Art & Comerce: Procter’s Gamble

The idea of pay for performance is not new, but its adoption by P&G is groundbreaking
When Procter & Gamble announced its new agency compensation plan, shares of Saatchi & Saatchi, one of P&G’s leading ad shops and the only one that’s public, declined 12.5 percent. There are two odd things about this swoon: first, that the stock was in a position to decline to a price of 17. A year ago, it was languishing below 9 and here it is, even after taking a big hit, still trading at roughly double that value; second, and more fundamental, that investors seem to have interpreted the P&G step as bad news for ad agencies.
The heart of the new scheme is a link between agency compensation and sales of advertised products. As we understand it, the manufacturer studied the relationship between product sales and agency payments and found a certain level to be “normal.” A company with more than 300 brands and that pays more than $300 million to its ad shops around the world every year ought to have enough analytic grist to determine a fair base level.
With that ratio as a starting point, agency compensation will grow in step with product sales and, presumably, decline if the product backtracks. Formerly, agencies were paid in proportion to the client’s ad spending, whether the product succeeded or not.
The bad part of this new system is there’s a lot apart from advertising that contributes to a product’s success in the market. An agency might get penalized if one of P&G’s competitors launches a price war–or if some product loses ground to a private-label knock-off–although there are obvious ways to take this into account. (Of course, a shop could get lucky on the plus side, too.)
The good news is, agencies, especially the larger ones, have been looking for ways to elevate the perceived value of their services and jump over the “vendor/partner” barrier. Here’s their chance. In proposing a revenue-sharing compensation plan, the client will make its agencies de facto partners.
This immediately addresses a number of important concerns. In particular, the new policy removes some of the natural bias of the big agencies toward using the bigger (and more expensive) media. On a straight-commission system, the higher the ad budget the more the agency made: Therefore, it made sense to push for more ad spending.
The new plan removes some of the risk involved in trying emerging media and may tilt an agency toward experimenting with some of the new techniques. It also strengthens agency arguments to be given control over sales promotion and other marketing services, which, in addition to advertising, have an impact on sales growth. Moreover, it will benefit both the agency and the client to manage brands–and related advertising–on a global basis. This will preserve financial as well as intellectual capital. All of this will make it harder for the client to fire an agency that’s doing a good job, as measured by the retail cash register.
The idea of pay for performance is hardly new, not even in the ad world. Keith Reinhard, the chairman of DDB Worldwide, has been an advocate for more than a decade. What is new is its adoption by a major–and traditional–ad client. Strong shops stand to see their own revenues grow in line with client success, and have a better shot at picking up additional revenues, marketing specialties and, perhaps, new brands.