you get x. Hit that and it is y. So, be clear and be specific. If you want improvements in research pre-test scores, tie a part of the bonus to this.

3. Be Flexible. If you are in a new relationship, in year one there will be little advertising affecting sales. Most of the year will be spent in strategic and creative development so ‘upweight’ agency performance criteria and ‘downweight’ other areas. Change the percentages each year to reflect the relationship and advertising lifecycle.

4. Make it attainable. Divide it into chunks of money and try to find ways of paying something at certain points throughout the year. For example, on time, on budget, on quality production of a key campaign gets an amount on successful delivery, not at yearend. All or nothing bonuses tend to be so “out there” that they are irrelevant to those working on the business. Also, this approach means both teams have to review the bonus throughout the year, which means it goes on working as it should. And keep to the spirit and not the letter of the bonus scheme. A client should not be a mean spirited scrooge when it comes to the final calculation of settlement.

5. Agree it upfront. I kept the most important tip until last. Sounds obvious but too many schemes are “set” by marketing, and the agency has only to accept -- no debate or discussion, no ability to genuinely agree and buy into the criteria. That’s hardly motivating. Other schemes I have come across are not agreed until the financial year is well underway. Seems mad as much of the benefit is lost.

Follow the above. Be prepared for some trial and error. Make the bonus pot big enough so it is worth trying for, it might just work!