Whether you choose to call them Pay for Performance agreements, Payment By Results, or PRIPS (Performance Related Incentive Payments), pay for performance type agreements have gained in popularity in recent years largely because of marketer’s increased focus towards accountability for tangible results.
Regardless of whether we’re working with a marketer on an agency search, helping negotiate or renegotiate a contract, or helping define agency roles and responsibilities when marketers are working with multiple agencies, the question of pay for performance typically gets tabled early in those discussions.
All too often, despite lengthy discussion, clients give up on the idea – either because they can’t come to terms with their agencies, or because they can’t align themselves around desired results and how to measure them.
But the reality is, pay for performance agreements shouldn’t have marketers wringing their hands with angst or pulling their corporate hair out in frustration. Providing marketers can come to terms with these basic principles, the rest can be relatively straightforward:
It’s not a bonus
Pay for performance isn’t a ‘bonus’. It’s a mechanism that requires both marketers and their agencies to put skin in the game and either reward or hold those accountable for a shortfall in pre-agreed performance metrics.
Sticks and carrots
Good pay for performance agreements can’t be all stick and no carrot. Marketers need to wrap their corporate heads around pay for performance as an opportunity for agencies to reap a reasonable upside for strong performance, not just levy a fail-safe penalty in the event things don’t go according to plan.
Partners, not suppliers
Marketers have to embrace their agencies in a true business partnership. Why? Because no agency will agree to a pay for performance agreement if there isn’t complete transparency in, how and when applicable results are calculated.
With those basic principles in hand, here are five secrets to a better pay for performance agreement that should help quell the angst and prevent corporate hair pulling:
Keep it simple
The biggest mistake marketers can make when proposing or defining performance metrics is to create too many. Long laundry lists of metrics are not only cumbersome to administer, but almost impossible to quantify because they have to be weighted and fragmented, leaving the door wide open for disagreement during an evaluation process. So wherever possible, marketers should try and limit the number of pay for performance metrics to between five and ten core criteria.
Create a formal process for evaluation
Pay for performance can’t be properly administered if there’s no formal process for evaluation agreed by both marketer and agency prior to implementation. Agencies want to know how and when they’re going to be evaluated and how relevant metrics are going to be measured. This requires a robust and transparent evaluation methodology that’s conducted at the same time every year.
While a formal evaluation process is essential, so too is regular, open dialogue between marketers and their agencies that monitors progress and pinpoints and resolves issues. If performance is lacking or there are obvious cracks in the relationship, the marketer and agency should be willing and able to discuss the issues or potential shortfalls in results or expectations as they come up – not wait for or (worse) be blindsided at the annual performance evaluation.
Performance metrics typically work best when there’s a mix of both marketer focused results and required agency performance standards. This alleviates all pay for performance eggs being loaded into one basket and ensures the agency is fairly evaluated – even if marketer performance is exceptionally strong or below expectations.
Because marketer targets shift over time and agency requirements evolve based on requirements, any pay for performance agreement will need to be revisited annually. Both marketers and agencies need to approach pay for performance with equal measures of commitment and flexibility to ensure their agreements have longevity and value for both sides.
While pay for performance agreements will always need to be crafted with care, they can open the door to considerably stronger agency relationships, through a greater understanding of both agency and marketer businesses.
And that should be a good thing for everyone.
Stephan Argent is a founding partner of LE RICHE ARGENT, Canada’s leading Agency Search and Media Management consultancy. Read more like this on our blog ‘Marketing Unscrewed’. Follow me on Twitter @StephanArgent