Tag Archives: agency compensation

Decision Time for Advertisers in Wake of ANA Study on Media Rebates

5 Jul

time to decideU.S. advertisers have long suspected their presence and agencies have steadfastly denied accepting rebates in the U.S. market. Depending on which side of the ledger one fell on, the ANA/ K2 study on media transparency may not have swayed your perspective on the topic one iota.

If such is the case, that is too bad. As the noted Irish playwright, George Bernard Shaw once said:

“Progress is impossible without change, and those who cannot change their mind cannot change anything.”

The study was thorough, insightful and shed light on some of the non-transparent sources of revenue available to agencies. These range from AVBs or rebates and value banks consisting of no-charge media weight to the spread earned by agency trading desks from the practice of media arbitrage or “principle buying” as it is often called. The source of these findings were agency, ad tech and publisher personnel that participated in the study in exchange for the ANA and K2 protecting their anonymity. Of note, not one representative from an agency holding company or ad agency was willing to go on the record and participate in this study.

We believe that the study should serve as a wake-up call for advertisers and agencies alike to engage in serious discussions regarding the level of disclosure desired by clients when it comes to the stewardship of their media investment. In the wake of the 4A’s shortsighted, premature withdrawal from the joint task force dealing with this topic and their subsequent challenges of the ANA/ K2 study methodology and findings, these discussions will have to occur on a one-on-one basis. Which, candidly, is the best means of affecting near-term change.

In most instances, it is not illegal for agencies to generate non-transparent revenue and is likely not even a violation of the agreements, which have been signed with their clients. Why? The contracts are lacking in the requisite control language to protect advertisers and agencies are masters at interpreting “gray areas” within those agreements and bending the rules in their favor. This coupled with the fact that only a small percentage of advertisers audit their agency partners and it is easy to see how such practices could exist.

Thus, as an industry we should not cast blame for the emergence of non-transparent revenue as an important element in agency remuneration programs… even if not sanctioned by advertisers. Nor should we accept the agencies excuse that client’s driving fees down somehow makes it acceptable for agencies to pursue non-transparent revenue to counter remuneration agreements, which agencies have knowingly signed on for.

Agencies are not suffering financially. Consider that in the first-quarter of 2016 the “Big 4” holding companies all saw increases in revenue ranging between 0.9% – 10.5%. WPP achieved a 10.5% increase on an 8.5% increase in billings, OMG saw net income per diluted share increase 8.4% and IPG achieved operating margins of 33.8%. Between these performances and media inflation outstripping GDP growth or increases in CPI and PPI it is easy to see how advertiser investments are fueling the trend of continued acquisition by these holding companies as they snatch up ad tech firms, content firms, digital agencies and traditional ad shops. Not to mention the fact that WPP’s chairman has an annual compensation package, which tops $100 million per year.

The focus of clients and agencies should be on returning to a principal/agent relationship predicated on full-disclosure. This is the surest path to rebuilding trust and establishing solid relationships focused on objectivity, transparency and a mutual focus on maximizing advertiser return-on-media-investment. Secondarily, both parties need to evaluate how to minimize the number of middlemen in the media buying loop, particularly for digital media, rethinking the role of ad tech firms, exchanges and publishers and the cut that each takes, lowering the advertisers working media ratios.

From our perspective there are four steps, which advertisers can take to address these issues:

  1. Revisit client/ agency Master Services Agreements to tighten terms and conditions, which deal with disclosure, financial stewardship and audit rights.
  2. Undertake constructive conversations regarding agency remuneration, with the goal of ensuring that your agency partners are fairly compensated, removing any incentive for non-transparent revenue generating behaviors.
  3. Pay more attention to the proper construction of statements of work (SOWs), establishing clear deliverables and review/ approval processes against which your agency partners can assess the resource investment required to achieve such deliverables. This will assist both client and agency in aligning remuneration, resources and expectations.
  4. Monitor agency performance, resource investment levels vis-à-vis the staffing plan and audit contract compliance to ensure that contractual controls and the resulting levels of protection and transparency are being met.

