Why Mediabrands Believes Agencies Need Performance Pay

Last week Digiday explored why performance-based compensation models haven’t worked for most agencies to date. But Matt Seiler, CEO of IPG Mediabrands, views the performance-compensation model as integral to the future of the business. So much so, in fact, that he’s spent the last two years attempting to move all of the agency’s clients to some form of performance-based relationship. Digiday caught up with Seiler to learn why.

How have you gone about transitioning clients to performance-based models?
I didn’t believe any agency was taking enough responsibility for its clients’ businesses, which is what I wanted to promote. The challenge was doing so as part of a public holding company. Switching all your clients to this kind of model, where you might not get paid for twelve months while you wait for results, is something Wall Street would typically frown upon. I went to the CFO and said I want to do this, and we found the trick was to transition clients slowly. We worked with McKinsey to look at what other industries do, and learned a lot from hedge funds and the banking sector, but also from out-of-the-box examples that had to do with things like paving roads. We began implementing this over two years ago, starting in North America and then moving to the rest of the world. Now roughly half of our client relationships have a performance element.

Why is this type of model important for agencies?
I got so sick of going to conferences and listening to agencies complain that procurement was commoditizing agency work and threatening the business model, but nobody was coming up with any ideas. I look back 26 years when Proctor & Gamble came out and said to agencies that they wanted to pay them based on business outcomes. They all said no, and they got away with it. If you look author the business has devolved it’s precisely because at that moment we didn’t take the challenge to prove to clients that their business matters. If you look at the margin pressure and the fragmentation that’s happening now it’s very likely the conclusion of something that was set in motion way back then. I’m amused by people’s refusal to believe this can work. I think it’s inevitable that client partners will move to this model. Anyone that genuinely believes they’re in the business of selling must correlate compensation with intended outcome. Anything else leads to commoditization.

Is it scary using this kind of model when so many factors dictating success are outside of the agency’s control?
In order to do pay for performance it has to be based on significant client metrics. Things like sales, volumes, profits. It’s true, things aren’t always in our control, but in order for this to be truly pay for performance there has to be a risk that we take rather than just a reward. What’s more scary is living in a world in which you allow yourselves to be commoditized. I don’t think it’s scary to actually think of yourselves as a partner in this situation.

Are these models difficult to sell into clients?
It depends on where you’re connecting within a client organization. The CFO or CEO are always the best connection points for this. Those engagements are always really good, and a lot faster because there are no barriers. It gets harder the lower you go into an organization. Unfortunately the ad industry has had decades with a bit of a “used car salesmen” reputation, so this is where the data and analytics gets really important. It’s getting easier because we have stories to tell now. The easiest way to help a client get around the idea that it’s better for us than it is for them is to demonstrate that a significant increase in compensation for us comes directly from the more significant income for the client. There’s some risk for the client there, but you have to have some level of predictability. It’s a logical thing based on a data-driven analysis. It would have worked badly if at the end of the year we realized we’d blown past all projections and the client owed us big.

What about procurement departments?
Very honestly I have always been a poster person for procurement. I have nothing against them. A lot of people rail against procurement because they blame it for commoditization. But if you can prove your value to those guys then procurement is nothing but an advocate. However, I will say this is one instance in which procurement KPIs are not quite aligned, which leads to some more challenging conversations. Like any relationship it’s about having a frequent dialogue with different people in the same organization. One can’t pretend clients aren’t complex.