http://www.trinityp3.com/ 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.

1. Performance & Value Based
Remuneration
for advertising agencies
TrinityP3 Pty Ltd
2013
© Copyright 2013
marketing management consultants

2. 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:
1. Soft – relationship or service scores
2. Medium – marketing or brand metrics
3. Hard – financial or value based measures
marketing management consultants

3. 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:
1. Outputs – This is where a price or value is placed and
agreed on delivering a specific output.
2. Outcomes – This is where the agency is paid a fee linked
to the value created.
marketing management consultants

4. 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%.
marketing management consultants

5. 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.
marketing management consultants

6. 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.
marketing management consultants

7. 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.
marketing management consultants

8. What are the steps for PBR?
• Identify the agency performance attribute you wish to encourage
and reward.
• Discuss and agree with the agency a measure and
methodology, (One measure – KISS).
• Have the agency offer or suggest a level of ‘at risk’ component
from their current remuneration and at least double this for the
upside.
• Measure and provide feedback on a regular basis and pay
quarterly or six monthly if possible.
• Review and adjust targets annually based on performance.
marketing management consultants

9. What are the steps for VBR?
• Identify the approach to be used (or both) value pricing and
value creation based on circumstances.
• For value pricing, identify the elements of the agency outputs
to be priced.
• For value creation, identify the areas where the agency
significantly contributes to value.
• Look historically for the cost of each area.
• Develop a model to replicate the level of remuneration based
on either current or desired results.
marketing management consultants

10. The case for not using relationship in PBR
• In the first slide we identified soft measures such as
relationship as a criteria for performance based remuneration.
• There is behavioural economic evidence that financial rewards
for individuals are counter-productive to driving performance.
• In most cases, performance payments for the agency do not
impact the agency resource beyond senior account
management.
• While relationship management is important, we DO NOT
recommend it be linked to payments.
marketing management consultants

11. Performance or Value?
Performance Based Value Based
• Rewards the agency for • Links agency remuneration to
improving their the value of the task or the
performance. value created.
• Can be used on any • Is ideally used where the
marketing supplier agency task is defined or
relationship. correlates with results.
• Can be used with Value • Can be used with Performance
Based Remuneration. Based Remuneration.
marketing management consultants

12. For more information contact…
@trinityp3 TrinityP3 Pty Ltd
Sydney
+612 8399 0922
www.trinityp3.com/blog/
Melbourne
+613 9682 6800
TrinityP3 Hong Kong
+852 3478 3982
Darren Woolley Singapore
+65 6631 2861
people@trinityp3.com
www.trinityp3.com
marketing management consultants