Pundits have long been predicting the demise of the commission
system, but it has been a lingering death. Until, that is, last week
when one of its greatest supporters, Procter & Gamble, admitted it was
switching from a commission system to deals that link agency pay to the
sales of its brands.
If that was not bad enough for commission fans, the UK is about to
unleash an assault of its own. A report published by the Incorporated
Society of British Advertisers reveals performance-related contracts of
the sort mooted by P&G are better than old-fashioned deals linked to
media spend - both for agencies and clients.
The study, conducted by Jonathan Lace of the Advertising Research
Consortium, says that more than 20 per cent of clients already use some
form of Payment By Results (PBR) and that, in half of these cases,
agencies get paid more than under the old commission system.
There is even a silver lining for advertisers. About 50 per cent of
clients surveyed in the report said there had been clear improvement in
agency performance as a result of moving to PBR.
The problem, of course, is how much of the fee do you tie to
Ten per cent? Twenty? One hundred? With a few noble exceptions, most PBR
contracts today, even in the progressive US market, link only a fraction
of payment to performance. In the glare of publicity last week, P&G was
keen to talk about its move to tie pay to sales. But no-one is willing
to say just how far this will go.
P&G’s four key agency networks - Saatchi & Saatchi, Grey, Leo Burnett
and D’Arcy - have been running regional tests of the new system since
the start of the year. However, nothing has yet been finalised. All P&G
would promise was to be ’the first to link payment this closely to
In fact, few industry sources expect a ’no sales, no money’ deal.
Instead, agencies are likely to come away with agreements covering their
basic costs plus profits of, say, 5 per cent as a monthly fee. This
figure will then be ratcheted up or down according to sales.
The world’s biggest advertiser hopes the new deals, which will kick in
next summer, will foster a much closer partnership with its agencies and
encourage a more innovative approach to communication. Such arrangements
do have their obvious pitfalls, but P&G is better prepared than most to
avoid them. It has a solid stable of established brands, which will be
less affected by hobgoblins outside agency control - such as in
distribution - than less mature names. It also has long-standing agency
relationships, and has taken care to see these align globally.
Nevertheless, it will not be plain sailing, as those already using PBR
can attest. In the spring of this year, for example, the processed meat
company, Pork Farms, was hit by a major fire in its production line. It
was a particularly cruel blow since a recent ad campaign had reaped a
200 per cent increase in orders. Mustoe Merriman Herring Levy, the
architect of that advertising, knows this all too well since its payment
was linked to the level of sales. No pork pies, no fees.
’What looked like a sure bet disappeared at the stroke of a match,’ says
Mustoes’ co-founder, Andrew Levy, who is nevertheless still an
enthusiastic supporter of PBR. ’A principle, as they say, is not a
principle unless it costs you money. Of course, if all our clients had
fires, we would go out of business. But luckily this has been our only
Mustoes’ experience is a good example of why many agencies have fought
shy of PBR. If there’s a wet summer and beer sales drop, should the
agency pay for that?
Keith Reinhard, the worldwide chief executive of DDB, thinks so. He has
been an advocate of pay-for-performance contracts for years, and says
agencies should be willing to take the same risks as their clients - as
long as they have thrashed out a common objective.
’Marketers can’t predict what the weather is going to be, what the
economic situation is going to be,’ he said recently on the subject.
’They’re taking a risk. We should be willing to take those risks as long
as we are locked together in one single-minded objective, which is
important, measurable and committed to in terms of resources.’
So what of commission now? It was a fine system when a 30-second TV spot
was all agencies offered. In those simple days, a good ad, seen by a
mass audience, would lift sales. And since media spend was a fixed
percentage of sales, this would prompt more pay for agencies.
Now, however, briefs can encompass anything from setting up sports
sponsorship to designing a website, and P&G’s opinion is that payment by
media spend does not encourage this kind of broad approach. The company
has gone a long way to improve its mainstream advertising in recent
times - witness Grey’s work on Fairy Liquid and Vibrant, a new laundry
product that stops colours fading in the wash - but it needs more.
In any event, P&G’s change of heart will radically alter the payment
landscape, as other large advertisers such as Mars digest its
experience. Even one-time stalwart supporters of commission now paint
with an altogether broader brush. Nick Phillips, the director-general of
the Institute of Practitioners in Advertising, says: ’What matters is a
fair remuneration and that can happen in a variety of different
P&G’s move, of course, is just one way. But as a former account worker
puts it: ’When P&G moves, the earth tends to shake.’