How to incentivise collaborative agency behaviour with performance based remuneration

There has been much industry talk and discussion over the years on how to encourage agencies to work collaboratively with each other. It is a topic that we have been discussing and sharing with our clients for the past ten years. Our Evalu8ing system was developed to measure and manage collaboration between teams. And we have spoken many times on this subject around the world.

One of the key issues in creating a collaborative working environment is implementing a remuneration model that encourages collaboration rather than most models, which encourage competition. Trust is an essential ingredient in collaborative relationships and if agencies are set up to compete for a share of your marketing budget, then this undermines trust.

But let us share with you a technique, which has successfully created a collaborative environment between agencies using a performance-based remuneration model that aligns all of the agencies involved to a common goal.

Step 1: Decide on the most important and valuable objectives to the brand or business

The biggest mistake most marketers make is creating different performance metrics for each agency. It is impossible for agencies to align if they have different performance criteria. For example, if you are incentivising media agencies on media price, this could work counter to the creative agency being incentivised on innovation.

If you want collaboration between your agencies then they should share common objectives and therefore the best objectives are the ones that are of value to the brand and the business. We are talking about marketing metrics and financial objectives.

One of the best approaches we have used previously is to take the marketing director’s KPIs or the KPIs of the marketing leadership team. Eliminating the human resource metrics we were left with marketing and business metrics including Brand Health tracking, Brand Value calculations, Wholesale Volume, Market Share and Revenue. The best part here is that you are aligning the agencies to marketing and marketing to the business.

Step 2: Select the agencies that have the most influence on the delivery of those objectives

This approach is not to be applied across the whole roster, but just those agencies that have the most opportunity to contribute to achieving the objectives. This will of course depend on the strategic requirements of the marketing plan. It is the same approach we use in our strategic supplier alignment process to categorise the strategic agencies from the specialists and the generalists.

Basically it is looking at the objectives you have set and then reviewing the agencies and suppliers that are best placed to influence and implement the marketing and communications strategy. Typically this will be somewhere between one (no collaboration needed) and a maximum of five agencies (lots of collaboration needed).

Is it media driven or content centred? Is it awareness or engagement? While no one organisation or person has control over the market or even the effectiveness of the strategy, it is important to select those agencies that have the most to contribute. It is not about control, but rewarding contribution.

Step 3: Calculate the pool value based on the value of the objectives

The problem with most agency bonuses is they are paid out of the marketing budget. If the bonus is not paid it means the funds allocated to paying the bonus are often lost and returned to revenue.

The fact the agency bonuses are paid out of the marketing budget is a limitation to the size and effectiveness of the bonus to change behaviour and drive performance. After all, if it came to a choice, most marketers would prefer to pay the agency to do something rather than pay them for results. This is why currently, performance based models have failed because the bonus is set as low as 5% or at best 10% of the agency fees.

The purpose of the pool is to be able to fund the size of the pool based on the results against the marketing and business objectives. The pool can be capped at the top and bottom, but it needs to be able to grow and shrink based on the results achieved.

One way around the funding issue is linking the bonus payment to financial performance, and funding the bonus pool for the agency out of Cost of Goods Sold (COGS). Or, even more achievable is to embrace a Zero Based Budgeting method linking the cost of the agency services to the ROI or ROMI.

The size of the pool should not be linked to the fees paid, but instead should reflect the contribution the participating agencies make to the value protected, created or realised by the brand or business. A good starting point is to consider the company’s internal rate of return (IRR).

Step 4: Apportion the pool across the selected agencies

As just mentioned, traditionally the bonus has been linked to being a percentage of the fees paid to the agency. This is flawed as it acts as an incentive to try and secure a larger portion of the marketer’s budget as a way of being eligible for a larger performance bonus.

Instead we divide the pool equally across the agencies selected as strategic contributors. No matter how much is being paid in fees to each agency, they are all eligible to earn an equal share in the bonus pool and the size of the pool is based on shared marketing and business results.

In this way participating agencies could advise not based on earning revenue from providing the services the agency offers, but by making strategic recommendations based on growing the pool. I have personally seen agencies fighting over budget allocations to their particular skill-set as a way of maximising revenue and therefore maximising their share of the bonus.

Step 5: Measure the performance against the objectives on a regular basis

The evidence is clear that people respond to immediate performance feedback. Therefore in considering the objectives and their measurement, you want to choose metrics that can be monitored on a regular basis and not annually. Daily, weekly and monthly metrics are important and the immediacy provides a focus for the participants.

Remember these metrics will dictate the size of the pool and the agencies will be focused on growing the pool and maximising the size. One marketing team commented that it was refreshing under this system that all of the agencies would start the meeting discussing the marketing and business metrics that the marketing team were incentivised on and would then assess their collective recommendations against their ability to move those metrics in the right direction.

Of course, adjusting the pool size is a regular process; the actual reconciliation and payment can occur on either a quarterly, half yearly or annual basis. The most popular and effective timing is six monthly.

Step 6: Measure the collaborative contribution of each of the agencies

I mentioned earlier that each agency is eligible to an equal share of the pool. Once the pool size is determined, each of the participating agencies has contributed to the pool result. But there is one more measure and that is their level of collaboration.

The more they have contributed, the more they maintain their share. The less they have collaborated, the more they lose of their share of the pool, which is shared with the other agencies.

The method we use is the Evalu8ing system, which allows the marketer and the participating agencies to evaluate each other against a common set of criteria providing a holistic evaluation of each party’s collaborative contribution. Those with a higher score share in a proportionally higher share of the pool and those with a lower score get less, based on the evaluation of all participating parties.

Our experience is that agencies that try and command and control the others score badly, while those that genuinely collaborate and work together will maintain their share. This ultimately acts as the driver for collaboration.

Step 7: Adjust and pay the pool to the agencies based on the results

While the pool calculation occurs on a weekly or monthly basis, we undertake an Evalu8ing survey of the agencies and the marketing team every six months and use the scores from Evalu8ing to calculate each agency’s share.

The pool aligns the agencies to the shared objectives and the regular measurement and calculation keeps the agencies focused on delivering and maximising the results. The half yearly Evalu8ing survey keeps the agencies focused on their collaborative behaviour and their shared contribution as a collective group to the results.

The process, the results and the calculations are all open and shared with all of the agencies to support trust.

It is not easy but it works.

This process has been very effective in achieving two specific outcomes that are problematic for many advertisers:

1.    Have all of the agencies aligned and focused on achieving results

2.    Work collaboratively to contribute the most effective results

There have also been times when we have failed in this process, usually because either the marketers or the agencies were not ready for this approach. It requires a developed corporate maturity and a high level of trust between the CFO, CMO and the agency CEOs.

But for those that think they are ready, we are ready to discuss how to make it happen for you.

TrinityP3’s Agency Remuneration and Negotiation service ensures that the way in which you pay your agency is optimal.

Why do you need this service? Read on to understand more