A recent article in Advertising Age discusses Coca-Cola’s industry-wide push to a “value-based” compensation model.  Under the model agencies only reap profits if they perform to Coke’s standards.  If the agencies’ work meets or exceeds those standards, they can generate as much as 30 percent profit margins – otherwise they only get recouped costs.  Coke plans to implement this model across all of its ad and media agencies by 2011.

Several questions around this model immediately come to mind– two of which have been heatedly debated for some time; how do you define value?, and how do you determine ROI?  Additionally, if a company is only being paid on results, are companies less likely to be creative and go down a safer route that they know will generate targeted results?

According to the article, Sarah Armstrong, Coke’s director of worldwide media and communication operations and the driver behind the company’s move, that’s not a concern.  However, I’d have to think that an agency faced with the decision of doing something radically new and innovative with the possibility of delivering mediocre results, over a pretty creative idea that promises more targeted results, might go with the safer path – especially in this economy.  One poor showing could not only cost them a large client like Coke, but also give them a bad rep for potential future clients.  Under a traditional retainer model, agencies have more leeway to take those creative risks.

Coke’s move is just another indicator of a trend we’ve been seeing for some time now:  PR and advertising are no longer what they used to be – and I don’t mean that in a bad way – merely just the fundamentals of them have changed.  Between the groundswell of social media applications and their rapid adoption, the decline of print journalism and the demise of traditional advertising, we’re seeing them change every day before our eyes.

Despite my questions about the model, I can definitely see the benefits.  For one, it would force agencies and their clients to design more targeted campaigns.  Additionally, as the economic downturn continues, it gives companies a way to guarantee their “bang for their buck.”  What’s more, it would make competition between agencies much hotter, quickly identifying the agencies and individual employees that can’t cut it.

It’ll be interesting to see how this model plays out, as well as the continually changing landscapes in these industries.  Regardless, I think compensation models are – and will continue to be – different for each client and each agency depending on the objective, resources and company awareness.  It’s all about setting expectations appropriately and defining beforehand what constitutes as value.

More thoughts on the topic from my colleague Liz Caradonna here.