Reasons why performance based agency fees or payment by results often fail

When assessing, reassessing or creating new agency contracts, many marketers ask about structuring some pay-for-performance terms as part of their agency agreement. While the concept of Performance-based remuneration or payment by results (PBR) is a component of many agency remuneration deals, the fact is that in most cases, both the agency and the client will tell you that it does not work.

Providing a bonus payment for achieving results or rewarding desired behaviour is very attractive and has great merit. The problem is that it is rarely executed effectively enough to deliver the strategic outcome.

Here, we provide the questions marketers and their finance teams should ask before implementing a performance-based fee model and share many of the most common issues and mistakes made when implementing PBR agreements.

Questions to consider

In our experience, there are typically six key questions marketers and their finance teams should ask:

1. Do you have executive-level support?

Performance-based fees are a commitment from your organisation to do just that – pay for an agreed level or standard of performance across a number of pre-defined metrics. Generally speaking, other executive functions will want to know, understand and agree on those metrics – even if it’s only as far as the CFO. You don’t want your CFO (or anyone else) baulking at terms after agreeing.

2. Do you have the budget?

Any marketer entering a pay-for-performance agreement needs to be prepared to pay for the maximum upside contemplated in an agreement. A sufficient budget needs to be set aside if your agency(s) exceed expectations so that you can pay them within the specified period. In some cases, it can require financing the performance payments from other sources, such as GOGS, to maximise the budget investment.

3. Can you define meaningful and measurable metrics?

We address this in more detail below. But most pay-for-performance terms stand or fall on marketers and their agencies being able to agree on specific, measurable and meaningful metrics that can be clearly tied to the performance of the agencies concerned. Marketers must consider the mix of agency behaviours, marketing activity developed by their agencies and tangible business results tied to those activities.

4. Do you have a robust evaluation system?

Any pay-for-performance needs to be based on a predefined and formalised evaluation process. Your agencies will want to know how they will be measured and when their evaluations will take place. It is also important the measurement and evaluations can be completed in a timely and cost effective manner.

5. Can you share your results with the agency?

Particularly business results. Because performance metrics will often have a measure of marketing or business results tied to them – whether it be sales, conversion, website engagement or redemption, which can be commercially sensitive, you and your executive team need to be ready, willing and able to share those results with your agency(s) openly and answer any questions that may arise in the spirit of complete transparency.

6. Are you committed to the long term?

Pay-for-performance agreements are not a short-term fix. Marketers must be prepared to stick with it. In a scenario where you’re paying out on year one, for example, this shouldn’t have you running for the hills and tearing up the agreement. Agreements worked best when fine-tuned year over year and performance weighed against previous years’ results.


Common mistakes and issues

If you are committed to implementing a pay-by-performance or have a performance-based fee model that is under performing, here are some of the issues to avoid or address.

1. The stick is bigger than the carrot

There must be a carrot and a sizeable carrot to encourage change or incentivise performance. Too often, we see performance bonuses that are relatively small regarding the overall remuneration proposal.

A very popular one from a procurement viewpoint is to have the agency sacrifice 5% of revenue for the opportunity to “earn” 5% back, plus the possibility of a 5% “upside” if they achieve the KPIs. If your boss offered the same deal, would you jump at it? Firstly, why give up anything certain for the uncertain? And secondly, is 5% much of an incentive? After-tax, it is more like 3%.

So if you are taking a performance bonus, ensure the carrot is big enough to be a significant incentive. Otherwise, everyone is wasting their time.

Worse still, there is no carrot, just an “at risk” amount, which only makes the whole arrangement punitive.

2. The objective is virtually unobtainable

We were working with an FMCG who proposed a sales growth bonus for the agency where they could achieve a 20% lift in remuneration if the company achieved their double-digit objective. We stupidly forgot to ask how this objective was achievable, but the agency pointed out that the sales objective was the same one the company had for the past 3 years and had never achieved.

So here is the next point: if you want the agency to align itself to deliver your objective, make it one with a realistic chance of achieving it. Of course, you can also have a stretch objective, but if the only bonus is realistically unachievable based on history and circumstances, then it is not an incentive.

The one way around this is marking the result and payment continuous rather than a discreet all-or-nothing. If you achieve half the result, half of the bonus is paid.

3. The calculation is way too complex (or too expensive)

Reviewing the agency remuneration of another client, we noticed the contract had a PBR clause and asked if this had been paid. In the 3 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. Secondly, it was realised that 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 is not rocket science. The KISS principle applies here: Look for the measures that are already in place and then choose no more than 3 relevant criteria that will align the agency rewards to the organisational or corporate objectives.

4. The metrics are irrelevant to the business

This is a classic mistake; quite a number of PBR models are based on KPIs highly relevant to the marketing team and the agency but totally irrelevant to the business.

So even in a time of economic contraction, for example, when budgets and profits are in decline, many agencies still meet the KPIs on relationship performance and brand metrics, while the advertiser itself faces falling sales, shrinking margins and smaller profits. Imagine how happy the CFO was signing the “bonus” cheque for the agency, boosting agency profits, when their company’s bottom line was flailing.

At least some component of the bonus should relate to the value generated. When a company faces negative performance, it is hard to justify paying a supplier bonus, no matter how well they “performed”. A well-constructed PBR should reward the agency handsomely when the advertiser performs, less so when they’re not.

5. Linking contribution and value creation to payment

Finally, advertisers and agencies try to make the bonus payment linked to their contributions. Often, agencies will shy away from sales and profit measures because they 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 the agency proposed doing 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, hung up on the possibility the agency could earn more than 50% profit on their revenue. But they overlooked that the company would make many times that in real terms, with the agencies sharing less than 0.5%. Moreover, if the new product didn’t perform, the agency would only be paid the bare minimum, reducing the advertiser’s risk.

If you want alignment and partnership, you must embrace risk and not limit opportunity.


If paying performance fees is something you’re contemplating now or in future agreements, consider whether your organisation is ready and how you’ll manage internal and agency expectations. Or, if your current performance-based fee model is underperforming, please contact us to discuss.

When PBR works well, it aligns the marketing team and the agencies to the overall corporate objectives. You can read about our approach to agency fee models, including performance-based fees, as part of our ‘Agency Commercial Evaluation Services‘.