Five reasons agency compensation should not be relationship based

Don’t get me wrong, measuring and managing a high quality relationship is important between agencies and marketers. But at the ANA Marketing Financial Management Conference last week in Phoenix, Arizona, there was a presentation by Sarah Armstrong from Coca Cola on Value Based Agency Compensation.

In this Sarah presented that one of the four measures used for determining the agency incentive is a relationship / performance score card. This is the same approach we have been promoting with our clients with a system that uses Soft, Medium and Hard criteria. (See below for more details on this)

Our experience is that the linking of the performance score card or relationship survey to the agency financial incentive or bonus is that it can have little or no effect or in the worse case scenario a negative effect.

1. Focus on the score not the cause: The use of a score card system or the relationship measure will have the agencies obsessing about what the score is more so than what is the underlying cause of the change in score. This is often because many systems will provide a score with little or no commentary to help identify the root cause. Likewise marketers will often feel more comfortable giving a score that providing what can be confronting feedback or criticism.

2. The criteria and metrics can drive unwanted behaviour: We have seen score cards and questions that focus on creating a smooth, non-confronting relationship. In doing so the process is actually making the agency compliant to the marketers requests rather than encouraging the agency to challenge the thinking. The ideal strategic partner is one that provides an alternative view and strategic insight, while a supplier is simply one that provides what is requested without question.

3. The metric becomes the end not the means to relationship management: It sometimes appears that relationship and performance measures were linked to incentives and bonuses to make them more meaningful. And certainly the agencies have a high motivation to get the score, but unless the process is seen as valuable in its own right then the score and the incentive become the end of the process rather than the beginning of the discussions to foster improved relationships and working practices.

4. Leads to a focus on the scoring methodology and not the outcome: We have seen agencies waste hours questioning and pulling apart the methodology because they have a motivation to maximise the score rather than focusing on the process of improvement. All of these systems are subjective because you are dealing with perceptions from multiple individuals. In regards to the methodology, apart from the fatal flaw of self assessment used in many system, it is more important to use these systems to set the agenda of relationship management and improvement.

5. Both agencies and marketers reap the benefits of successful, functional relationships: Time again the benefits or creating and managing highly productive and successful relationships have been demonstrated for both the marketer in greater output and productivity and the agency in longer term, stable more rewarding engagement. Therefore why do we feel the need to provide a financial incentive on top of the inherent benefit?

Since dropping the recommendation of including a relationship metric in the agency incentive we have seen many marketers and agencies argue for its inclusion, not because of an inherent benefit, but because they cannot agree on a suitable medium or hard metric.

It appears to be a much softer, easier, subjective default metrics than one of the more objective, relevant and accountable marketing or business metrics.

What has been your experience?

Business Performance (Hard)

Examples include: sales, traffic, profit, market share, volume growth, etc. These can be measured by the same criteria that the advertiser uses for their internal bonus systems.

Agency often claims that business results may not be within their ‘span of control’ as many factors besides advertising can affect business outcomes.

Advertising Performance (Medium)

Examples include: product awareness, ad awareness measures, consumer measures, attitude ratings, persuasion, purchase intent, awards, brand equity, image, effectiveness awards, etc.

This kind of performance assessment is vulnerable to research technique, statistical anomalies and discussions of creative ‘philosophy’.

Agency Performance (Soft)

Relates to the evaluation of agency functional areas: account services, creative and media in terms of: performance, service, relationship, cost efficiencies, etc.

This is highly subjective and may be affected by ‘entertainment’ on the upside and personality problems on the downside.