Payment by results: The 25-year debate that rumbles on
Opinion
While many would say the current remuneration model isn’t fit for purpose, we can’t seem to agree on what that ‘purpose’ is.
Payment by results is on the way, says Isba
Payment by results (PBR) will form part of 75% of advertising agency contracts within five years.
The PBR system in the UK is growing by 28% a year for media agreements.
You could be forgiven for thinking this was a response to the recent survey of British advertisers in which most of them said they wanted to move to more results-based remuneration and that current agency compensation models aren’t fit for purpose.
But it is actually an excerpt from an article in Marketing Week from 21 October 1999!
So it would appear that, 25 years on, the predicted prevalence of PBR didn’t quite materialise.
Fit for… what purpose?
As it still remains something that advertisers want, how come things haven’t moved forward?
After all, PBR is pretty logical. The agency is there to drive business success for the advertiser and so why shouldn’t the agency have some “skin in the game” if things don’t go well, or enjoy the spoils if they do?
Most agency leaders I know would agree that the current system is not fit for purpose, but for them the purpose is trying to employ the right talent and tools to do a good job while hopefully making a reasonable profit to invest in their business.
Until everyone is aligned on that, we are not going to resolve this equitably.
Defining bonus
In reality, most large sophisticated advertiser/agency remuneration models do probably include some mix of fixed (fee) and flexible (usually commission) remuneration, alongside some form of performance bonus (although whether it represents a true bonus is up for debate).
More importantly, as commentators go on to note, these bonuses are usually only based on some quantifiable inputs such as media price and quality, and often some intangibles such as service levels as judged by the advertiser.
However, it is not completely unheard of for an element of the bonus to be based on outcomes — ie. business results — but it remains rare and usually the dusting on the cherry on the icing on the cake.
One large client contract with an agency I worked for had a small proportion of the “bonus” based on the advertiser CEO’s performance bonus. If that person earned 100% of their bonus, then things must have been going well and the agency must deserve theirs too. Elegant but, at the level it was, almost a bit of fun and lip service.
Why PBR isn’t more prevalent
So how do we move this forward?
There are several very good material reasons why agencies’ remuneration is not already more often, and at a greater scale, linked to business results.
First, the vast amount of variables affecting business results are largely out of the agency’s control. Not least the ads themselves, but also market dynamics, competitors, macroeconomics, the weather etc.
These aren’t excuses; they are fundamental business realities, quantified and known in many businesses, and accurately modelled by a reasonable econometric multi-variant regression analysis.
Secondly, the business “result” might not happen today, this month or even this year.
Without getting into the great work of Les Binet and Peter Field, among others, purchase cycles on many products are enormously long and the effect of communication can last for years.
Would an advertiser be happy to pay an agency in five years’ time for a sale attributed to a campaign that ran in the distant past? Unlikely. Therefore this route would surely encourage even more short-term performance-based thinking than we already have. And no-one needs that.
Finally — and here’s the crunchy one — no advertiser business is able to write an open cheque.
What if the business doubles or triples, potentially opening up a huge bonus? Great in theory, but nobody likes a big bill even if things are going well and the chief financial officer will tell you that any potential PBR has to be accounted for as a liability on the balance sheet.
These are fundamental accounting issues that aren’t in the gift of the agency or the advertiser chief marketing officer to rewrite.
Moving the debate forward
No agency should be pushed to put their business continuity at risk for any upside, however attractive, which is affected by a vast amount of external factors. No marketer should find themselves exposed to a large retrospective bill that they would struggle to explain to their finance department.
But, at the right level, with the right parameters and, most important, with everyone’s “purpose” aligned, there is no reason to think that PBR can’t increase in the future.
I am always happy to offer unbiased and objective advice to any advertiser, agency, intermediary or industry body trying to unravel this conundrum for the long-term good of our industry.
So let’s get this debate on a sensible footing and then hopefully no-one will have to write the same article in 25 years’ time.
Danny Donovan is CEO of Build Media