The age-old question: 'Where does a 800-pound gorilla sit?' often gets the familiar answer: 'Anywhere he wants to.'
So when the automotive companies - the proverbial 800-pound gorillas of the advertising world - want their advertising agencies better focused on their brands and their business, they ask for fee-based compensation with a performance bonus.
And agencies respond: 'Any way you want it.'
In a fee-plus-performance system, an agency receives a fee that usually includes the cost of servicing the account for salaries, overhead and other costs. Media is provided at net cost. The fee also includes a profit, which is sometimes negotiated with the automaker. The performance bonus varies and may be linked to increased product sales, improved product name recognition or higher client profits.
Under the earlier commission system, automotive advertising was compensated on the basis of 15 percent of media billings plus a specified markup on production.
In fact, 1999 marks the first year all major automakers except Honda are tying their advertising agencies' compensation to fee-plus-performance goals. General Motors, Ford Motor Co., DaimlerChrysler, Nissan and Mitsubishi have negotiated fee-plus-performance contracts with their agencies in the past year. Other major players already were using the system, except Honda, which uses a fee system only.
The switch to fee-based compensation resulted from a feeling that the easy-to-manage commission system, which relied on expensive mass media buys, had become obsolete and did not give the agencies a stake in helping automakers meet marketing goals. In some years, auto executives saw their ad agencies reap the rewards of huge spending increases, while their own companies experienced sales declines and red ink.
Jim Schroer, vice president of global marketing at Ford Motor Co., explains it this way: 'Ford of Europe's market share has declined. Under the old system, the agency is doing fine, thank you very much! Where is their incentive to get involved and fix it? As long as the advertising budget went up, they were happy people. Right now they are not.'
The auto industry has followed other major advertisers into the fee-based arena. The Association of National Advertisers' 1997 compensation survey showed 53 percent of major advertisers were using a labor-based fee to pay their agencies, compared with 24 percent in 1988.
Toyota went to a fee-only system in the mid-1970s, followed by Honda and Nissan. The domestic automakers initially just cut their commissions - first the former Chrysler Corp. during its brush with bankruptcy in the late 1970s, followed by GM and Ford in the mid-1980s. By 1989, Chevrolet was at 9 percent, and Ford Division was between 11 and 14 percent.
'If the agency isn't putting its profits at risk, how can it be a true partnership?' asks Robert Lundin, a Chicago advertising consultant. 'Agencies need to share in the (client's) pain and the pleasure.'
Contracts vary widely
Each performance clause is unique. Nissan has used a performance bonus off and on with agency Chiat/Day. A few years ago the automaker dropped the bonus, added more assignments and increased the fee. But John Rinek, Nissan director of marketing communications, said Nissan reinstated the performance clause this year to keep the agency focused on the slew of new product launches.
'Our fates are tied together in the marketplace,' said Rinek. 'It's all sales-related.'
The fee-plus-performance system also helps automakers become more disciplined in planning the business, according to Phil Guarascio, vice president of advertising and corporate marketing at GM.
Guarascio saw the difference in focus when Saturn put agency Publicis & Hal Riney on a 'risk-and-reward' pay system in the late 1980s. In the mid-1990s, GM instituted a fee-and-performance system with Leo Burnett when it nearly lost the Oldsmobile account, worth an estimated $242 million.
'The reason we decided to go all the way (with a fee-based system) was to a large degree a result of two things,' Guarascio says. 'One was our brand management (system), and another was watching our fee-based systems (at Saturn and Oldsmobile) where it was clear we were more focused on the work.'
Mike Vogel, vice chairman of Bozell Worldwide and director of the agency's DaimlerChrysler Global Operations, agrees with Guarascio.
'We sit down with our (DaimlerChrysler) counterparts and find out what their priorities are, and we are not doing anything outside of that,' he said.
But DaimlerChrysler's agencies risk losing some of their base compensation and profitability if they don't meet the stated goals.
Vogel isn't worried, however: 'We rolled the dice because we know we're good enough to make more money.'