Ford Motor Co. marketing czar Jim Schroer remembers the year he began to slay the sacred cow of advertising tradition. It was 1975, and Schroer was director of marketing for STP Corp., the fuel-additives maker. Instead of paying the time-honored 15 percent commission on media and 17.65 percent markup on production, Schroer told STP's ad agencies - J. Walter Thompson and Dancer, Fitzgerald and Sample - that they would receive a flat fee for their services.
'If you were an agency and had a great campaign, you might have initially invested costs over what the client was paying you,' Schroer says. 'But after you got it going, it was a commission gravy train.'
Now, 24 years later, Schroer has teamed up with ex-Reebok marketing executive David Ropes, now Ford's director of corporate advertising and integrated marketing, to dry up the commission gravy at Ford's agencies. Beginning in January, Ford began phasing in a fee-plus-performance compensation plan for all of the company's global advertising agencies.
Schroer says the new compensation plan is the natural course in Ford's desire to become a great consumer marketing company, shifting from sheer mass-media advertising to employing myriad marketing tools such as sponsorships and one-to-one marketing. He also hopes it will forge a tighter partnership with agencies by tying agency and executive bonuses to the same criteria.
Outcomes, not incomes
'We told them this was not about incomes but outcomes,' Schroer says. 'We want to connect with customers, and we want our agency partners to make recommendations unbiased and unrelated to how they're compensated.'
Agency compensation and media buying were the first two issues Schroer and Ropes dealt with in their first six months at Ford. The first step was consolidating Ford's media buying under Ford Motor Media, which is owned by J. Walter Thompson, in April 1997 and putting Ford Motor Media on a fee system rather than a commission system. Schroer and Ropes knew the next step was to put the rest of Ford's advertising business on a fee system.
For nine months, Ford worked with senior account executives and CFOs from each of its four agencies: J. Walter Thompson, Young & Rubicam, Ogilvy & Mather and W.B. Doner. The result was a new labor-based fee compensation plan that includes a performance bonus for meeting specific marketing goals. The fee covers salaries and overhead to service the account plus a profit margin. Other costs, such as media, production and travel, are provided at net cost.
Three key areas
To qualify for the performance bonus, Ford evaluates its agencies in three areas:
1. There is a subjective review of the agency performance by a Ford manager.
2. Ford's overall profitability will be considered.
3. Ford is developing a brand-loyalty and brand-strength matrix to measure everything from consumer loyalty to the ability of the brand to make more money.
Schroer says initially the subjective score will be given more weight in the agencies' semiannual review. But in the future, the weighting will shift from the subjective to the more quantitative.
If the agencies and the divisions they work with perform poorly, the agencies risk losing some compensation. On the upside, agencies can make more than they made under the old system, which, as an example, was an 11 percent commission rate paid by Ford Division.
'We extended the opportunity on the upside if they were willing to take the risk on the downside,' says Ropes, who adds that there is a cap on how much of a bonus an agency can make.
Though Ford's agency executives say they like the plan, the know they face new competition. The agencies must compete with smaller boutique shops on nonadvertising services, such as event promotions.
'Reaching consumers is the part a lot of creative people forget,' says Bruce Rook, executive creative director at J.Walter Thompson. 'The new agreement adds that necessary discipline; I don't think it's unwelcome.'