Could Value-Based Compensation Benefit Shopper Marketing?

The "pay for performance" contract model, in which an agency's compensation is based on the success of the marketing program, has caught the attention of the corner office at some CPGs. "Every customer is looking to control costs today," says David Lloyd, a partner at LG&P Instore Agency, a shopper marketing firm in Paramus, N.J. "They want to improve their return on investment and push agencies to deliver successful programs and better ideas." However, how well this model could be applied to shopper marketing depends on how accurately "success" can be defined and measured.Brief Background In 2008, Atlanta-based The Coca-Cola Co. began paving the way for value-based compensation and made noise when Sarah Armstrong, director of worldwide media and communication operations, discussed the company's plans at the Association of National Advertisers' 2009 Agency/Client Forum. Her point: Great results -- not agency labor through billable hours -- should define value.Coca-Cola's compensation approach, as reported by ANA Magazine in November, consists of three elements: the scope of work (determined by Coke); the cost to deliver that work (the agency's expenses); and the performance goals that the program should meet before the agency receives more money. Coca-Cola hopes to have this model in place for all of its ad and media agencies by 2011. Another major CPG using an incentive program is The Procter & Gamble Co., Cincinnati, which has operated its Brand Agency Leader program since 2007. "The goal wasn't to reduce compensation but to generate bigger ideas that are more holistic, and do it in a simpler, faster way that is flexible and more agile," explains Martha Depenbrock, P&G spokesperson.The program provides a Brand Agency Leader (BAL), typically someone at the lead advertising agency, who works directly with the Brand Franchise Leader (BFL) at P&G. They develop the annual goals, after which the BAL meets with the supporting agencies (selected by P&G) and "creates ideas across all of the touchpoints for the program," says Depenbrock. Although Kraft Foods, Northfield, Ill., has not used such a format with agencies, it is paying attention. "We have talked about using a profit-sharing or goal-sharing approach, and we've done it with some consultants and key vendors," says Lou Mastriano, senior director of in-store merchandising. "The evolution of partner relationships is driving the discussions."What are the Pros and Cons?Those in favor believe agencies will be more motivated and have a deeper personal investment in a program. Those opposed argue that if an agency will be compensated based on performance, then it should have full control and final edits over the work.All say the biggest challenge is defining a program's goals. "If compensation is going to be based on what you're asked to do, the client has to have a definite goal for what they expect to accomplish and what that's worth," says Rich Butwinick, president of MarketingLab in Minneapolis."It forces all parties to decide what they want to do and what value there is in doing that," says Michael Brunner, CEO of M.J. Brunner Inc. "If we can define that, we can create better compensation programs than exist today." Brunner is a proponent of value-based compensation; his Pittsburgh-based ad agency handles packaging, print, broadcast, nontraditional advertising and focuses a lot on digital and social media. "You need to have benchmarks that are realistic and measurements that are direct," says Scott Testa, professor of business administration at Cabrini College in Radnor, Pa., who has studied these agreements. "If done right, they can be win-win situations. But finding an accurate way to measure results can create trouble." Kraft's Mastriano says there are too many variables impacting a program. "Smaller programs are better for calculating the impact, but where do you draw the line on what influenced shoppers?" he says. "The programs now focus on big efforts, but there are so many companies and services to measure and compensate. You have to find the right balance."How Could This Model Apply?Since shopper marketing programs are more strategic, they are harder to quantify, making it harder to apply value-based or incentive compensation, says LG&P's Lloyd. "There are ways to measure the execution of a shopper marketing program, but there's a difference between strategic services and tactical execution. You can create measurements that can be results-oriented and measured from the execution side, but it's harder when you're creating the strategy for the program."Mastriano sees benefits to "value-engineering" strategies, in which the agencies use their expertise to reduce expenditures, sharing a percentage of the savings. "It would work better as a bonus or incentive rather than the basis for compensation, but it would help create a true vendor partner rather than just a vendor contract."Using incentives to encourage agencies to lower total supply-chain costs would benefit everyone, says LG&P's Lloyd. "Agencies should be looking beyond the program to the cost to distribute, execute, inventory and ship. There are great metrics there to work with."An agency's capability to improve sell-in also can be the basis for incentives, says Lloyd. "If we can show that our efforts got the program placed in more stores, that's a viable component of compensation."A variety of metrics can work at the store level, adds David Lied, vice president of consumer promotional services at Brunner. "Anything that points to creating changes in the shopper's decision process can be the goal: gaining trial uses, converting light users to heavy users, producing added value in the store and improving brand loyalty." Those measurements take effort, but they can be done, he says. "A benefit is that this approach controls resources better and directs them where both parties agree the value should be. What gets measured gets done."Lloyd says for value compensation to work, it has to be very collaborative between agency and client. "We have clients where we work from a cubicle in their office. At that point, you can construct programs and measurement processes that are needed to quantify success. But you need a trusting relationship, and the customer needs to be able to live up to his half of the bargain."With major marketers considering these programs, interest will continue to grow, says Testa. "If you're Nike or Pepsi, and you see Coke and P&G trying this, you have to consider if it's right for you. Some smaller, aggressive agencies may propose it to their accounts to gain business. But more dominant agencies may take a wait-and-see approach to ensure there really is the possibility of more profit."Brunner says there are brands and agencies exploring these arrangements, especially as agencies see a downward spiral in their margins. "Advertisers need to be able to answer the question, 'What is working in my marketing program, and what is my return on investment?' This question alone will be the driver for many advertisers to explore new compensation models." Kraft's Mastriano says the conversation is just starting. "As we evolve our vendor partnerships, we see more of this discussion. It's definitely going on, and we feel pretty good about how our efforts are progressing."

Could Value-Based Compensation Benefit Shopper Marketing?

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