Whether you choose to call them Pay For Performance agreements, Payment By Results, or PRIPs (Performance Related Incentive Programs), pay for performance type agreements have gained in popularity in recent largely because of marketer’s increased focus towards accountability for tangible results.
Regardless of whether we’re working with clients on an agency search, helping negotiate or renegotiate contracts, or helping define responsibilities across multiple agencies, the question of pay for performance typically gets tabled early in those discussions.
But despite lengthy discussion, clients often 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 the basic principles, the rest can be relatively straightforward:
- First, pay for performance isn’t a ‘bonus’. It’s a mechanism that requires both marketers and their agencies to put corporate skin in the game and either reward or hold-back for a shortfall in performance.
- Second, it can never be all stick and no carrot. Marketers need to wrap their corporate heads around pay for performance as an opportunity for agencies to reap as much upside for strong performance as there is downside when things don’t unfold as planned.
- Third, marketers have to embrace their agencies in a true business partnership, 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 a few 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 – preferably by a third party.
While a formal evaluation process is essential, so too is regular, open dialogue between marketers and their agencies that monitors progress and pinpoints issues proactively. 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 are a mix of business and marketing results, together with agreed agency performance standards. This alleviates all pay for performance eggs being loaded into one basket.
Because marketer targets shift over time and agency performance evolves, 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 client and agency businesses.
And that should be a good thing for everyone because pay for performance should be no secret at all.
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