CINCINNATI: Paying agencies based on their performance will improve accountability and generously reward the best ideas, according to Procter & Gamble and Coca-Cola, two advertisers which have championed this approach.
It has been argued that focusing too strictly on accountability during the downturn could actually have negative consequences for brands, despite the apparent advantages of such a strategy.
At the beginning of July this year, Procter & Gamble, the world's biggest advertiser, transferred a number of its products – which were responsible for delivering 40% of its total revenues – to its new Brand Agency Leader model.
This means the company now hires one agency to head up the marketing efforts for a specific brand, including appointing and invoicing other shops for duties such as PR and consumer research.
It is estimated that more than 10% of agency billings are now dependent on campaign success, which is assessed over a full fiscal year, based on an analysis of areas like sales and market share data.
P&G, which spends over $8 billion (€5.6bn; £4.9bn) on marketing a year worldwide, intends to use the BAL remuneration structure to cover assets providing 70% of its revenues by the end of 2009.
According to the company's finance director, Rich DelCore, the FMCG giant's agencies are "more accountable now. It's about total consumer engagement and brand building."
Coca-Cola has also announced an intention to adopt a similar style of payment in all of its markets by 2011, having rolled it out in 35 countries thus far.
The beverage maker now pays an initial fee to its agencies based on a valuation of the contract they have been awarded, a figure that could ultimately be "topped up" by as much as 30% where results surpass expectations.
Sarah Armstrong, Coca-Cola's director of worldwide media and communications operations, argued "the amount of labor or time should not define the value of the work."
"We didn't go into this to cut our agency fees. We wanted to ensure we were compensating fairly for work," Armstrong added.
"I know our agencies would prefer to stay with the labor-based model, but having said that, we are putting in a new model that requires change and getting used to a new way to work with Coke."
Should it be based on "whether a team showed interest, and if I'm pleased with your performance, then you find by and large that doesn't get paid," he argued.
Alexander Wisch, an analyst at Standard & Poor's, said the emphasis on this form of relationship was a direct result of the recession, and is "harmful for the ad agencies, and they are very much against it."
He estimated that, in the short-term, a move towards variable forms of remuneration would lead to a 0.5% decline in revenues, amounting to a loss of $220m for the top five holding companies combined based on current sales.
However, Jeff Hicks, ceo of Data sourced from Bloomberg; additional content by WARC staff