Introduction
Performance-based remuneration is a widely adopted approach in various industries, aiming to align interests and encourage teams to strive for excellence. At Semetis, a digital-native agency driven by business goals, discussions with prospects and clients sometimes revolve around this strategy. However, potential pitfalls exist that organizations must navigate to ensure the success of such incentive programs. In this article, we'll explore common pitfalls associated with performance-based remuneration and discuss strategies to avoid them.
1. Demotivation due to Uncontrollable KPIs
Tying remuneration to performance poses a risk of demotivating teams when key performance indicators (KPIs) are beyond their control. Market trends, external economic conditions, or uncontrollable variables may influence KPIs, leading to frustration. It's crucial to select KPIs within the team's control and reflective of their contributions. This means relying on KPIs available within the advertising platform rather than analytical tools or CRMs. This is already creating friction given the KPI that would make the most sense is sales or revenue.
2. Contradictory Perception of the Variable Part
Miscommunication about the variable component can lead to contradictory perceptions. For example, the agency may see the variable remuneration as part of the remuneration, while the advertiser perceives it as a bonus. Clear communication and mutual understanding of the incentive structure are essential. Including both a bonus and penalty in the remuneration model can motivate teams to go the extra mile.
3. Frictions and Conflicts Arising from Poorly Selected KPIs
Selecting the right KPIs is crucial to avoid conflicts within the team. For instance, focusing on reducing the cost per acquisition (CPA) may conflict with the advertiser's growth goals. Let’s illustrate this point: we agree on a cost per acquisition (CPA) metric. It would be tempting to reduce the volume of acquisitions and reach the CPA. Reducing the volume contradicts advertiser growth. To avoid this pitfall, we should select a KPI that positively impacts the advertiser’s North star metric.
4. Impact of Attribution Problematics on KPIs
Difficulties like cookieless environments or delays in tracking can significantly impact KPI accuracy. Relying on KPIs within advertising platforms can simplify measurement and reduce endless discussions.
5. Lack of Transparency in KPI Measurement
Transparency in KPI measurement is vital for effective performance-based remuneration. Both partners must have easy access to KPIs to avoid distrust. It goes without saying that the advertiser should have access to the platforms concerned. In the opposite direction, it would be absurd for the KPI to be in the CRM and not accessible by the agency.
6. Balancing KPI Value with Results
There's a delicate balance between setting the value of KPIs and focusing on achieving better results. Organisations must avoid spending excessive energy fine-tuning KPI values at the expense of actively pursuing improved performance. The remuneration model should be designed before collaboration starts, and the value must be determined beforehand. Finally, all parties should remain flexible and have a meeting every six months to reassess the value or even the KPI based on the market.
7. Overly Complex Remuneration Mechanisms
Complex remuneration mechanisms may make it difficult to forecast budgets accurately. Simplicity is often key in designing incentive structures to ensure that both parties can easily understand and anticipate the financial implications of their performance. A pragmatic approach is to focus on the platform where we are investing the most and which is generating the most results.
8. Short-Term Focus at the Expense of Long-Term Strategy
Relying solely on short-term results for remuneration can lead to a lack of focus on long-term strategic objectives. The idea is to avoid judging, for instance, an awareness effort with short-term performance KPIs. This remuneration should thus only focus on the conversion/performance layer.
Conclusion
Avoiding these pitfalls is a significant challenge. If we caricature, we end up with a remuneration model based on cost per click (CPC) for only the SEA (Search Engine Advertising) that we should reassess every six months. This indeed impacts sales but with an indirect link that we honestly wonder if it's worth the effort. Navigating these pitfalls is so complex and sometimes contradictory that, for the sake of advertiser growth, we should truly question the remuneration-based model in digital advertising. Strong partnerships don't always require contractual mentions; instead, alignment on North star metrics and shared objectives should be the focus.
Margaux Marien
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