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Every agency wants to be paid its worth for its services, and there are many compensation models that agencies and brands use for payment, but finding the right one that is equitable for both sides, and is easy to implement, is sometimes as clear as mud. A new paper—a collaboration between the American Association of Advertising Agencies (4A’s) and the Association of National Advertisers, called “Decoding Compensation Models & Implementing the Right Model”—aims to clear things up.
Within the paper, the two groups included a breakdown of current compensation models. Agencies reported that fixed pricing—for both agency-of-record relationships and projects—was the most popular model of compensation, followed by hourly rate fees.
The paper addresses the current compensation model challenges and lays out what works and what doesn’t. It also seeks to enhance transparency, fairness and efficiency in how companies are compensated for their efforts.
The two trade organizations united because their members bring up the subject of compensation on a regular basis, so the 4A’s and the ANA wanted to educate members on different models to give agencies and advertisers a choice, because one size definitely doesn’t fit all on the issue.
Bill Duggan, group executive vice president at the ANA, has been with the organization for 24 years and has seen a hefty appetite for the subject of compensation the entire time.
“There hasn’t been a whole lot of significant change in compensation models in recent years. And the purpose of this paper is to lay out the options that are available now, and to get more marketers and agencies involved in how agency compensation evolves going forward,” Duggan told ADWEEK.
The compensation structures by marketers have not kept pace with rapid industry changes, states the paper. Some have fully converted to new models, while others use hybrid models. However, a bulk of agencies and advertisers are just starting to consider new approaches that incorporate input, output and outcome-based models, according to the ANA’s Trends in Agency Compensation study.
Industry insiders form a compensation task force
To help uncover all of the compensation models and how they can best serve the industry, the 4A’s and the ANA formed a collaborative task force, made up of brand marketers, agency executives, sourcing procurement specialists, marketing operations and others for a diverse and balanced perspective.
The ANA has been putting out compensation studies for 50 years, and earlier this year, the 4A’s released a study on the most prevalent compensation models with 149 participants for 357 projects and 342 AOR/retainer-based arrangements, so both sides came armed with plenty of information.
Nicole Rizzo, senior vp of business intelligence and insight at the 4A’s, noted that the evolution of compensation hasn’t changed much since the 1990s, although it has gotten a bit better, moving from commission and cost plus to hourly rate, but she added that almost 50% of agencies are still doing something labor-based.
“A lot of our members are actually hiring SaaS-based pricing experts to try to get something new, and the industry is moving so fast with technology, it’s really just a matter of time that it’s going to accelerate the need for change,” said Rizzo.
Laying out the options
The study states that navigating the unknown of changing compensation models can be difficult, from financial risk to changing entrenched practices to measuring benefits of each model and return on investment. But the potential benefits of reshaping relationships into more strategic partnerships can outweigh the challenges. “Like all substantial transformations, success is entirely dependent on achieving alignment among all of the key parties—in this case the agency, marketer and marketing procurement,” said the study.
It then categorizes the many compensation models into three main types: output-based, input-based and performance-based.
While no one model is correct, the study breaks down each model and sub-model into understandable phrasing and its core components and factors. It then divides it into pros and cons so everyone can easily comprehend the advantages for their needs.
The paper lays out the most prevalent compensation models, plus hybrid models. It also adds 10 characteristics of what companies should look for in a compensation model. They can then score each characteristic and score the importance for their particular organization.
“If you think your compensation model isn’t working, this is a tool to evaluate it, and then the definitions and descriptions of the model can help you choose what might work,” said Rizzo.
Both Duggan and Rizzo hope the paper helps companies test and experiment with new compensation models that work best for them and their clients, because the models need to be fair to both agency and client, without skimping on compensation, without chasing the cheapest CPM (cost per thousand impressions) and without extended payments.
“I’m a believer that it’s about the value the agency brings, and not about the cost,” said Duggan.
The study will be available on the 4A’s website and the ANA’s site.
