As Agencies and Brands Define the Value of Their Work, Compensation Models Merit Closer Scrutiny

If a brand pays an agency for working on its ad campaign without the agency feeling undervalued or the brand feeling ripped off, congratulations: You’ve mastered agency compensation. The Association of National Advertisers (ANA) recently released its Trends in Agency Compensation survey of advertising industry professionals and found there’s still some question of how to pay agencies in a way that satisfies everyone. According to the survey, roughly 82% of the industry still uses labor-based fees and timesheets when paying agency partners. However, 53% advertisers spending $500 million or more each year pay a fixed or output-based fee, up from just 5% of that group in 2016. In the background, agencies are struggling for recognition from high-profile advertisers and brands are considering payment terms that meet their needs far more than those of their partners. Adweek spoke with representatives from agencies, brands and their intermediaries and had a discussion about agency compensation that boiled down to two points: value and trust. “There are a lot of ways of doing compensation. Everybody does it differently; there's no right or wrong,” said Ken Robinson, search consultant for Ark Advisors who helps brands find and evaluate agency partners. “There's plenty of room in the industry for innovative models for compensation, but it is really incumbent upon the agencies to come to the table with at least a jumping off point of defining the parameters so that it can be explained and measured empirically.” Agencies Are Developing Their Own Products to Show Clients They Know How to Build a Brand Agency angst A commercial leader from a global agency network who requested anonymity took a look at the ANA’s survey and noted that a fundamental shift in agency compensation toward value-based pricing is already well underway. Brands juggling multiple agency partners struggle with credit and compensation for a campaign’s success. As the ANA survey points out, they’re turning to metrics, including agency performance reviews (75% of advertisers), brand awareness measurements (71%) and sales goals (52%) to determine how much value an agency partner is bringing to the table. As the agency network rep pointed out, companies' compensation plans are increasingly driven by what an agency produces and less by the time consumed by production. That’s made timesheets less popular, leaving fixed and output-based fees—and accompanying performance incentives—as the models of choice for more brands. When you have clients that endure, and they can see the natural health of the relationship, … you can track and monitor that.Elaine Purcell, chief growth officer, DDB North America Rob Davis, CMO and president at media planning and buying agency Novus Media, noted his agency tries to be flexible with clients' compensation models and has worked with labor-based fees, fixed fees, commissions and hybrid payment plans. However, he said that reaching those agreements without conflict requires clients voicing their specific needs and determining early in the process if they, for example, value flexibility over dedicated resources. “We’ve always customized our compensation structures to a given client’s needs, so [we] don’t typically haggle over the model,” Davis said. “As long as the scope is clearly defined and aligned, as well as deployed in a disciplined manner, we can almost always find success with any client-appropriate model.” When performance incentives and payment terms enter the conversation, however, the tone of the discussion changes dramatically. In the ANA survey, 70% of those surveyed “don’t know” if incentives actually improve an agency’s performance. As a result, only 41% say they use such incentives with agency partners, the lowest reported level since 2003. The Key to Retaining Agency Talent? Letting Them Leave Multiple sources noted that performance incentives only qualify as such if they’re rewarding performance, not if they’re offering clients a lower fee and forcing agencies to earn back the full amount by simply delivering the product. Those same sources doubted that companies have the appetite to allow agencies to earn more for their efforts, but noted there are ways for everyone to get what they want. Both Robinson and Davis recommended holding off on performance incentives until after an agency and a brand have worked together for at least a year and have learned how each side operates. Davis added that if a brand offers an incentive structure that puts an agency’s profits at risk, it’s helpful to know the company will be correspondingly generous if goals are met or exceeded. Finally, a long courtship will help an agency figure out if a company’s incentive metrics are fair—like accounting for supply chain issues, weather-related anomalies and other factors beyond the agency’s control—and if they’re measured in a way that engenders trust. “When you have clients that endure, and they can see the natural health of the relationship, that transparency, that communication, that efficiency and output, you can track and monitor that,” said Elaine Purcell, chief growth officer at DDB North America. “It's really healthy to do those quarterly audits to make sure that you are seeing around the corner asking those questions about how the relationship is working on both sides." Where brands stand Despite 85% of marketers telling the ANA they were either “very satisfied” (24%) or “somewhat satisfied” (61%) with how they compensate their agency partners, change is coming. More than half (51%) plan to switch up their compensation approaches with full-service agencies, while 46% want to try a new payment option with creative agencies. Another 45% aren’t altogether happy with how they’re paying media agencies. Steven Tristan Young, CMO of Poshmark, has worked in brand marketing at American Express, Puma and Grubhub. He’s looked at the agency head counts assigned to him and percentage of hours required, and used that information to construct output-based compensation plans for agency partners. While at American Express, he bypassed the agency of record and went with another agency to rebrand the company’s Centurion brand. He explained to the AOR that brand strategy wasn’t its strength and the agency would actually lose money on an hourly basis plotting out the rebrand instead of developing marketing materials, which was a better fit for the shop's skills. I don't care about Cannes; I’ve got to drive a business.Steven Tristan Young, CMO, Poshmark He’s looked at short-term turnarounds on projects and has broken them up into phases rather than paying for them all together under one larger lump sum, keeping separate agencies in discrete buckets to determine who’s contributing what. He reserves the right to change through subtraction, he’s wary of agency overhead (traffic staff, account staff, lunches with vendors), and he’s taken to smaller agencies over larger ones, feeling they’re more attuned to the tech industry’s tight turnarounds and less concerned with awards. While working with Grubhub, he offered a creative firm a 10%-20% bonus at the end of its term if the TV spots they worked on exceeded reach and performance goals. “I've worked with so many agencies and seen so many things that I say, ‘Be very clear what we need,'” he said. “I don't care about Cannes; I’ve got to drive a business. If I'm going to spend half a million dollars with you, I’d better know it's gonna make my TV ads better or it’s going to make my digital performance better.” Eddie Revis worked at agencies including Digitas, Essence and Energy BBDO before jumping over to the brand side with Chobani. Now the CMO of Magnolia Bakery, Revis has seen the agency compensation debate from all sides, and has settled on labor-based and labor deliverable hybrid models when dealing with agency partners. While he realizes the “noble” intent behind performance- or outcome-based models that tie investment to a measurable outcome, Revis noted such compensation ignores the driving factor behind those outcomes: the client. Agency relationships remain tethered to a client’s needs, including assets, media buys and app development. Revis said clients ultimately make the final decisions about an agency’s services and how they’re used in the marketplace. “Holding agencies to a performance or outcome that can often be a result outside their scope or control is not setting up our partners for success,” he said. “So while labor-based models come with their own challenges around scoping, deliverables and utilization, those models leave room to create the necessary space and opportunities for what ultimately defines a successful agency engagement and outcome: trust, collaboration and understanding.” Talent Issues Force Agencies to Stay Selective, Leaving Brands With Fewer Options From the agency perspective, Purcell said the distrust and discord that leads to discounts disguised as “incentives” and nearly year-long payment terms sit at the core of the agency compensation discussion. She sees opportunity for agencies to come together, reject terms unfavorable to them, collaborate on a pitch process that often undersells agencies’ offerings and reassure marketers of agencies’ value. “It says a lot about the difference between seeing an agency as a partner and an extension of the brand,” she added. “That's ultimately where we've seen our greatest successes, where we are joined at the hip. And, truly, their success is our success and they are interchangeable.”