A personal story that is not about advertising agency remuneration, but could be

I was reflecting on the recent conversations I have had in regards to media agency remuneration, both globally as a strategic partner of the WFA and locally with our strategic partnership with the AANA, and thought that there are many parallels with my experience with financial advisers.

My personal experience with financial advisers has not been a happy one, but I have explored remuneration models that include commissions, retainer fees and performance fees and I have to say while none are perfect, some have definitely worked better than others.

Negotiation remuneration models for professional services can be like negotiating a maze

In the mid 1980s as a medical research scientist, before the introduction of compulsory superannuation, I engaged the services of a financial adviser who immediately sold me a superannuation policy. Over the coming years he sold me another and another and another. There was no financial transaction with him directly as he explained that the Insurance Company paid him a commission on the policies, much like the media commission system. The more I spent the more he was paid.

Then the Government introduced the Superannuation Guarantee in 1992, my employer at the time,  encouraged me to roll my super into the company fund which I did. It was at this time that the company appointed Financial Adviser informed me that the previous adviser had effectively robbed me as each time I wanted to increase my super contributions he opened a new policy to increase his commission rather than simply increasing the existing policy which would have yielded a smaller return to him. The impact on me was less superannuation contributions.

I continued to contribute to the company fund and transferred this to successive employers with the understanding that a fixed fee was paid to the adviser each year for their work, much like the labour based fee. The relationship was mechanical with no more input from the financial adviser than was paid for and certainly produced an unspectacular result.

In 2000 I established my own business and the Financial Adviser that had managed my superannuation over the past 8 years suggested that he could take on a larger role based on a combination of fee and performance success based on returns each year.

The relationship quickly deepened and become more encompassing with the Financial Adviser providing advice beyond superannuation to include property, family and testamentary trusts with all of the associated complexity. This was a boom time and the results were excellent and the Financial Adviser reaped the rewards of this growth on top of the fee.

This continued, but there were concerns that the investment strategy was high yield but high risk. At the time advice that the boom would continue were soon to be proven false and in 2008 the correction proved that the eight year growth strategy was flawed.

So what are the lessons?

The commission system provided an incentive to the adviser / agency to look for ways to maximise their return even at the expense of my long term performance and provided no incentive for them to be proactive beyond selling me more products.

The head hour fee based retainer model provided a level of service and attention from the adviser / agency but there was no incentive for managing performance or requirements. It became a very pedestrian relationship driven by the transactional nature of the remuneration.

The performance based remuneration model provided a high performance relationship, the the adviser / agency with proactive advice and subsequent growth. The important lesson was that the success metrics must be considered carefully as the focus on annual performance only was executed with an unacceptable high risk.

But certainly where you are investing significant amounts, it is important to achieve alignment where possible between the buyer and supplier and not just treat the relationship as a simple transaction of services.

In media and investments this is especially important where the ultimate sellers of the media / investment products are able to provide incentives much greater than the fee you are comfortable paying for those adviser /  agency services.

What remuneration models have worked for you in any sort of business / commercial relationship and why? Let me know here by leaving a comment.

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About Darren Woolley

Darren is considered a thought leader on all aspects of marketing management. A Problem Solver, Negotiator, Founder & Global CEO of TrinityP3 - Marketing Management Consultants, founding member of the Marketing FIRST Forum and Author. He is also a Past-Chair of the Australian Marketing Institute, Ex-Medical Scientist and Ex-Creative Director. And in his spare time he sleeps. Darren's Bio Here Email: darren@trinityp3.com
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6 Responses to A personal story that is not about advertising agency remuneration, but could be

  1. Anne Miles says:

    I'm very interested in this too Darren. I've recently looked into this for various reasons and thought I'd add another observation. I've looked at securing a PR consultancy and the model suggested there was based on a retainer fee that was created based on some understanding of the hours likely to be spent each month. The hours would be evaluated after 3 months to determine if the fee was appropriate. In addition there were KPI's set to help determine if the relationship was on track. I liked this balance of performance with a balance of hours.

    What I think is key in this type of agreement is some kind of action or consequence if KPI's are not met, or even potentially if they are overachieved what bonus or reward can be imposed.

    I have real concerns about someone else benefitting from commission as a direct proportion of the final value if that person/company has any responsibility for keeping the costs to a minimum for a client. There are music consultants that work on a percentage commission of the final fee they negotiate – so therefore there is no incentive to work harder on behalf of the client. What I've agreed to in the past for this type of project is to have a projection of the likely fee and agreed up front on a fixed cost based on this projection should the contract be signed. There is therefore no incentive to inflate the costs, but at the same time no incentive to really push for the lowest possible price other than professionalism as a personal driver. This is still a huge leap better than the often used model of commission based remuneration. A professional should do the best possible job for the client without consideration of what they personally get out of it.

    It seems easy to suggest some kind of KPI or bonus based on saving money for a client but then we get into sticky territory where a lot of past production auditors went where they look at a job after the event and talk about saving costs in a hypothetical way, or they also get based on how much they save without consideration of the creative result. So, this can be self defeating if done incorrectly. The big question for me is – what's the best way to make it attractive to be keeping costs down but also balancing the creative result at the same time. In my experience that's where I thought that I personally worked well with TrinityP3 in production audits – ensuring that balance was made. I'd love to know how to implement a system where these standards are more than just my own professional standards, or TrinityP3's respect to the creative as an important part of the success of the job.

    Does anyone think that some kind of sanction for making savings ever works?

    • TrinityP3 says:

      Hi Anne a good question that needs a big answer. The fact is that increasingly the way forward here is to try and move away from head hours to pay for results. Results can be measured any number of ways. It could be as simple as the delivery of an agreed output to a more detailed business outcome. The core reason for applying creativity to the business through marketing communications is to actually drive value. Yet the way we remunerate is on the basis of cost. I have written a number of posts here on value based remuneration as a way to increase not only creativity, but creativity that delivers business results. The issue seems to be that everyone (marketers and agencies) are locked in a cost based model.

  2. Anne Miles says:

    I agree about people being stuck in an old model for sure. Having been consulting for a few years myself I saw so many purely on head hours – can't believe that! I moved as many as I could onto a model of delivering a 'product' or creative end result. This is slightly different than I think you're talking about as again it has some relevance to cost but it is still a fixed price based on creative value – this does tie in with what you're saying to a degree and I love this. Having a folio of a certain level of 'creative value' also contributes to the overall value of the work delivered when it is a fixed price without the hours as a factor. This does really work for everyone. It works in 'swings and roundabouts' at the end of the day across projects but needs careful management about what is being delivered and when, what are the approval stages and what are other expectations creatively and process-wise. It certainly can be done though. I see this work so well at post or production service level and also at agency level.

    For the kind of services that are about saving costs or making extra efficiencies, or about a negotiation on someone else's behalf – I don't think I've seen a successful model linked to a sliding scale for payment though. Any examples you could cite?

  3. TrinityP3 says:

    We have done a number of deals where we have incentivised the agency with a percentage of the delivered savings. This is usually around 2 x the agency's profit margin. In the way there is an incentive for the agency to deliver the savings rather than do the inefficient work as they will make double the margin on the savings.

  4. Anne Miles says:

    That's the best model I've heard so far around savings.

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