Coca-Cola introduces its agency value compensation model

The world's most famous brand, Coca-Cola, created major waves at the recent Association of National Advertisers (ANA) Advertising Financial Management Conference this week with the announcement of its new Value Compensation Model for its advertising agencies.My colleague Tim Williams attended the presentation and was impressed that Coca-Cola has already piloted the model and is rolling out globally this year to 35 markets. It wants to be converted to what it calls Value Based Compensation (VBC) for all agency compensation by 2011.Sarah Armstrong, Director, Worldwide Media & Communication Operations at Coca-Cola gave the presentation, which provided details of the model.Coca-Cola is sharing the model publicly with both advertisers and agencies because it believes VBC needs to be adopted as an industry standard.As Sarah said in her presentation (paraphrasing here):

Under the commission model we rewarded spending. Under the labor model (hourly billing), we rewarded effort. Under VBC we will reward results.

Sarah also said that they will no longer be dictating the profit margin that their agencies can make, as it's none of their business how the agencies run their businesses. This is revolutionary thinking!Henry Ford once said "History is bunk." This may also be one of the first examples of a customer changing the pricing paradigm of a seller's industry. Time will tell whether or not agencies apply similar models to the rest of their customers.For all of those agencies that constantly asked us, "Which big advertisers truly subscribe to the concept of value based compensation?" we now have another titan to add to Procter & Gamble.I wonder what the excuse will be now? Ed, fire up your keyboard. (That's easy for them, they're Coca-Cola).As Tim said, this is another very large and important penguin that has made the plunge off the iceberg. When will others—from both agencies and advertisers—follow?Congratulations to Sarah Armstrong and her entire team at Coca-Cola for not only blazing the trail for others, but recognizing that cooperation in sharing intellectual capital will help focus both agencies and their customers on the right things—creating value for all involved.Bravo, and hopefully, Encore!