Performance and Value Based Remuneration for advertising agencies
TrinityP3 Pty Ltd
© Copyright 2013
What is Performance Based Remuneration?
This is when some or all of the agency remuneration is paid based on one of more pre-agreed performance metrics.
These metrics usually fall into one of three categories:
Soft – relationship or service scores
Medium – marketing or brand metrics
Hard – financial or value based measures
What is Value Based Remuneration?
This is when agency remuneration moves away from a cost base (retainer and hourly rates) or spend (commissions and mark ups) to being based on a determination of value.
These value measures usually fall into one of two categories:
Outputs – This is where a price or value is placed and agreed on delivering a specific output.
Outcomes – This is where the agency is paid a fee linked to the value created.
How does PBR work?
Usually some or all of the agency profit margin is put ‘at risk’ with the opportunity for the agency to earn this, plus more, back based on the performance criteria.
Eg. Agency ‘risks’ 10% of profit for the opportunity to earn 20% back.
The performance criteria is weighted based on the perception of the agency’s ability to influence the outcome.
Eg. Relationship 40%, Marketing Metrics 40%, Financial 20%.
How does VBR work?
This is where a price is set for the delivery of a specific output by the agency based on the value the marketer places on that output.
Eg. A fixed, agreed fee for the agency to produce a website, an advertising concept or a print advertisement.
Or the agency is paid a fee based on the contribution to creating measurable value for the brand or business.
Eg. A fee per lead or sale, fee linked to market share or sales volume.
When should you use PBR?
PBR can be used for almost any agency or marketing supplier relationship.
The requirement is to identify some aspect of the agency’s performance that is critical to success and create measurable criteria.
Eg. Media buying efficiencies, On-time, on budget performance.
Ideally this would be tracked either continuously or at regular intervals (monthly, quarterly etc) with feedback to the agency.
Objectives for delivering the bonus should be reasonably achievable to act as an incentive.
When should you use VBR?
VBR can be used either when the agency is providing specific tasks or deliverables which can be ‘valued’ and priced, (Value Pricing).
Eg. Campaign or project work.
Or when the agency has a significant input to the strategic direction and there is a reasonable correlation between the work of the agency and the measurable value created, (Value Creation).
Eg. Direct response is the best example of this.
VBR can be used alongside PBR. They are not mutually exclusive.
What are the steps for PBR?
Identify the agency performance attribute you wish to encourage and reward.