Friday, June 11, 2010

Performance-Based vs. Value-Based vs. Ego-Based Compensation

Rance Crain wrote an interesting column in Ad Age this week on performance-based versus value-based compensation. His conclusion was that neither compensation model would soon be adopted by agencies in the ad industry.

As Mr Crain points out, there are two problems with value-based compensation. The first is in finding a way to define "value" that can be agreed to by both agency and client. And, the second is that the advertiser would need to allow this so-called “value creation” be in complete control of the agency.

Sales, awareness, brand preference, lead generation – most of the results currently tied to value-base compensation — are no longer in complete control of any one agency. It used to work that way when there were agencies of record.

But today, most marketers have a record number of agencies rather than an agency of record.

To determine who’s solely responsible for sales has become impossible to decipher.

Which doesn’t mean that value-based compensation can’t work. What it means is that rather than having the marketer or the agency determine whether the work offers value, we need to start letting the viewer do so.

How do we do that?

Let’s say an agency creates a commercial for their client. The commercial runs online as a click-to-play commercial. In other words, the viewer clicks in if interested. When the viewer decides the commercial is no longer offering value to them, they click out.

How long viewers spend with a commercial can now be measured. Which means it can now also be monetized.

If the commercial is 90 seconds long and, on average, only 10 seconds are consumed, that commercial offered much less value to the advertiser then if 80 seconds were consumed.

After all, the advertiser paid for all 90 seconds to be produced. The more of the commercial that is consumed, the less waste and the better the ROI on the production budget.

In effect, this model allows the advertiser to pay based on viewer time sheets rather than agency time sheets. The result being that they're paying for outcome rather than effort.

Would creative agencies go for this?

Most, I afraid, would run like hell. Because most agencies know that their work isn’t really that good. But the handful that would view this approach favorably are those that have always wondered why good work couldn't be worth more than bad work. These same agenices understand that, up to now, their brilliance hasn’t been properly rewarded.

Ego-based?

You bet. Because as we all know, ego is what really drives this business. And, ego is why this new method of compensation will spread.

Take a large CPG client. They have a number of agencies working on their different brands. Say one decides to be paid based on how good they are.

Do the other agencies really have any choice but to follow? Value-based versus performance-based versus ego-based?

As a betting man, my money’s on the last one.

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