The ANA/ K2 study can and should serve as a platform for advertisers and their agency partners to work through any concerns or expectations regarding media transparency, both in the U.S. and across the globe. Experience suggests that progressive organizations will use the insights gleaned from the study as a launch pad for improving contractual controls, working media ratios and client/ agency relations.

For the industry, it is important to dispatch with concerns regarding media transparency quickly. This will allow all stakeholders to focus on tackling the myriad of issues that dramatically impact media effectiveness including ad fraud, cross channel audience delivery measurement, viewability and attribution modeling.

 

Linking Agency Fees to Outcomes

14 Dec

overheadThe topic of agency remuneration is one that the advertising industry has wrestled with for the last few decades, since the 15% standard agency commission went by the wayside. 

Agencies want to be paid fairly for their services and clients want to earn a fair return on their agency fee investment… at least theoretically. In reality, agencies want to earn as much money as possible on each of their accounts and clients want to pay as little in agency fees a they can. 

Unfortunately, both stakeholder groups’ true intentions can at a minimum negatively impact perceptions one side may have of the other and in a worse case scenario, drive bad behavior. This can include an advertiser focusing on continually ratcheting down agency fees, with little consideration for the relationship between agency fees and the scope of services. In turn, this is a perfect breeding ground for an agency’s decision to pursue non-transparent revenue sources to shore up perceived inequities at the expense of the advertiser. Ultimately, these actions can serve to undermine trust and eventually the stability of the client/ agency relationship. 

Thus the question remains; “How can both parties bridge the divide when it comes to the agency remuneration discussion?” 

The best solution, obviously, would be to structure a compensation system which is fully transparent, fair to both parties, encourages good behavior and fosters a relationship based upon mutual respect and shared goals. As Sam Walton, founder of one of the world’s largest companies once said; 

“We’re all working together; that’s the secret.” 

In our experience as contract compliance auditors, we have found that the most effective compensation programs link to agency fees to outcomes. We have seen more beneficial results when this is the case compared to fixed retainer fees that have no link to a mutually agreed upon foundation. Typically, these outcomes fall into one of three categories: 

  1. Agency deliverables
  2. Agency time-of-staff investment
  3. Qualitative and quantitative outcomes, those controlled/ influenced by the agency and KPIs tied to the success of the client in-market

It should be noted, that remuneration programs often combine elements from each of the aforementioned categories. In many respects, this is an ideal scenario, particularly in the context of agency-of-record relationships, where the nature of the client/ agency relationship is more akin to a partnership than a buyer/ vendor interaction. 

Regardless of the mode of compensation ultimately selected, value-based, direct-labor driven or performance based, we believe that there are two critical components, which must be negotiated in advance of focusing on the level of remuneration. 

First and foremost is the development of a tight scope-of-work (SOW) collaboratively constructed by the client-side marketing team and the agency account services team. At a minimum, the SOW should explicitly identify all projects, expected outputs, the quantity and timing of those outputs and some indication of whether those items must be created versus modified or adapted. Ideally, the SOW will also address issues with regard to project component complexity and the number of rounds of input/ review per project component to assist the agency in assessing the required time-on-task and to assist the client in establishing project briefing and approval processes which are consistent with desired project outputs. 

Secondly, with a mutually agreed upon SOW, the agency should be asked to provide a detailed staffing plan, one which identifies the names, titles and functional responsibilities of the specific individuals who will work on the business along with their utilization rates. The staffing plan should also identify the base number of hours utilized to calculate a full-time equivalent (i.e. 1,800 hours per year) and at a minimum, a blended hourly rate by department or by function for use in pricing out-of-scope work and or in reconciling fees relative to the agency’s time-of-staff investment if and when necessary. 

The time invested by both parties on the front-end to clearly establish the client’s desired outputs, timing requirements and qualitative expectations and to assess the resource investment required by the agency to deliver on those anticipated outcomes will yield significant dividends. 

Additionally, tracking monthly progress project status and the agency’s time-of-staff investment will allow both parties to stay on track and within budget… while eliminating any surprises. 

In the words of Henry Ford; “Coming together is a beginning; keeping together is progress; working together is success.”

 

 

 

 

 

 

 

 

 

 

What is the Right Approach to Agency Compensation?

14 Nov

agency compensationThe topic of effective, mutually beneficial ad agency remuneration methodologies has been discussed ever since the mid-1980’s when full-service agencies and 15% commissions became passé.   

There has been no shortage to the variations on compensation structure that have been explored, adopted and debated over the last thirty years, well before the emergence of procurement in the agency sourcing and contract negotiation mix.  The perception among many industry professionals is that agency compensation is a “zero-sum” proposition… somebody wins and somebody loses.  Further, agency representatives have long alleged that procurement wants one thing, year-over-year rate decreases in spite of the fact that advertisers are asking their agency partners for increasing levels of support. 

Experience has taught all of us who have been participants in constructing agency compensation packages that there is no silver bullet.  The variables which come into play to customize a fair remuneration program which optimizes an advertiser’s return on agency fee investment while properly incenting the agency vary greatly from one relationship to the next.  In our agency contract compliance practice we have reviewed commission only, fee only, base fee plus commission, direct-labor based fees, retainer fees tied to SOWs, flat fees and on and on.  Each has its pros and cons. 

In our opinion, the key to crafting a proper remuneration package comes down to one item, measurement.  It has been said, “If you aren’t measuring, then you are just practicing.”  Time and time again we find that neither the advertiser nor the agency has the requisite inputs to assess and effectively negotiate and or monitor a balanced compensation program.  Ultimately, the way to create a “Win-Win” scenario in this area is for an advertiser to tie agency compensation to agency deliverables.  Unfortunately, advertising is a complex sub-set of the professional services arena and valuing deliverables is a major challenge. 

The good news is that consultants such as Farmer & Company have made inroads in the area of connecting compensation to outputs.  Like most things worthwhile, the initiatives are challenging, but can be tackled.  Farmer & Company takes an in depth, data-driven approach to compile historical project / task level information that many agencies and clients have not maintained.  Why?  They’ve simply never tracked variables such as the effectiveness of the client briefing process, time-on-task, rework levels and or the quality of the outputs.  All are achievable and rewarding, but require a commitment among both client and agency stakeholders to begin capturing this data at the requisite level of detail. 

Recently, I came across an article written for Procurement Leaders by Danny Ertel a partner with Vantage Partners entitled: “Complex Services: Alternative Pricing Models.”  The article addressed the topic of service purchasers achieving their “budgetary concerns with pricing models that do a better job of aligning incentives.”  Importantly, marketers and agencies alike can take solace in the balanced approach proposed by Mr. Ertel for a more “strategic” approach to negotiation, rather than focusing on “trading volume for discounts.”  To quote noted actor and martial artist David Carradine: 

There’s an alternative.  There’s always a third way, and it’s not a combination of the other two ways.  It’s a different way. 

If you’re interested in learning more about balancing risks and outcomes, you will find the article to be thought provoking.  Separately, if you’re interested in discussing how to lay the groundwork for valuing outcomes on this important topic, contact Cliff Campeau, Principal at AARM at ccampeau@aarmusa.com for a complimentary consultation.

Do Performance Incentives Have a Place In Agency Remuneration Systems?

1 Oct

Agency Performance CompensationThe direct answer is “yes” bonus compensation systems can be a viable means of incenting proper resource allocation decisions, behavior and performance among an advertiser’s agency network… just as they are with driving employee performance within an organization.

Perhaps a better question is; “What type of outcomes should be recognized?”  While the answer to that important question will vary by advertiser, as Stephen Covey wisely stated:  “Begin with the end in mind.”

This is clearly the case in designing performance compensation systems for marketing services agencies.  Properly structured, incentive compensation systems are an excellent tool for aligning an advertiser’s agency network partners with the organization’s long-term business goals.  Yes, that’s right, long-term goals.  That is not to minimize the importance of the near-term sales and profit needs of the business and the role that marketing communications can play in successfully realizing those goals, but those outcomes should be the focus of the “base pay” portion of an agency remuneration system.  A solid base compensation program is a requisite first step toward insuring that an agency makes the appropriate investment in staffing, consumer research & analytics, market insights and efficiency enhancing technology tools necessary to achieve next quarter’s demand generation goals. 

Securing agency “buy-in” and participation in supporting the broader strategic objectives of the organization are essential for long-term brand health and market share success.  This is where we believe a performance compensation program should be focused.  Too often we have seen incentive programs focus on tactical or executional outcomes at the expense of tapping into an agency’s strategic reserves as a means of upping the value of their contribution to an organization’s long-term success. 

One of the keys to success in this area is to involve the top management of both the advertiser and the agency.  Bringing senior management together to discuss the client’s vision for success, business goals and the performance criteria that should be put in place to assess progress has a dual benefit.  One, it can elevate the perspective of the agency from “vendor” to “partner” status in the eyes of the client’s management team and gain their appreciation for the agency’s strategic capabilities.  Secondly, the opportunity for a broader level of “strategic engagement” with a client can be an incredibly compelling proposition for senior agency management.  In turn, the combination of the respect exhibited by the client for the agency’s ability to contribute and the corresponding financial reward tied to their mutual success will fuel an agency to make the desired resource investment.

When structuring the performance criteria for an incentive compensation program, the need to blend both quantitative and qualitative measures is very real.  While written in the context of organization’s incenting their employees to take a long-term perspective, we were intrigued with a recent article in the McKinsey Quarterly and its relevancy to this topic.  Entitled; “Encouraging Your People to Take the Long View” authors Gibbs, Heywood and Pettigrew surmised that “over time, traditional hard performance metrics can encourage short-term success at the expense of an organization’s long-term health.”  However, they recognized that both measuring and strengthening the “capabilities that help companies thrive over the long haul” can be challenging.  Their answer?  Structure an evaluation process that effectively assesses contributions to “corporate health” by embracing the following principles:

1) Root-Out Unhealthy Habits 

2) Prioritize Values

3) Keep it Simple

We would certainly echo the notion of “simplicity.”  Too often in our contract compliance auditing practice, we encounter incentive compensation systems that are confusing, overly complex and metric laden to the point that they may incent very little in the way of extraordinary performance.

Finally, we would recommend integrating an annual client-agency 360° evaluation process that involves the same senior managers that were party to constructing the terms of the performance compensation program.  The ability to mutually assess progress and to identify areas for refinement in the coming months can boost the chances for successfully achieving the client’s goals and for building the client-agency relationship. 

Interested in learning more about the role of performance compensation programs in agency remuneration systems?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation. 

There are no guarantees. Are there?

10 Sep

profit guaranteeWhether it relates to new product launches, store openings, catalog sales or a new advertising campaign, there are no guarantees that marketers will meet with success.  No matter how sound the strategy or crisp the execution or the level of investment made to support these initiatives, there is no certainty that response rates, sales, market share or profitability results will achieve expectations.

The same can be said of an organization’s investment in marketing.  Just because a firm spends 5.0% of revenues on advertising support, the investment alone doesn’t automatically guarantee an upward move in the organization’s key indicators.  Further, there is always the risk of campaign failure, or under-delivery, which can have negative consequences on an advertiser’s bottom line. 

Despite this risk, many advertisers continue to contractually guarantee a profit margin to their advertising agency partners.   And yet, agency pundits continue to lament how “unfair” current remuneration programs are, and that the agencies don’t fully participate in the “upside” results of their clients’ demand generation efforts.

Turn it around.  If a client-side CFO knew  they could book guaranteed profits as a result of the advertising investment made by their organizations they would surely take that deal.  Further, the industry would see a steady increase in advertising spending.

Shared pain, shared gain.  As investors know, generally financial returns are directly proportionate to the risks incurred.  In light of this truism, should there be any upside potential when agencies benefit from the security of a guaranteed profit floor?  

With the move toward direct labor based compensation programs, agencies are able to recoup their sunk costs (i.e. labor, employee benefits, rent, corporate expense, etc…) and to secure a guaranteed profit margin typically ranging from 12% – 18% (excludes additional profit from in-house studio and the like).  Perhaps it is time for advertisers to begin to question the efficacy of this practice.  Don’t get me wrong.  I believe that an agency should have the opportunity to earn a profit on each of their client account, and I don’t believe that agencies should bear inordinate risks to their remuneration for items and outcomes that are beyond their control.  However, it seems that agency profitability should be more aligned with resource investments and the outcomes of their efforts.

Further, from a financial control standpoint, without the benefit of tight controls and audit oversight, a cost-plus / fixed profit margin remuneration system can inflate an advertiser’s fees as a percent of marketing spend.  Too often client-agency contracts fail to adequately define key components of agency overhead or to identify employee compensation levels, agency staff utilization and out-of-pocket cost expectations.  Beyond inadequate contractual clarity on these items, there is another factor which compounds an advertiser’s risk in this area… the lack of a disciplined process to verify actual financial performance for each of these categories.

To optimize agency fee investments and enhance transparency into this aspect of advertising spend, there are three items that an advertiser can include in their letter-of-agreement (LOA):

  1. Comprehensive definitions of key remuneration program components and examples of how various factors will be calculated.
  2. Quarterly reconciliation process for agency fees, time-of-staff investment and billings.
  3. An advertiser’s “Right to Audit” clause and an “Agency Records Retention Policy.”

Successful optimization hinges on a commitment to actually following through on the right to audit, whether through the advertiser’s Finance/ Audit team or by engaging a 3rd party agency contract compliance auditor. 

To kick off the process, we would suggest an open dialogue and information exchange between client and agency to discuss profit expectations and to review those items which impact agency costs and client fees.  This conversation should take into account a client’s total spend with the agency and its parent company, which offices the client’s account is serviced from, agency employee compensation, retention & training philosophies and the agency resources that will be brought to bear on the client’s business.

In the end, it is in each parties best interest to develop an agency remuneration program that incents an agency to deliver superior performance, recognizes an agency’s resource investment and where there is a shared investment in market-based performance stemming from the client’s and agency’s efforts. 

If you would like to gain the benefit of what we’ve learned through first-hand experiences and would like to schedule a complimentary consultation on “Client-Agency Contract Trends,” please contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com.

Marketing Agency Relationship Management; “Who’s Responsible?”

24 Jul

contractWho owns the relationship between your organization and your network of marketing services agencies? Simple question, right? We would suggest that the answer to this straightforward inquiry is more convoluted than you might think.

Here is a process for self-assessing whether your organization has the most basic, yet overlooked, supplier governance characteristics in place:

  1. Identify the functional area(s) and or individual(s) that you believe are responsible for the stewardship of your marketing agencies.
  2. Request of them a current copy of the executed letter-of-agreement (agreement), along with amendments and all relevant statements of work related, including the basis & calculation methodology for current agency compensation.
  3. Request of them a copy of the latest independent agency contract compliance audit results, performance assessment document, and agency fee reconciliation.

From our experience in working with advertisers large and small, chances are very likely that securing the aforementioned documentation will prove to be much more of a challenge than it should be. The reasons are many and varied, and range from the rate and rapidity of turnover within the marketing organization to the lack of a clear established process for managing and monitoring the marketing services vendor network.

In most organizations there are multiple touch points over the course of the lifecycle of an agency relationship that usually involve representatives from Marketing, Procurement, Finance, Legal and Internal Audit. Typically, certain of these groups plays a role on the front-end in on-boarding an agency, negotiating the agreement, ensuring proper controls are set, and developing the compensation program. The groups should then stay involved. However, in practice once initial terms are set, involvement of non-marketing personnel tends to end. This leads to relationship “drift” and creates risks for the advertiser that are directly related to a lack of (or a lax enforcement) of controls and transparency into the stewardship of its marketing funds.

How much does your organization spend on marketing? According to a 2009 Businessweek article, “What Should You Spend On Advertising?” the authors indicated that retailers typically spend between 1.5% – 5.0%, automotive advertisers between 2.5% – 3.5% and consumer packaged goods marketers between 4.0% – 10.0% of revenues on marketing. No matter how you view it, the absolute dollar marketing investment is significant and is worthy of a commitment to solid contracting and contract maintenance procedures, as well as a consistent program to monitor contract compliance and agency performance; all in an effort to optimize the return on marketing investment (ROMI) and manage risk.

Implementing a pro-active marketing services agency vendor management program starts with the perspective that members of an organization’s agency network are valuable contributors to the organization’s demand generation efforts. Secondly, the enhanced asset value generated through clarifying agency roles and responsibilities and synchronizing their efforts can yield asset value well in excess of the advertiser’s agency fee investment. Thirdly, developing performance criteria and agency remuneration systems that align an agency’s resource investment with the organization’s business goals is a critical component of the process. Finally, it is imperative that agency performance vis-à-vis both contractual obligations and KPIs is monitored and feedback provided to insure that each link of the marketing services supply chain is properly focused on what is important to the advertiser.

With the average tenure of a “Top 100” branded company CMO right at 23 months (source: 2004 Spencer Stuart, Blue Paper “CMO Tenure: Slowing Down the Revolving Door”) businesses must provide a level of “continuity” insurance to counter the level of turnover among CMOs, and to avoid unnecessary vendor churn.

Without a commitment to continuity the predictable cycle of upheaval and change within an organization’s marketing agency network will begin anew every two years.

Often when a new CMO comes on board, a number of agency reviews are launched to bring in “their team” and before the new agency even has two full planning seasons under their belt, the cycle begins again. And make no mistake about it, changing marketing agencies carries a level of risk and cost that negatively impacts an advertiser’s ROMI – due to the agency / client business learning curve, cultural assimilation, and transition management, amongst others.

Best Practice: Constructing and implementing a successful vendor management program for marketing services should NOT be the sole purview of marketing. In order to achieve a level of stability and sustainability with an organization’s professional services providers in this area, cross-functional involvement is an important and necessary ingredient.

Thus, shared ownership, strong stakeholder continuity outside of Marketing, along with independent compliance and monitoring support to provide objective feedback on marketing agency performance, can assist an organization in building a responsive, highly productive agency network.

Interested in learning more about a marketing services vendor management program? Contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com for a complimentary consultation; “Building a High-Performance Marketing Agency Network.

Keys to Successful Client/ Agency Negotiations

7 Apr

Too much has been made about the participation of Strategic Sourcing personnel in the marketing services procurement process and whether or not it has had a negative effect on agency compensation levels. While it would be nice to be able to identify some overarching force or entity to blame for an organization’s or an industry’s ills, strategic sourcing is not the culprit, nor is pointing a finger in their direction a productive response. The notion that advertisers view certain aspects of an agency’s offering to be “commodity like” (i.e. media buying, production) and therefore able to be bid and sourced on the basis of the lowest available price is largely overblown.

Agencies themselves are responsible for this issue going back to the start of the “unbundling” process as key service offerings were spun out as separate profit centers in the hope that they could optimize their resources in a particular area by expanding utilization of those services to a broader client base. By definition, a commodity is a good or service that is viewed as interchangeable with another because it has lost its qualitative differentiation. Offering commodity like services, while they may be priced at lower rates, doesn’t necessarily mean they lead lower to lower margins.

Agencies are the masters of competitive differentiation. That is what they do for their clients. It is why Tide brand laundry detergent commands a higher retail price than Purex. Agencies can boost rates and margins by effectively positioning their service offering for competitive advantage while demonstrating the efficacy of their approach. Give advertisers credit for being able to discern both qualitative and quantitative differences in one vendors offering versus another’s beyond price. The three keys to successful negotiations between marketing services firms and their clients;

1) Preparation

2) Transparency

3) Respect.

