A view from Chris Pearce

Understanding loss, risk, and trust is key to successful PBR deals

Points for agencies to consider when using Payment by Results. By TMW Unlimited's chief executive.

Claire Beale’s PBR is risky but worthwhile leader, along with the findings in the ISBA Paying for Advertising report, which pointed out the use of PBR now makes up only 43% of client/agency agreements, has put the payment method firmly in the spotlight.

Much maligned and often misunderstood, PBR does not have to be the blunt and unforgiving remuneration mechanism it’s often portrayed to be.

Perhaps it all starts with the name. "Payment by Results" should be pretty clear, but in practice it comes in all shapes and sizes and means different things to different people. Interestingly, a couple of academics at the University of East Anglia, Paul Clist and Arjan Verschoor, have done some great work in trying to define what it should mean and, more importantly, studied the behavioural effects of such contracts.

Their work focuses primarily on International Aid agreements but some of their findings are more than applicable to our own industry.

At its heart, the PBR debate is about attitude to loss, risk and levels of trust. In any PBR arrangement two things are key.

  1. There is a risk transfer as payment (or an element of payment) depends on an outcome, not action.
  2. Payment is contingent on (independently) verified results.

According to the behavioural contract theory outlined by Clist and Verschoor, there are three key points for agencies to consider.

The winner’s curse

Often in the competitive pitch situation, one is more likely to over-estimate the value of the contract relative to one’s costs.

Attitude to loss

A more loss averse agency (one that experiences a greater decrease in "satisfaction" when something is lost than the corresponding increase in satisfaction when something of the same amount is won) would likely accept a lower upside incentive payment.

Level of risk aversion

A more risk averse agency would need a larger premium for a given amount of risk in order for the arrangement to have any affect on behaviour.

But so much for the theoretical affect of PBR on behaviour. What about its impact on the relationship with the client? Or, in other words, the trust element. While it was alarming to read Claire Beale’s example of the agency boss feeling "totally shafted" by a client not paying out on PBR, we’ve recently experienced the opposite.

Much maligned and often misunderstood, PBR does not have to be the blunt and unforgiving remuneration mechanism it’s often portrayed to be.

Firstly, like most of our client contracts, the PBR element for this particular client was more about the broader performance of the agency across a whole host of metrics.

Secondly, even though there was a reasonable element predicated on the client’s sales figures that were below forecast, they completely acknowledged that this was driven by broader macro-economic issues and could not possibly be attributed to our performance.

Furthermore, they agreed to pay us a percentage of the potential upside in recognition of our overall performance.

For me that’s a real sign of when the much sought (but rarely achieved) status of trusted, long-term partner has been reached. Ultimately, if the trust exists and the agency recognises its own attitudes to risk and loss, PBR can be a more nuanced, genuine influencer of behaviour.

Sadly, this requires significant investment in time and resources for both agency and client to measure and administer fairly and in these margin-pressured times it’s no wonder that its popularity is on the wane.

Chris Pearce is the chief executive officer at TMW Unlimited.