Performance and Value Based Remuneration for advertising agencies

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marketing management consultants Performance & Value Based Remuneration for advertising agencies TrinityP3 Pty Ltd 2013 © Copyright 2013

Transcript of Performance and Value Based Remuneration for advertising agencies

Page 1: Performance and Value Based Remuneration for advertising agencies

marketing management consultants

Performance & Value Based Remuneration ���

for advertising agencies

TrinityP3 Pty Ltd

2013

© Copyright 2013

Page 2: Performance and Value Based Remuneration for advertising agencies

marketing management consultants

What is Performance Based Remuneration?

•  This is when some or all of the agency remuneration is paid based on one of more pre-agreed performance metrics.

•  These metrics usually fall into one of three categories:

1. Soft – relationship or service scores

2. Medium – marketing or brand metrics

3. Hard – financial or value based measures

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What is Value Based Remuneration?

•  This is when agency remuneration moves away from a cost base (retainer and hourly rates) or spend (commissions and mark ups) to being based on a determination of value.

•  These value measures usually fall into one of two categories:

1. Outputs – This is where a price or value is placed and agreed on delivering a specific output.

2. Outcomes – This is where the agency is paid a fee linked to the value created.

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marketing management consultants

How does PBR work?

•  Usually some or all of the agency profit margin is put ‘at risk’ with the opportunity for the agency to earn this, plus more, back based on the performance criteria.

•  Eg. Agency ‘risks’ 10% of profit for the opportunity to earn 20% back.

•  The performance criteria is weighted based on the perception of the agency’s ability to influence the outcome.

•  Eg. Relationship 40%, Marketing Metrics 40%, Financial 20%.

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marketing management consultants

How does VBR work?

•  This is where a price is set for the delivery of a specific output by the agency based on the value the marketer places on that output.

•  Eg. A fixed, agreed fee for the agency to produce a website, an advertising concept or a print advertisement.

•  Or the agency is paid a fee based on the contribution to creating measurable value for the brand or business.

•  Eg. A fee per lead or sale, fee linked to market share or sales volume.

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When should you use PBR?

•  PBR can be used for almost any agency or marketing supplier relationship.

•  The requirement is to identify some aspect of the agency’s performance that is critical to success and create measurable criteria.

•  Eg. Media buying efficiencies, On-time, on budget performance.

•  Ideally this would be tracked either continuously or at regular intervals (monthly, quarterly etc) with feedback to the agency.

•  Objectives for delivering the bonus should be reasonably achievable to act as an incentive.

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When should you use VBR?

•  VBR can be used either when the agency is providing specific tasks or deliverables which can be ‘valued’ and priced, (Value Pricing).

•  Eg. Campaign or project work.

•  Or when the agency has a significant input to the strategic direction and there is a reasonable correlation between the work of the agency and the measurable value created, (Value Creation).

Eg. Direct response is the best example of this.

•  VBR can be used alongside PBR. They are not mutually exclusive.

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What are the steps for PBR?

•  Identify the agency performance attribute you wish to encourage and reward.

•  Discuss and agree with the agency a measure and methodology, (One measure – KISS).

•  Have the agency offer or suggest a level of ‘at risk’ component from their current remuneration and at least double this for the upside.

•  Measure and provide feedback on a regular basis and pay quarterly or six monthly if possible.

•  Review and adjust targets annually based on performance.

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marketing management consultants

What are the steps for VBR?

•  Identify the approach to be used (or both) value pricing and value creation based on circumstances.

•  For value pricing, identify the elements of the agency outputs to be priced.

•  For value creation, identify the areas where the agency significantly contributes to value.

•  Look historically for the cost of each area.

•  Develop a model to replicate the level of remuneration based on either current or desired results.

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The case for not using relationship in PBR

•  In the first slide we identified soft measures such as relationship as a criteria for performance based remuneration.

•  There is behavioural economic evidence that financial rewards for individuals are counter-productive to driving performance.

•  In most cases, performance payments for the agency do not impact the agency resource beyond senior account management.

•  While relationship management is important, we DO NOT recommend it be linked to payments.

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Performance or Value?

Performance Based

•  Rewards the agency for improving their performance.

•  Can be used on any marketing supplier relationship.

•  Can be used with Value Based Remuneration.

Value Based

•  Links agency remuneration to the value of the task or the value created.

•  Is ideally used where the agency task is defined or correlates with results.

•  Can be used with Performance Based Remuneration.

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For more information contact…

TrinityP3 Pty Ltd Sydney

+612 8399 0922 Melbourne

+613 9682 6800 Hong Kong

+852 3478 3982 Singapore

+65 6631 2861

[email protected] www.trinityp3.com

@trinityp3 www.trinityp3.com/blog/ TrinityP3 Darren Woolley