Major advertisers like Coca Cola, Proctor & Gamble and Tata Chemicals increasingly appear to be opting for a performance-based fee model over options like fee-based (calculation based on the cost of staff required to service an account, time and effort, plus overheads) and commission-based (percentage of the total budget) modes of payment.
Globally, companies like Coca Cola, P&G and Unilever have adopted the performance-based model. In India, the trend is gradually catching on. A Coca Cola India spokesperson said the company is in the process of moving from an input-cost based compensation system for its agency partners towards a value-based one. This model is about paying agencies for results, not activity. HUL refused to comment, citing policy constraints on speaking about remuneration.
Advertising agencies do not seem to have any problem with this mode of payment, wherein both agency and client agree to certain key performance indicators (KPIs) which, when achieved, ensures the agency gets the variable component. The agency and client jointly quantify the performance parameters.
“Most of our clients have performance-based incentives and we are very happy with the model. As both agency and client get the upside, it will soon become a trend,” says Rohit Ohri, managing partner, JWT.
Leo Burnett India, too, has a number of such accounts. Arvind Sharma, chairman and CEO, Leo Burnett India, says: “They give us sales-linked incentives. We love this model. Since 90-95 per cent of our projects exceed success parameters, the model benefits us.”
There are two modes of performance-based remuneration. The first is variable pay, where the client, on achieving the trageted performance, gives a bonus amount on the total payment — mostly measured in terms of agency performance like quality of strategy, buying benchmarks and servicing. The other is where the agency remuneration is linked to client communication and business results.
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Sandeep Lakhina, MD, India-West & South, Starcom Worldwide, observes that a handful of companies in India make part of the agency remuneration linked to results, based on parameters like awareness scores and brand track results. An extension of the second is a true value-based remuneration model — which is seeing traction is some parts of the developed world, where a part — or in some extreme cases, the entire agency remuneration — may be linked to the business results of the client.
Lakhina adds: “The Indian system is still evolving, and we will see some cases of the former, a very few cases of the latter, and almost minimalistic or non-existent on true value-based remuneration.”
Ajay Chandwani, CEO of Percept/H, says: “While most of our accounts are commission- or fee-based, some clients pay incentives for better performance. But over the last five years, advertisers are making efforts to justify deliveries and the performance-based model is one such effort in the direction. As the model is becoming common in the West and Europe, it will slip into India, too.”
However, Chandwani also has his doubts. He feels there’s no foolproof method to measure performance. Sales are not entirely dependent on advertising. The company’s sales and marketing team and distribution network are also responsible for it.
Ohri of JWT thinks differently. He says it depends on how you work. The wise way is to balance out pre-stated measures in the account. Advertising’s prime aim is to build an image for a brand. Sales is a collaborative effort. “In our accounts, 80 per cent of variable pay is evaluated on softer aspects of advertising like perception of brand among consumers, and only 20 per cent is evaluated on increase in sales,” notes Ohri. On an average, variable pay happens to be 10-15 per cent of the total pay, he says.
Even those agencies that do not have clients asking for the performance-based model are welcoming this trend. “It’s a damn good idea. But none of our clients have asked for it yet. We will welcome it, as it rewards and encourages good work,” says Mona Jain, India Head, Strategic Investments, India Media Exchange (a division of Publicis Groupe Media in India).
Sanjay Thapar, group president, North and East, Ogilvy & Mather, concurs: “So far, none of our clients has asked us to work out such a model. We will welcome it if the model brings value to clients.” O&M handles the accounts of Fanta, Limca, Sprite and Kinley for Coca Cola.