How to construct a pay for performance agreement that works.

When it comes to assessing, reassessing or creating new agency agreements, most marketers now ask us about structuring some kind of pay for performance terms as part of their overall agreement.

But coming up with a pay for performance model is actually the easy part.

The hard part is ensuring our clients are corporately prepared for what pay for performance really means, the implications for managing such agreements and how they need to be administered.

Once you’ve reached the ‘yes, we want something like that in our agreement’ stage, there are some tough questions to ask of your own organization before attempting to craft pay for performance terms.

In our experience, there are typically six key questions marketers should be asking themselves:

Do you have executive level buy-in?

Pay for performance is a commitment from your organization to do just that – pay for an agreed level or standard of performance across a number of pre-defined metrics. Generally speaking, other executive functions are going to want to know, understand and agree to those metrics – even if it’s only as far as the CFO. What you don’t want is your CFO (or anyone else for that matter), baulking at terms after you have an agreement in place.

Do you have sufficient budget?

Any marketer that enters into a pay for performance agreement needs to be prepared to pay for the maximum upside that’s contemplated in an agreement.  Sufficient budget needs to be set aside in the event your agency(s) hit it out of the proverbial park, so that you can pay them within the time period specified.

Can you define meaningful, measurable metrics?

Yes, this is the tricky part. Most pay for performance terms stand or fall on marketers and their agencies being able to agree on specific, measurable and meaningful metrics that can be clearly tied to performance of the agencies concerned. Marketers must look at a balanced mix of agency behaviours, marketing activity developed by their agencies and tangible business results tied to those activities.

Do you have a robust evaluation system?

Any pay for performance needs to be based on some kind of predefined and formalized evaluation process. Your agencies are going to want to know how they’re going to be measured, who’s going to be evaluating, and when their evaluations will take place each year. The keys to any evaluation system are that your process and timelines need to be consistent, and of course – fair and objective.

Are you prepared to share your results?

No, I mean – really share your results. Because performance metrics will have some measure of marketing or business results tied to them – whether it be sales, conversion rates, year over year growth or other potentially sensitive information – you and your executive team need to be ready, willing and able to share those results with your agency(s) and back-up their respective sources.

Are you in it for the long haul?

Once you’ve initiated a pay for performance agreement, marketers should be prepared to stick with it.  In a scenario where you’re paying out on year one for example, shouldn’t have you running for the hills and tearing up the agreement.  Agreements work best when fine-tuned year over year and performance weighed against previous year’s results.

So if pay for performance is something you’re contemplating now or in future agreements, consider whether your organization is really ready and how you’ll manage internal and agency expectations.


Stephan Argent is Founder and Principal at Listenmore Inc offering confidential advisory to marketers looking for truly independent insight and advice they can’t find anywhere else. Read more like this on our blog Marketing Unscrewed / follow me @StephanArgent

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