Perspective... Coke's compensation model will meet resistance

The soft drinks giant wants to introduce a new structure that directly ties an agency’s pay to the performance of a project it rolls out for the company.

What does this new model mean for agencies? Essentially, it means that agencies will only have their costs refunded if their work doesn’t perform, but they could generate profit margins as high as 30 per cent if their work hits targets. The potential is to be paid more because you are adding value to a campaign or strategy.

Coke’s goal is to have this in place globally by 2011. Ultimately, it wants to see this payment structure accepted as an industry standard. Which is good news, because although the model has been debated in the industry for at least a decade, there aren’t many marketers that have attempted to apply it in Asia.

When implemented correctly, payment by results (PBR) is not just about results. It’s really about forming long-term, mutually beneficial client-agency relationships built around common goals. The agency becomes the investor, so has a bigger voice.

Advocates will tell you that it has many benefits - it motivates the agency, it creates a shared agenda and targets, it encourages partnership, it promotes accountability. So, why is Coke’s announcement making agencies nervous?

For all its simplicity, the PBR model Coke is pursuing raises some key issues. For one, it makes the agency accountable for things beyond its control. The communication message is only part of the marketing mix that contributes to value. What happens, for instance, when you are dealing with a new product, developed by the client, which isn’t competitive in the marketplace? Are there too many variables to make the model work?

There is also concern about how much autonomy Coke’s agencies will actually have to put their best ideas forward and the degree of client involvement.

For this type of compensation model to work, clients will need to trust their agency partners more and be willing to act upon agency recommendations.

Can an agency be held accountable for its work if the client demands to alter the creative, an act that the agency believes has ultimately diluted the effectiveness of the campaign?

At a time when Coke is decentralising its marketing activities and seeking greater efficiency and effectiveness, there is likely to be some resistance from agencies, which, accustomed to being able to book profits long before they deliver work, won’t have that sort of certainty anymore.

Sir Martin Sorrell has seen better days. As clients across the globe rein in spending, WPP’s Q1 revenues have dropped six per cent. It has been forced to make layoffs and fold two agency brands - Enfatico and Batey - into larger agencies. To top it off, Sorrell’s personal fortune is down by more than US$30 million.

So, the year isn’t off to the best of starts. In a video interview with Media TV, the CEO of WPP describes the current climate as the most difficult in his three decades in the advertising industry.

Clients, he says, are behaving badly; there’s tough talk and tough action. Competitors are cutting prices violently - reducing compensation expectations - in order to win business. It’s brutal, draconian stuff.

Unsurprisingly, big agencies like his, he predicts, will outpace the smaller rivals this year. He has a point. The more diversified the client base in a recession, the more you spread your risk - a key challenge at both Enfatico and Batey.

The question, however, is not whether the bigger agencies are growing faster right now, but whether they are best positioned for the future of the marketplace.

So, is WPP in good shape? View the interview on www.Media.asia and tell us whether you agree with the holding company chief.

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