Performance-based remuneration or payment by results (PBR) is an increasing component of many agency remuneration deals. But in most cases, agencies and clients will tell you it doesn’t actually work.
The concept of providing a bonus payment for achieving results or rewarding desired behaviour is very attractive and has great merit. But the problem is that PBR is rarely executed effectively to deliver the desired strategic outcomes. And this is usually due to the fundamental mistakes that are made when it is implemented.
Here are our top five:
1. The stick is bigger than the carrot
To encourage change or incentivise performance there has to be a carrot—and quite a sizable carrot at that. Too often we see performance bonuses that are really relatively small change in regards to the overall remuneration proposal. A very popular one from a procurement viewpoint was to have the agency sacrifice five percent of revenue for the opportunity to “earn” 10 percent back if they achieved the key performance indicators (KPIs). If your boss offered you the same deal would you jump at it? Firstly, why give up anything certain for something uncertain. And secondly is five percent really an incentive? After tax it’s more like three percent. So if you are talking performance bonuses make sure the carrot is big enough to be a significant incentive, otherwise everyone is wasting their time.
2. The bonus calculation is way too complex (or expensive)
Reviewing the agency remuneration of another client recently we noticed the contract had a PBR clause so we asked if this had been paid. In the three years of the contract no one had been able to calculate the PBR, for two reasons. Firstly, it had more than 12 different KPI measures and the person who designed it had left the company. And secondly, the cost of commissioning the research to provide the data required to calculate the PBR would cost more than double the value of the PBR payment. This ain’t rocket science. The KISS principle applies here. Look for the measures that are already in place and then choose no more than three relevant criteria that will align the agency rewards to your organisation’s objectives.
3. The objective is virtually unobtainable
We worked with a FMCG client who had proposed a sales growth bonus for the agency if the agency could achieve a 20 percent lift in revenue and the company achieved their double-digit objective. The agency pointed out that the sales objective was the same one the company had for the past three years and that they had never achieved it. So here is our next point. If you want the agency to align themselves to deliver your objectives, make them realistic. Of course, you can also have stretched objective or KPIs but if the bonus is realistically unachievable based on history and circumstances then it isn't really an incentive. The one way around this is making the result and payment continuous rather than a discreet ‘all or nothing’ deal. That is, if you achieve half the result, then half of the bonus is paid and so on.
4. The metrics are irrelevant to the business
This is a classic mistake which has really hit home during the GFC. Quite a number of PBR models are based on KPIs that are highly relevant to the marketing team and the agency but totally irrelevant to the business. So in a time of economic contraction where budgets and profits are in decline, many agencies were meeting the KPIs on relationship performance and brand metrics, whilst the company itself was facing falling sales, shrinking margins and smaller profits. Imagine how happy the chief financial officer was signing the “bonus” cheque for the agency and boosting the agency profits when the company’s bottom line was falling. Often marketers would want to suspend the PBR last year rather than rub salt into the financial wounds. At least some component of the bonus should relate to value generated. In a time when companies are still facing negative performance it’s a hard or brave business decision to justify supplier bonuses, no matter how well they “performed”.
5. A failure to link contribution and value creation to payment
Finally, both advertisers and agencies try to make the bonus payment linked to their contribution. Often agencies will shy away from sales and profit measures because they quite rightly say they do not control or influence all the steps and channels of the sales process, such as retail, call centres and sales teams. Likewise, clients with a major growth brand want to limit the agency bonus to what they see as the agency’s contribution.
In one case we saw an agency proposing to do all the communications work at cost and their profit to be linked to the profit of the new product launch. The idea was knocked on the head by procurement who said the agency could possibly earn more than 50 percent profit on their revenue but they were overlooking the fact that the company would make many times that in real terms, with the agency's share less than 0.5 percent. If you want to get alignment and partnership then you need to embrace risk but also not limit opportunity.
When PBR works well, it works very well at aligning the marketing team and the agencies to the overall business objectives. It’s just a pity that too many people try to protect their patch to let PBR work as well as it can for all involved.