Creative Compensation Deals No Longer Uncommon

It’s not exactly the same as buying an entire island with a string of beads, but alternative forms of compensation in the ad industry are becoming more creative and commonplace, as evidenced by the recent deal between Crispin Porter + Bogusky and its new client Haggar.

Upon arriving at Haggar in February as chief marketing officer, Stephen Croncota faced the daunting challenge of returning the struggling clothier to its heyday, when the company’s name was synonymous with men’s slacks.

The first thing he needed was an ad agency with experience in “making familiar brands new again,” said the former Versace executive. His first choice: Crispin, which he felt had been successful with Burger King and Mini Cooper.

Croncota wanted the MDC Partners’ shop to handle all aspects of the clothier’s marketing. But Haggar, a relatively small private company, had limited resources to pay Crispin. