The Fatal Flaw of Pay for Performance

June 23, 2008

Here’s a copy of my article that appeared in Adotas:

The Fatal Flaw of Pay for Performance

The Harvard Business Review, however interesting, is not always at the top of my reading list for a seven-hour flight to the UK. I’m more of an Esquire kind of guy, but I recently relented and forked over the cash for good old HBR (I still bought an Esquire to keep me entertained). While flipping through the articles, it struck me that the issues discussed on those pages transcend industries and are widely appealing because they affect any business. The contents seemed to be custom produced by writers that perhaps had been listening in on my team meetings and brain storming sessions over the past six months. This reminded me that some dilemmas – strategic, operational, motivational and ethical – are universal.

One piece in particular sparked my interest immediately, as it resounded for the performance-based online marketing industry yet had little to do with it. Odd. The title of the article was something along the lines of “The Fatal Flaw of Pay for Performance.” I immediately devoured the article, quickly realizing that it had nothing to do with online marketing. It was, however, fascinating and perfectly applicable.

The article discussed how rewarding a CEO for performance may satisfy certain critics so they don’t get swept away with backdating stock options, or the like. One of the main points addressed in the piece, which I felt was perfectly appropriate for our industry, is that when people (or in our case publishers/affiliate marketers) are rewarded for performance only, there is a fatal flaw – the temptation to cheat.

We open the system up for fraudulent activity because the one responsible for performing is so desperate to meet a certain benchmark that they loose site of the bigger picture. The article listed examples of CEO’s who had “cooked” the books. In my mind, I thought about rampant fraudulent leads I’ve seen over the years – affiliates forging applications, entering fake emails, even using stolen credit cards – all with the intent to be paid for performance.

The bottom line is, however appealing it is for advertisers, if not properly regulated, this model is flawed. You don’t want a CEO to be rewarded for something he or she didn’t really do. Nor do we in the performance-based marketing industry want to reward someone for performance they didn’t achieve on behalf of our advertisers.

The model shouldn’t be just pay for performance, but rather pay for performance with integrity. Let’s be honest though, there are too many affiliates and publishers to cut out all of the shady guys. So, how do we solve this dilemma? The first step is to be AWARE of the issue, and then monitor, regulate and participate.

Once you’ve recognized the existing threat, it’s important to monitor your affiliates and the manner with which they generate leads for your advertisers. Have a task force assigned to not just monitoring, but identifying and then terminating the relationship if the publisher is seen to be doing anything out of the ordinary. It’s also crucial to regulate the publishers that join your network. It’s your integrity as well as your advertisers’ at stake, be in charge and lay down the law. Finally, participate in removing these publishers actively as well as educating your advertisers about the pitfalls of pay for performance (i.e. Don’t allow incentivized traffic on lead generation offers).

My trans-Atlantic encounter with HBR ultimately reminded me that pay for performance is flawed – a dilemma that echoes across all industries. For those of us in performance-based online marking, particularly affiliate marketing, it should be clear that pay for performance with integrity is always better, albeit difficult to execute, and therein lies the differentiating factor for the best networks.

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Ad:Tech Miami Re cap

June 12, 2008

Ad:Tech Miami Conference attended – June 3rd

After spending a full day in sessions and walking the floor at Ad:Tech Miami, the message is clear – the Latin market is growing exponentially

Highlights/Insights
Hispanic online market has grown 18% YTY
Top 25 % of Latin consumers use the internet 250% MORE than the general market
Bottom 50% use it 78% less than the general market
Most of those users are under the age of 25
38% have some college education
76% use cell phone as the PRIMARY phone
19% use the internet to connect with family and friends, and they’re generating their own content online – blogging, social networking etc.
Major US Markets = LA, NY, Miami, Houston, Chicago

Top Latin Markets = Brazil, Mexico
Latin American has 87% online search penetration – 3million searches per month
Brazil = 90% online search penetration

Mexico
2008 27.4 million Mexicans are online
70% have broadband. (Most likely due to the usage of internet cafés – this does not indicate that they have broadband services in the home).
97% of Mexicans multi task while online
– 50% on the phone
– 41% while working
– 35% listening to music
– 25% watch TV

49% user generated content
33% own a blog
96% growth this year
2011 = $192million
UP 134% in 2008
Only 1.5% of total ad spend is going toward digital in Mexico.

Brazil and Mexico have a great deal of online user’s spending money online. There is also a huge potential in the US market for advertisers to target Spanish speaking Americans. Latino culture in the US is becoming more educated, and more versed in the online arena. Social networks are exploding, and Latin Americans are generating content to stay in contact with family back in their mother countries.