P&G; to Pay Agencies on Performance, Not Commission
Procter & Gamble, the world’s largest advertiser, is changing the way it pays advertising agencies that work on such familiar brands as Ivory, Tide, Crest and Pampers. Effective July 1, the Cincinnati-based consumer products giant will abandon traditional commissions and instead award ad agencies a percentage of its worldwide sales.
“It’s really simple,” P&G; Global Marketing Officer Bob Wehling said in a statement. “As we grow, our agencies grow. I can’t think of a better way to align around common objectives. It will simplify our efforts and keep us all focused on the end goal: increased brand sales.”
Industry observers say P&G;’s pay plan will accelerate a trend among advertisers that are demanding more accountability. The P&G; contract is in decided contrast to the common practice of paying agencies a set percentage of an advertiser’s total media spending budget. P&G; spent an estimated $5.7 billion on worldwide advertising in 1997, the most recent year for which figures are available.
“P&G; has long been a gold standard in the industry because it spends so many millions of dollars,” said Catherine Bension, managing partner of Select Resources International, a Los Angeles-based firm that helps match companies with ad agencies. “So P&G; is, in effect, establishing a barometer by which other companies might better be able to measure compensation.”
P&G; executives are betting that the compensation plan will correct flaws in an existing system that favors costly television advertising over less expensive marketing programs done through the Internet, direct mail and other options.
Some advertisers worry that agencies prefer higher-priced media such as television simply because they’re more attractive from a bottom-line perspective.
Some ad industry insiders admit that commission-based contracts don’t always produce the best creative work.
Despite the possibility that performance-based plans might result in smaller paychecks, executives at agencies working on P&G; accounts characterized the new compensation strategy as a welcome development.
“With this system we will be encouraged to create holistic marketing plans,” said Ed Meyer, chairman and chief executive of Grey Advertising Inc., one of several major agencies that work on P&G; brands.
P&G; did not release details about the pay plan. But Bension said the company will have to begin with a formula that is “fair to both sides. What usually happens is that there’s a base compensation figure agreed upon, and the agency has an opportunity to be rewarded above that.”
