Procter & Gamble, the world's biggest advertiser, has announced it is going to pay its advertising agencies on the basis of sales performance.
The decision is a major shock to an industry used to being paid on commission. The new results-based system is being seen as a serious reality check, especially for creative departments.
Procter & Gamble spends more than £2.2 billion (€2.79 billion) annually advertising its extensive portfolio of brands, many of which are household names, including Pampers, Tide and Sunny Delight.
Of that, £300 million commission is paid to its four advertising agencies.
Under the new arrangement, which Procter & Gamble says its agencies fully support, payment will be in the form of a flat percentage of revenue from the company's brands.
The move is being seen as a reaction to Procter & Gamble's modest recent sales figures. The group is now looking for results for its mammoth advertising spend.
The runaway success of Sunny Delight also fuelled the company's move. The sugary drink with "the citrus taste" is one of the most successful new brands of the decade. Saatchi & Saatchi spent £9 million marketing Sunny Delight, which brought in £160 million of sales.
Procter & Gamble business in Ireland is divided between Youngs, DDFH&B and Grey Mediacom. According to Mr Steve Shanahan at DDFH&B, his agency has yet to hear anything officially from its client about the new payment system but he is doubtful how it could be implemented in practice.
Mr John Fanning, managing director at McConnells, is similarly sceptical. "A sales based performance system would be too difficult to measure," he says, "simply because sales are affected by several variables over which the advertising agency has no control, such as distribution, production and even being de-listed by a retailer".
He further suggests the issue of control arises again over the creative output of an advertising agency.
Clients currently have ultimate say on creative output but that would have to change in a sales performance based relationship.
According to Mr Fanning most advertising agency clients conduct performance audits at the end of each year anyway, so agencies are used to performance reviews.
These are always conducted by the company's marketing department and cover a broad range of categories.
It would not be unusual for an agency to lose an account after a bad review. "If you don't perform, you're fired," says Mr Fanning succinctly.
Ms Frances Marsh, managing director at Universal McCann, is equally doubtful about the implementation of such a performance based payment system, not least because large international accounts cost so much to service and no agency would be in a position to take on such an account without some guarantee of a certain level of payment.
She does like the notion of the close relationship between agency and client but points out that no other professional would agree to be remunerated on that basis.
"A client would never dream of setting up such a pay per results system with their accountant or solicitor," she says, "so I don't see why advertising agencies should accept it."
