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Payment by Results 2

We speak to the author of Payment by Results 2 and Director of the Advertising Research Consortium, Professor Jonathan Lace

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What is Payment by Results? What is the report about?

Payment by Results (aka performance related incentive program (PRIP) or simply incentive compensation) is a method of agency remuneration (compensation) based on performance of measurable criteria that are mutually agreed. Typically it represents only part of the agency’s remuneration with the majority paid by fees of one sort or another.

An aim of PBR is to motivate and reward the agency based on the results it achieves or contributes to. A variety of measures are possible ranging from the performance of the advertiser’s brand in the market through measures of adverting, branding, marketing to the service performance of the agency on the account (agency evaluation).

Payment by Results 2 is a research report. It is rich in both qualitative and quantitative evidence on PBR gathered from a variety of sources. The report is intended as a resource for both advertisers and agencies – as a source of reassurance and ingenuity. The report also touches on some industry wide issues (e.g. whether PBR should be only offer the agency upside and whether PBR is largely divorced from analysis that demonstrates the contribution of advertising to business success found in the IPA’s Advertising Works series).

The report is not going to tell a particular client or agency exactly what to do for their situation – that’s impossible. However there is plenty of evidence – advice from people on the road if you like - on what others are doing and what they think the issues are and the prime considerations should be.

How does this report differ from your first report in 1999?

There are naturally some common features. Both reports have a review of the literature, interviews with agencies, example schemes and a review of the benefits and pitfalls of PBR. Of course the actual content in these chapters in the new report is new. The main difference now is the amount of data that we have available on PBR. In 1999 it was mainly UK data from our first Paying for Advertising survey. Now we have tracking data from four editions of the UK survey and from other countries including the US, Japan Germany and France.

This data has enabled us to explore the relationships between client situation (e.g. budget size, sector), scheme design and success to identify win/win outcomes. Besides being much richer in data and analysis the new report also presents client perspectives on PBR together with the views of the main trade bodies - the IPA and ISBA.

What are the most important trends the report reveals in the ten years since the first report was published?

The most obvious statistic is the growth in use of PBR in both creative and media agency agreements in western markets. In the UK for instance, PBR was present in just 20% of creative agreements in 1997. Ten years later this had risen to 56%. Ten years ago adoption of PBR was lead by the larger advertisers retaining larger agencies. Now we see PBR in use across the board – at smaller agencies and across client sectors. Not surprisingly PBR scheme design has also changed not least with more upside potential. Generally the trend is towards a greater sophistication in scheme design.

Why are more and more clients and agencies using PBR as a mechanism?

There are many reasons but the root of it is a greater desire amongst advertisers for agency accountability and transparency and ultimately value for money. Clearly the rise in marketing communications procurement people over the past decade has had an impact on management of the client/agency relationship not least in the scrutiny of expenditure.

PBR is one of the tools in the procurer’s armory. However PBR is not the sole preserve of procurement. It is also beneficial to marketers, helping to motivate and focus the agency and to create a partnership between client and agency based on mutually agreed goals. Ten years ago nearly one half of creative agency agreements were based (in whole or in part) on commission. As media was hived off from creative it was not surprising that advertisers asked why commission was relevant for creative agencies. Now use of commission is negligible, with fees, in one form or another, dominant. Whilst commission offered an incentive (the more advertising is placed, the higher the agency income) this was very much a flawed incentive for efficiency in advertising.

With fees there’s no inherent incentive, hence the rise in use of PBR. This rise was also undoubtedly helped by some forward thinking agencies keen to stand (and be paid on) their performance. In a highly competitive market PBR offered a source of differentiation and potential upside. Now there is also a much greater awareness and experience of the workings of PBR, helped by our own Paying for Advertising reports in the UK and overseas. The promise of PBR – a win for clients (i.e. greater marketplace success, a better agency service) and a win for agencies (i.e. higher pay, a more effective relationship) – is seductive. Whether that is achieved depends of course on scheme design and results achieved.

What advice or assistance does the report give to companies who might be feeling the impact of the current economic climate?

I’m a firm believer that marketing should not be turned on or off like a tap. It is fundamental to the success of a business in good times or bad. Clearly the situation facing UK marketers is demanding in a recession with, not least, unpredictable or reducing demand, pricing pressures (low interest rate impact on exchange rate) and inevitable budget cuts. Marketers in a recession want to be sure as possible that their brand communications are going to achieve results. They would want their budgets to work even harder – more effective and efficient advertising. They would want to know what’s working and what’s not and – as much as possible – to pay for success, not failure. Payment by Results is a natural part of that solution. It is of course down to individual clients and agencies to design a scheme and agree terms that suit their circumstances and are mutually beneficial. This new report is a useful resource in that endeavor.