Coca-Cola Is Changing The Way It Pays Agencies

With perhaps a nod to the rising power of value seeking procurement executives, The Coca-Cola Company altered the way it compensates its agencies. Overwhelmingly, agencies are compensated by charging their clients a fee, estimating labor cost and including an agreed profit margin.  Coke, however, feels that labor-based fees are irrelevant, and that compensation should be tied solely to business results. It adds a pay for performance overlay that allows the agency to earn up to a 23% margin when meeting a performance criteria that includes Agency Evaluation Score, Specialist Metrics, MarCom Metrics, and Business Performance Metrics.
This sounds good and fair on paper: why pay agencies if the business does not meet its goals?  But it is problematic in practice. I don’t know of another service organization that is compensated by performance results – not lawyers, not accountants or architects. This approach ignores the fact that there’s little control for the agency has over the results. What if the client doesn’t choose good work?  Does the agency get final say on creative? Or over other critical parts of the marketing plan? And if they push too hard to get their work produced, how does that affect the agency evaluation?
Coke starts by establishing a base fee for a project, which is unusual in itself as the price is always set by the seller, not the buyer.  The base fee is established through a combination of past fee on similar projects plus/minus Coke’s “current value considerations” (such as budget, strategic importance, talent assigned, industry dynamics, etc.)

Coke is going to great lengths to claim that it’s agencies like this arrangement. Yet, I believe that this approach could weaken the relationships that Coke has with agencies. Setting compensation is at the heart of a relationship, and when the process becomes one sided, the risk of resentment and a frayed relationship is increasing.