Pay-for-performance deals have no doubt been around since Adam first incentivized Cain and Abel with some incremental allowance money based on which son could produce the most caloric content for the recently-down-on-its luck human family. Are you listening to Pandora or Spotify while reading this blog post? Then you literally have a pay-for-performance arrangement playing out between your ears, with many artists receiving tiny royalty payments for each digital spin.
Below, we revisit five all-time pay-for-performance classics. Our main criteria: significant mutual benefit to both parties (one side can’t drink the other’s milkshake) and enough notoriety to interest our readers.
#5 – Pitching Ace Roy Oswalt Bulldozes the Cardinals in Game 6 of the 2005 NLCS
The Stakes: An elimination game on baseball’s second-biggest stage. A win for Oswalt’s Astros punches their ticket to the World Series.
The Incentive: Astros owner Drayton McClane draws up a real-time addendum to his ace’s contract. If Oswalt wins the game, he’ll be rewarded with a bulldozer he’s had his eye on for years. Yes, a bulldozer. A $200,000 bulldozer in fact.
The Outcome: Oswalt tosses seven innings of one-run ball, vanquishes the Redbirds, and takes home the W and the heavy machinery.
Why The Deal’s a Classic: It was personalized and timely. As a rookie, Oswalt told McClane about his goal to one day own a bulldozer. For McClane, the $200,000 was a significant outlay – but a not a huge hit – to Houston’s balance sheet. Meanwhile, the bulldozer represented an unparalleled feel-good positive psychology cue for Oswalt. The famous competitor was no doubt motivated to win the game anyway, but pitching for — and winning — the bulldozer let Oswalt know that ownership was equally invested in his ascension to elite pitcher status.
#4 – Tom Hanks Waives his Salary in Exchange for a Percentage of the Gross … ofForrest Gump
The Stakes: Big budget adaptation of a best-selling book with a sweeping plot line involving … a folksy Alabaman with a big heart and a modest IQ.
The Incentive: Hanks agrees to waive his usual 25 million dollar salary in exchange for 3% of gross receipts.
The Outcome: Oh Jenaaay! Sometimes life is like a smash box office hit that grosses $677 million worldwide in theatrical release alone. Paramount cashes in huge on its 55 million dollar original budget, while Hanks’ payday is estimated at $70 million and counting. Thrown into the bargain is Hanks’ second-straight Best Actor Academy Award.
Why the Deal’s a Classic: Both parties knew the movie’s success or failure would be heavily determined by Hanks’ performance. With this deal, Paramount ensured it had its indispensable man whole-heartedly behind the success of the film AND they saved themselves $25 million if the picture had failed. For his part, Hanks was able to bank a payday commensurate with his massive contribution to the film. Clearly, Hanks had learned his lesson after earning a mere $70,000 from his breakout role in Splash.
#3 – The General Contractor for L.A.’s “Carmageddon” Freeway Construction Project Goes Under the Gun to Finish Off the Overpass
The Stakes: L.A’s 405 Freeway at the Sepulveda pass, the most heavily traveled stretch of freeway in the country, is about to be closed to all traffic for an entire weekend while an overpass bridge is demolished. If the weekend project, better known as “Carmageddon,” spills over into the start of the work week, the country’s second largest city will plunge into a dystopian economic gear grind of disastrous proportions.
The Incentive: Kiewit Pacific Co, the project’s general contractor, is to be fined $6,000 for every 10 minutes the project goes past deadline. The freeway must be clear and open to traffic by 6 AM the following Monday morning. If the project goes even one day over deadline, Kiewit stands to lose $864,000 in a single 24-hour period. At $72,000 per hour, that’s a good yearly union salary down the drain for every 60 minutes of delay.
The Outcome: Kiewit Pacific completes the work hours AHEAD of schedule, and the entire “Carmageddon” experience is viewed by many Angelenos as a kind of benign hipster holiday that should probably be mandated to happen at least once a year.
Why the Deal’s a Classic: Both sides already had huge incentives to execute flawlessly, but, then again that’s the case for almost every major construction project. By putting the “penalty for-non-performance” contingency in place, the LA Metro Traffic Agency signaled to the public it meant business, while giving Kiewit a very concrete, extremely “motivating” incentive to complete the project on time.
#2 – GoTo / Overture /Yahoo Scales Pay Per Click Search Ads; Changes Advertising Forever
The Stakes: Scaling an advertising medium (search) that could put the old “I know half of my advertising is working, I just don’t know which half” cliché in its grave.
The Incentive: Advertisers are charged only when a user clicks on an ad. All parties to the advertising arrangement are incented properly. The company is incented to display better search results for more relevance and hence more clicks from interested users. The advertisers are highly incented to enter the market, with the zero up-front costs more than outweighing the real risks of fraud / dicey audience quality etc… The advertisers are also incented to write better ads and provide better destination experiences for customers.
The Outcome: The company revolutionizes advertising with a viable, self-service pay-per-click model at scale. A few massively lucrative years follow before the product is eclipsed by Google, whose Adwords product ends up taking the “incentives” discussed above and putting them on executional steroids.
Why the Deal’s a Classic: As obvious as it seems to us now, pay per click was not obvious then. The barriers to realizing this now omnipresent “performance”advertising model crushed dozens of startups, but Overture persisted and won.
#1 – Lester Wunderman Makes Advertising Pay … For Himself AND His Employer
The Stakes: It’s 1941 and Lester Wunderman, the Godfather of direct marketing is a talented 21-year-old ad man earning $55 a week in salary while making new business rain down for his employer, Casper Pinsker.
The Incentive: Wunderman is getting higher salary offers from other agencies but needs security for the duration of the war. He and Pinsker negotiate a contract that guarantees Wunderman $55 dollar per week for the war’s duration PLUS a 33% commission on any new business he brings in and works on.
The Outcome: Wunderman continues his development as a direct marketing genius while bringing Pinsker a steady stream of new revenue and clients. Soon, Wunderman is making six times his weekly base salary.
Why the Deal’s a Classic: In that insecure time, Wunderman was gutsy enough to take much less up front salary than he was worth. Meanwhile, his employer was farsighted enough to first give Wunderman a significant performance incentive and then get out of the way while Wunderman worked his magic. Wunderman used this original negotiation as a springboard for the rest of his storied career in direct marketing. He would go on to link advertising performance to compensation (his own and his vendors) in ways that still look innovative two generations later.
Other Classic Performance Deals: What did We Miss?
We’re just scratching the surface of classic performance compensation deals, and we’re planning on a second post with more amazing pay-for-performance deals. Got a classic performance story we should know about? Leave us a suggestion in the comment box or drop us a line.