Preparation for a successful negotiation involves diligence in assessing why the buyer is in the market for your services in the first place, what the key purchase drivers are and what pain points might they be seeking to eliminate. With a tacit understanding of these issues, a seller can begin to lay the process of educating the buyer on how their offering addresses these items in an efficient and effective manner, yielding maximum benefit for the buyer. When it comes to establishing a rate for your organization’s services, providing transparency into your service methodology, delivery processes, resource offering and cost structure is a pre-requisite for establishing sound dialogue on both the caliber of your service offering and the rates that you seek. Treating all parties in the negotiation and the process itself with respect is essential. Be mindful of the client’s time, help them to understand your organization’s offering, how it differs from those of your competitors and where it fits within the context of the industry. Share normative data to support your assertions and in the process position your organization as a knowledgeable, confident and valuable resource. If the advertiser doesn’t approach the marketing services acquisition process with a comparable level of respect, which is usually apparent at the RFP stage, than you have a conscious decision to make about whether you participate and if you do, how you will shape the pursuit approach to be taken by your organization.

Employing these “three keys” can result in a more meaningful negotiation process, more wins for your firm, higher margins and a clearer set of expectations on deliverables, staffing, rates and reconciliation of the effort between you and your client. Interested in learning more? In the following Advertising Age article by Sandy Sbarra, VP of Scotwork he shares his view on the keys to successful marketer/ agency negotiationsRead More

 

Value-Based Agency Compensation Models; Viable or Not?

23 Mar

moneyIt wasn’t until the mid-to-late ’80’s that the advertising industry’s century old reliance on commission based agency compensation systems began to evolve. The reasons for this evolution are not as important to the discussion surrounding agency remuneration as is the fact that multiple compensation approaches were spawned to replace the traditional commission-based approach.

One coveted, yet highly elusive approach, value-based compensation, provides a base fee sufficient to cover the agency’s costs of servicing a client and links their ability to generate a profit to the advertiser’s in-market performance.

The notion of an agency “having skin in the game” has long been discussed. Generally speaking, both advertisers and agencies have agreed that this type of approach could drive positive results for the advertisers business and for the agencies bottom lines.

Unfortunately, the industry has failed to settle on a workable methodology for constructing a value-based agency remuneration system that is considered fair and balanced to both parties. Why? There are several trends that impact advertiser/ agency relationships that have made this a difficult proposition:

  • The length of client/ agency relationships has continued to decline, as perhaps have both parties commitment to those relationships.
  • A typical Chief Marketing Officer’s average tenure with an organization is less than two years, creating a number of “continuity” impediments to forming and maintaining a productive relationship with their agency partners (CEO tenure is not much better).
  • The move away from full-service agencies, driven largely by the advertising agency move to unbundle their services has resulted in most advertisers having a fragmented, diverse agency network making it difficult to clearly attribute responsibility for in-market results.
  • The Marketing function is not as highly regarded by many organizations today as it once was, which has negatively impacted the view of marketing services providers in general and advertising agencies in particular.

Perhaps, advertisers and agencies can take a positive step in the right direction by first linking compensation to agency performance.  Linking an agency’s remuneration to their ability to effectively satisfy the deliverables identified within a contractual statement of work and to deliver a level of service commensurate with the staffing plan has many benefits.  Primarily, this approach aligns agency compensation with advertiser expectations and allows for a clear, fair assessment of performance, eliminating the ambiguity that is often associated with attributing credit for success or failure within a value-based compensation system.

Structured properly, agency delivery against the client’s expectations will drive in-market results while satisfying client-side Financial and Procurement Teams desirous of performance based vendor remuneration. It can also serve to strengthen the relationship between the client and the agency.  The following article from AdAge sheds additional light on the topic of value-based compensation.

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