How your agency compensation method can add value

I was recently participating in a discussion in the ANA Advertising Financial Conference LinkedIn Group when Bob Cauley from Beekman & Associates chimed in with “at Beekman Associates argue that “how” you pay your agency is far less important than “how much” you pay your agency”.

I thought this was incredibly myopic and commented on this to Bob, to little effect. Then I remembered an excellent ISBA, IPA document on agency remuneration which provided a check list for advertisers to review their current model or when they are developing and implementing a new model. (I have included these in totality below)

But I think, unlike Bob, in choosing or implementing a particular compensation model you need to consider the following:

•  It is easy to understand and simple to manage – now media commission is easy to understand and simple to manage (just set and forget). But then again many of the retainer and resources cost based models are incredibly complex, as are many of the performance based calculations.

•  Is it fair and equitable to all parties – this is often the sticking point with many of the traditional compensation models as if the agency resource is not directly proportional to the media spend then the commission is not fair or equitable. But likewise if the agency resource is not linked to the scope of work produced the retainer or fee may become inequitable for the agency or the client as the scope of work moves up and down.

•  Is it flexible enough to meet future needs – One thing media commissions did was as the spend increased the agency got paid more and vice versa. But many of the retainer models are so inflexible that as the scope of work changes year on year or even during the year the fee stays the same.

At this level, Bob is sort of right, the more important thing is how much you pay in any year not how you pay it. But this is a very narrow view of the role of compensation. Much more importantly the right model can:

•  Reward and encourage positive agency behaviour and practices – Rather than simply compensating the agency for the resources used, a well structured value based model can reward or remunerate the agency in a way that encourages positive or desired behaviours, rather than rewarding the agency for encouraging the advertiser to spend more or take more time and resources to deliver the work.

•  Align agency efforts and outputs to the advertisers objectives and priorities – Performance models that go beyond the simple sacrifice of the agencies profit for the opportunity to “earn” it back by meeting a mix of performance, relationships and marketing metrics are ineffectual and yet widely popular. But when real profit incentives are linked to the financial performance of the brand and the agency and the marketing team share metrics then it can very effectively align agencies to the advertisers objectives.

•  Increase resource efficiency by focusing on the outputs rather than the cost of inputs – by moving the compensation model away from the cost of resources to the value of the outputs you move the emphasis to measuring and monitoring the strategic quality of the outputs and move it way from measuring the cost of the inputs.

Of course the total amount paid to the agency matters. But to say that it is the most important factor and more important than how it is paid is to reduce the agency compensation to a simple transaction for the cost of services and to ignore the huge opportunity agency compensation can make to adding value to the outputs and outcomes of the client / agency relationship.

The ISBA / IPA check list:

1. Simple to understand and easy to administer.

2. Fair to both advertiser and agency.

3. Aligning advertiser and agency interests and priorities.

4. Finalised before agency resources are committed.

5. Recorded in a ratified advertiser / agency contract.

6. Flexible enough to accommodate changes in the future.

7. Involving senior management stewardship, with principles clearly communicated to the teams on both sides.

8. Capable of standing the test of time and being understood by any future Marketing Director.

9. Based on agreed and understood terms and definitions.

10. Inclusive of specified tracking and review dates.

Are there any more you think are important? And more importantly does your model measure up?