Adding Up Agency Pay

Agency compensation has taken on the aura of a math problem —as though it involves creating a new algorithm. But it really isn't like cracking a code. Most of the elements are known. It's just a matter of getting them in the right order and the right magnitude. At this month's meeting of the Association of National Advertisers in Miami, linking agency compensation to performance (or output) was the centerpiece of forward-looking conversations. However, discussions about the "real" overhead at agencies still ruled the day. As you may know, a task force of the ANA and the American Association of Advertising Agencies is working to determine a common ground on overhead transparency, methods for tracking each individual client's utilization of overhead and a lack of standard definitions, among other issues. This is not only a necessary step toward future agency compensation models but also a much needed step toward greater trust between clients and their agencies. Increasingly, ANA members are focusing on the future of agency compensation. Where is it going? Are new strategies necessary? We believe the future is the right mix of already understood elements, not a wholesale exodus from one type of agency compensation model to another. Many of our clients use a set of compensation elements that are all aimed at aligning the performance of the agency with the goals of the client. We see this manifest itself in a combination of full-time-employee-(FTE)-based fees (still the basic building block) with three forms of incentive or performance-based remuneration (PBR): client business metrics (including sales, margins, profits, etc.); agency performance metrics (including advertising test scores, brand metrics and media buying performance measures, among others); and 3) agency relationship measures. Not enough attention is being paid to how to put these elements together. As an example, until recently, agency relationship tracking (the dreaded annual evaluation) was left to qualitative surveys from client staff, from most junior to senior, and was often not weighted either for the seniority of the respondent or the subject of the score. (Example: Junior people angry that the agency was late for meetings score low, while senior people pleased with long-term strategic insights score high.) Today, this last piece of the agency compensation code may be solved with the advent of new software like, among others, the Web-based Agency Relationship Optimizer, which delivers consistent real-time and year-to-year tracking of the agency relationship with weighted responses. Such systems demystify this useful element of compensation and offer a quantitative, trackable metric to guide and improve agency productivity. With tools like this increasingly available, the next step is combining them. We don't believe the "right mix" for agencies is one where they risk a material portion of their most basic employee and overhead costs on the potential of earning that plus more back on the PBR segment of the compensation. However, we do believe that agencies will, if the potential upside is worth the risk, put increasing amounts of not only their profit but also some of their overhead costs on the line. Why? In some cases, they feel they have to, to follow the client's lead, as the client climate is increasingly ROI driven. In other cases, the chance to "bet on themselves" for a higher-than-average income is attractive. Perhaps most important, PBR (incentive) as a significant component of compensation is growing because clients and agencies have come to realize that they can trust the data collection and tools available to measure it. While agencies were crying out for more "genuine partnerships" and "idea-based compensation" at the 4A's this month, we believe the industry is closer than anyone thinks to the new chapter in compensation. That new chapter will utilize measures agreed on by client and agency. It will combine base-level manpower compensation (without guaranteed profit) and performance-based remuneration to align agency and client interests. And to will bring all concerned closer to that oft-heard goal of true partnerships.

Brand Marketing

Adding Up Agency Pay

Dick Roth

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Dick Roth