Pay-for-Performance 2.0

Surinder Siama

First published in Research World January/February 2011

He runs insights for one of the world’s biggest research spenders, Coca-Cola. Now he’s using that muscle to change the terms of business by pioneering a variation on the pay-for-performance model. Simon Chadwick decided to chat to Stan Sthanunathan, VP Strategy and Global Insights, to find out more.

Endearingly referred to as a ‘provocateur’ by some, Stan Sthanunathan regularly pops up at conferences and in print to evangelise the need for radical change.

That’s because he believes that the industry has largely focused on incremental change, unsuited to a world where disruption has become the norm. A world where explaining past behaviour is less useful than trying to predict the future. A world where traditional research techniques are merely the tip of a very deep iceberg in terms of understanding the human condition. But rather than just talk about it, he’s putting Coca-Cola’s considerable financial fire-power to use: he’s starting a pilot programme with two agencies where part of their compensation will be linked to “the value that their research output generates within Coca-Cola.”

Accountability
The warning shots were fired almost two years ago. In April 2009, Sarah Armstrong, Coca-Cola’s director of world media, told Advertising Age that she wanted all agencies to earn their profitability and not assume it was guaranteed.

In the same way that marketers prefer to talk about value rather than price, Sthanunathan is at pains to distance his scheme from a direct pay-for-performance model: “I’m using the term value-based compensation more than pay-for-performance. The objective is to get better value, as in better quality output. The conversation is less about price reduction.” Former ARF chief research officer, Joel Rubinson, blogged that Sthanunathan was “…interested in creating leveraged compensation models where the research agency gets a bonus for superior business outcomes.”

‘Value’
Sthanunathan unveiled the scheme at last year’s AMA conference and, perhaps predictably, immediately attracted concern that Coca-Cola would hold agencies responsible for company performance. He managed to defuse this: “Our performance could be a small component in the definition of value, but a big chunk of the definition of value is going to be based on what my internal clients think about the value a research agency brings to the table.”

So, how will ‘value’ be defined?

One thing he wants to inculcate across all agency partners is just that, a strong sense of partnership. A strong relationship. Beyond individual transactions: “If somebody has a transactional orientation to a relationship [i.e. just delivering basic findings and conclusions], their compensation should be pegged at a totally different level than someone who comes to this table and says ‘having done this kind of work … for you over the years … here is our strategic point of view.”

In practice, this means agencies bringing evidence from other studies they’ve done with Coca-Cola as well as evidence from other studies and observations outside of specific project work. You’re probably thinking that sounds familiar, since most agencies claim to offer this as standard. That’s clearly not Sthanunathan’s experience. He points out an even bigger imperative to deliver strategic insights and ideas nowadays; with market change happening so fast, incremental change is no longer sufficient. Coca-Cola, along with other billion-dollar brands, needs research and ideas that lead to truly big innovations in order to maintain growth, “Incremental insights results in incremental actions, which results in incremental improvements in business results … and that is not going to make anybody happy!”

Minimal profit
Although Sthanunathan is still working through the detail of the scheme with the two pilot agencies, he’s agreed to share some highlights.

He plans to score the agencies on a 1-5 scale, where 5 would represent ‘clearly exceeded our expectations’, 4 would be ‘met and exceeded expectations’, and 3 would be ‘ delivered against expectations’.

He adds: “If you clearly exceed then you deserve a hike in profits. But if you just deliver on expectation, you probably deserve minimal profit.” Yet he readily concedes that quantifying ‘minimal profit’ is easier said than done: “Working out an agency’s profit element in their fee will not be straight-forward unless they decide to disclose this.”

At the same time, he’s keen not to damage an agency’s financial ability to hire talent in cases where improvement is required, especially in an industry where margins are modest compared with, say, the advertising sector: “I strongly believe that if you pay peanuts then you get monkeys.”

Measurement
The plan is to base the overall ‘value’ score on three factors.

We’ve already mentioned business performance. And this will only be a “small component” because “we all know that research is so far in the front-end to be directly influencing our business results at the back-end.” Nevertheless, he justifies including it to align agencies with Coca-Cola’s long-term growth: “… we want our partner to be vested in our success and our failure.”

The second factor in the value equation will be how client users perceive the agency. It sounds like this will be the biggest element in the final score, to encourage better, more strategic thinking, greater collaboration and deeper investment in the efficacy and effectiveness of solutions.

And, finally, a score based on how the whole process is working which, Sthanunathan says, “is likely to be [weighted] bigger than our business results, but certainly not as big as [perceptions of agencies].” Agencies would be scored by the client insights team on criteria such as the level of innovation in approaches, the degree of pro-activity, and the extent of transformational thinking “to bring unique differentiated solutions to the table.”

Alongside this will be 360-degree survey on how well Coca-Cola treats its partners, the aim being to ensure partners are treated with respect, provided with clear briefs, and encouraged to work collaboratively. This would help to offset any criticism from agencies with sub-par performance blaming Coca-Cola: “We can’t crack the whip and expect great quality results. We have to deliver our side of the bargain. Then we have the right to expect our agencies to deliver.”

360-degree surveys are not new for Sthanunathan. Annual compensation for his team is partly dependant on agency feedback.

Reactions
Sthanunathan didn’t disclose the agencies involved in the pilot but claims they are “very supportive” and pragmatic. “They said let make it work. It is a challenge but we will make it work.”

Industry reaction, he says, is mixed. There’s an apprehensive camp that says it won’t work “because how do you define value – it’s very subjective.” And a positive camp that says “if I’m confident of my capability, I think I look at this as an opportunity to make extra profits.” These are similar to the reactions ten years ago when advertising agencies faced similar changes: “Right now, if you talk to some of our advertising agency partners, they will turn around and tell you that the thing works.”

He says the biggest lessons from that experience are to be brutally objective and to start things slowly: “You really need some solid checks and balances so that everyone sees at the end of the day that this was a fair process and they had a good shot at it. I would probably experiment with it for a year before I turn around and tell everyone that this is it and you’ve got to follow it.” He emphasises the need for a collaborative approach during the pilot “otherwise the agency will do everything to sabotage it and then we will become even more reactive.” Openness and honesty, he adds, are critical to resolving challenges along the way: “We should walk into this process with a huge amount of humility. You should never use the power of your budget to bully anyone.”

As for the reaction from client-side peers, many seem to be looking at the scheme with intense interest. A few were interested in trying it jointly but Sthanunathan didn’t feel this would work because of the risk: “My initial reaction was I would love to make this an industry-wide initiative today, but the moment [you do that] you know it will take a long time …We’re willing to take risks … If companies have transformational growth aspirations, we should also be transformational in the way we do business.”

So, will the scheme work? That’s anyone’s guess because we’re at least a year away from an objective evaluation. But given the challenge on companies to maintain growth in disruptive marketplaces, and the disruption in the insights sector from alternative, often faster and richer sources of decision data, there’s never been greater pressure on agencies to deliver measurable efficacy and effectiveness.

Listen to the audiocast here.

Simon Chadwick is managing partner of Cambiar, USA and editor in chief of Research World in print.

Surinder Siama runs research and engagement firm ResearchTalk

Stan Sthanunathan is vice president – marketing strategy & insights at The Coca-Cola Company in the USA.