How Agencies Can Make Performance-Based Compensation Work

Tony DeNunzio is group vice president and general manager at Leapfrog Online, a results-driven digital marketing agency. 

The question of whether agencies should tie their compensation to performance on behalf of the brands they serve never fails to draw impassioned arguments on both sides. Many agency execs argue, with good reason, that the overhead costs of running their business are simply too high for them to risk linking their income to an unpredictable outcome. Others say that agencies that don’t move toward a pay-for-performance model are burying their heads in the sand, as clients are increasingly demanding accountability.

I’d like to cut through these arguments to point out that not only is a results-oriented model in everyone’s interests, but to illustrate how, exactly, we believe brand agencies can pull it off. I believe there are two things needed to make this a reality: data-driven metrics and attitude.

One of the biggest obstacles to linking an agency’s compensation with customer sales is a resistance to using metrics that enable clients to measure how effective advertising efforts are. For years, the murkiness of this kind of measurement protected agencies from criticism. But as advertising increasingly becomes digital, there is simply less and less excuse for not using data to determine the success of an advertising campaign, whether the goal is brand-building or a more concrete need for sales from new or repeat customers.

Whereas sophisticated data mining used to be an expensive undertaking limited to hardcore data scientists, today’s Web-based analytics should make it possible for even small- and medium-sized businesses to afford and understand whether clicks and calls are leading to sales and/or whether users are engaging with the brand.

Agencies should be proactively offering their clients this information. It’s unclear how they can responsibly service clients without it. This requires them to be able to identify and understand consumer behavior at all touchpoints, whether it’s mobile, tablet, desktop or contact center.

Understanding the different ways customers interact with the brand via these channels — marketing to them appropriately, addressing their needs and then working to make these experiences as seamless as possible — helps the client truly address whether its advertising efforts are proving effective to the bottom line, and how to fix that if they aren’t.

Doing so also demonstrates an agency’s willingness to make the clients’ pain its own, which I believe is the second important factor in moving toward this business model: attitude. More than just a payment system, value-based compensation, as I like to call it, is about showing that you identify with the brand and its business goals, rather than just punching an hourly time clock.

Companies today seek partners that understand marketing’s responsibility beyond impressions or clicks. Showing that you have understood this paves the way for discussions about a new payment model defined more by a common market opportunity for the brand and agency than billable hours. Rather than being focused on bonuses or short-term rewards, it’s about sharing in the clients’ expenses as well as their revenue.

And when it functions correctly, it should lead to a better-defined, more innovative and more trusting relationship delivering greater business result for the client and agency.

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