THE COCA-COLA COMPANY'S VALUE-BASED COMPENSATION MODEL
The Coca-Cola Company made headlines earlier in the year with the announcement of its new value-based agency compensation model. This model was inspired by the company's commitment to integrated marketing communications and has benefited from the input of cross-functional teams and agency partners around the world. The Coca-Cola Company's value-based approach was built on the underlying belief that "number of hours should not define value" and aligns the economic incentives of agency and client by focusing both parties on outcomes instead of inputs.
Sarah Armstrong Director, Worldwide Media & Communication Operations
The Coca-Cola Company
Positives
The intent of this model is excellent. We agree with the stated goals:
- "Best Work" - To deliver the best strategic and creative output
- "Best Value" - To drive continuous improvement in production of Marketing Communications investments
- "Best in Industry" - To provide a competitive advantage
- "Best Client" - To attract and retain best talent
We also like the discipline behind it, building on historical compensation and prioritization of an agency’s expected scope of work.
Major Issues of Concern
We would argue that this model is clearly not value-based, and that the compensation structure is inherently unfair to agencies.
Coca-Cola is effectively the only party determining value, without soliciting or obtaining input from the seller. By defining agency profitability in terms of mark-ups, at a 30% maximum Coca-Cola is taking a step backwards by treating their supplier-partners as contract labor “vendors.” With agency profits effectively capped at 23%, and the client defining value on a largely qualitative and subjective basis, agencies can expect to land, at best, in the 15-20% profitability range. In our opinion, Coca-Cola is essentially deploying a cost/fee reduction program.
An even bigger problem for Coca-Cola’s agency community is that actual compensation is not typically determined until month 13 following annual work having been initiated. This puts an undue hardship on agencies that must operate during the entire year without margin. Coca-Cola doesn’t have a cash flow problem, but they’re creating one for their agencies by asking them to operate as banks. The model could lead to efficiencies, yet may actually have the unintended consequence of agencies attempting to make a profit during the year by reducing agency staffing or talent levels on the account.
Coca-Cola undoubtedly has enough industry weight to impose their will on agencies, but it is not really a “model model” for agency-client relationships. Coca-Cola expects their approach to be embraced as an industry standard. We believe that would establish a dangerous precedent in the marketplace and effectively eliminates small- and mid-size resources from working on the brand. We look forward to seeing what adjustments they make in the coming months and hearing more from the affected agency finance folks.
In our minds, you can’t “templatize” value-based compensation based on Excel spreadsheets. True value-based compensation requires a more tailored discussion that involves formalized inputs from the seller, which drives to a “win-win” arrangement.
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