• Coke Pushes Pay-for-Performance Approach
  • June 9, 2009
  • Law Firm: Manatt, Phelps & Phillips, LLP - Los Angeles Office
  • Coca-Cola Company is urging fellow advertisers to adopt a “value-based” approach similar to one it is rolling out that ties compensation to ad agency performance.

    The company unveiled its plans at an April 20 conference of the Association of National Advertisers. If it successfully convinces others to follow its lead, ad agencies will no longer be able to count on booking profits before they deliver their work. “We want our agencies to earn their profitability, but it’s not guaranteed,” Sarah Armstrong said at the conference. “[T]hey have to earn it through performance.” Armstrong is Coke’s director of worldwide media and communication operations and the motivating force behind the company’s new approach.

    Coke started rolling out its pay-for-performance model last year, and plans to add another 35 accounts this year. By 2011, Coke expects to use the model for all of its relationships with advertising and media agencies.

    Agencies typically define the value of any given assignment based on the number of people and amount of time needed to complete it. In contrast, Coke’s new model values projects based on factors including strategic importance, talent required, and the agency’s unique qualifications. Once the project’s value is established, agency performance and business results determine what, if anything, the agency will get paid in addition to its costs. If all targets are met, the agency could earn up to 30% on a project, but if all targets are missed, the agency will not earn any profit at all.

    Although the new approach comes in the midst of a recession in which ad budgets—and fees—are sharply down, Armstrong said cost savings were not the main motivating factor. She declined to reveal whether Coke saved any money in the five test markets—Australia, China, Germany, the U.K., and the Philippines—in which it tested the new model last year.

    Why it Matters: Value-based compensation models have been around for at least ten years, but only a handful of marketers have tried them. For instance, Procter & Gamble uses a pay-for-performance system for about a dozen of its brands. Coke’s move, however, may be a harbinger of things to come, especially in a recessionary economy where marketers are looking to save money wherever they can.