Now Mad Ave Really Has To Sing For Its Supper

What a sweet deal for Young & Rubicam Inc. In late November, the agency won new business worth $200 million a year in billings from Colgate-Palmolive Co. when the consumer-goods giant consolidated its annual $550 million of ad spending at Y&R. Just one catch: Y&R, which already had more than half of the Colgate account, now will be paid based in part on how well its ads work.

The agency is no newcomer to the pay- for-performance concept. Two years ago, it struck a similar deal with Sears, Roebuck & Co., and its "Softer Side of Sears" television commercials have paid off big time. Both contracts are high-visibility examples of a quiet but growing trend on Madison Avenue, where the standard 15% commission has gone the way of the three-martini lunch.

BIG CUTS. Why the change? As Corporate America undergoes wrenching cost cutting, ad fees are being scrutinized along with everything else. Agencies are being pressured to accept lower pay while improving quality. "Advertising has been seen as an expense to be cut," says Peter A. Georgescu, chairman and CEO of Y&R. "I see this as an opportunity to break out of that cycle."

Indeed, about 45% of advertisers say that they have changed the way they pay agencies during the past three years, according to the Association of National Advertisers. Nearly 20% say their contracts now include some incentive pay, up from 13% in 1992 (chart).

The problem is measuring how well an ad does. "It's very difficult to agree on criteria," says Alan Bishop, chairman and CEO of Saatchi & Saatchi North America. Colgate plans to use three benchmarks to measure Y&R's performance: a subjective evaluation of creativity, sales results based mainly on market-share growth, and the mileage it gets from the worldwide ad budget.

The agency already has made Colgate's global advertising more efficient. Its "White on White" TV commercials, created to sell laundry detergent in France, have now been introduced in 30 countries, replacing 20 different local campaigns. "Once you have a winning formula, there's no need to reinvent it," says Emilio Alvarez-Recio, vice-president for global advertising at Colgate.

Of course, even the best campaign can be jolted by circumstances. What if there's a labor strike in France or a currency devaluation in Mexico? Top managers, whose pay is increasingly weighted to performance, often get hit by such events. In this case, agency and client will sit down and together figure out the best way to cope, Recio says. "Our objective is to treat the agency as any other human resource," he says. "It requires a lot of confidence in each other to be fair."

A BOON. The Sears deal is slightly different from Colgate's. Performance measures include growth in customer awareness based on surveys, growth in its apparel business, and total profits. Sears also makes subjective judgments about Y&R's strategic contributions and account management.

For Y&R, the Sears pay-for-performance scheme has been a boon. John Costello, senior executive vice-president for marketing at Sears, credits the "Softer Side" TV spots with helping apparel sales outpace the industry over the past two years. Y&R's Georgescu says the agency has earned more with its incentive-fee plan on the $60 million-a-year Sears campaign than it would have earned with a 15% commission.

Not all ad agency executives are as gung-ho as Georgescu about performance pay. Many think that it's a euphemism for less pay. "There are clearly some clients that look to reduce their remuneration to the agency by creating incentive compensation," says Philip Palazzo, chief financial officer at Ammirati & Puris/Lintas, New York. But at a time when cost cutting is the rage, agencies may find it's better to accept the possibility of a profit than the certainty of none.

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