Slow Growth In Pay-For-Performance Compensation

With marketers looking for greater ROI from their investments in advertising, pay-for-performance agency compensation has been a hot-button industry topic for several years. But according to a new survey from the World Federation of Advertisers, there appears to be more talk than action when it comes to implementing performance-related clauses in client-agency contracts.

The survey reports that just 11% of respondents now feature performance-based elements in their contracts, although that’s up from 7% in 2011. However, an additional 37% of those surveyed said they planned to implement performance incentives and 36% said they wanted to “explore” value-based compensation. Two-thirds said they wanted to link agency income more closely to their own performance.

The WFA commissioned global media management consultancy ID Comms to help with the survey, which polled 43 member companies operating in 12 different regions and representing more than $100 billion in annual ad spend. 

“This research reveals how the world’s biggest advertisers and agencies are working hard to build new relationships that move away from commissions and give their agency partners a reward for the success they help generate,” said Stephen Loerke, the WFA’s managing director. 

The research found that across all agencies and regions, labor-based fees (calculated by the hour or as a percentage of personnel time) remains the most popular remuneration model, which is used about 50% of the time, a drop of 6 percentage points from 2011.

About 12% of contracts are commission-based, about the same as three years ago. However, Asian advertisers remain outside the norm in the use of commission models—30% of them use a fixed-rate commission to pay their agencies. 

According to the survey, the percentage of contracts negotiated by procurement departments crossed the 50% threshold for the first time (51% versus 43% three years ago), while the percentage of contracts negotiated by marketing departments dropped from 26% to 20%. 

For the first time, the survey, which the WFA last did in 2011, asked respondents about specific measures of performance being used to compensate agencies. 

Frequently used business performance metrics for creative agencies are sales volume and market/brand share. For media agencies, preferred business metrics include buying targets and composite performance scores. The benchmarks for those scores can vary. For example, for TV, a composite performance score might combine reach, targeting, programming goals, break placement or quality and other possible metrics into one score.   

Digital agency performance is often evaluated on the basis of sales volume, per the survey.

Ad performance metrics are also used to help shape performance pay. For creative shops, preferred ad performance metrics include ad awareness, brand image shifts and predisposition to buy. Ad awareness is commonly used for media agencies.

More on the survey can be found here.

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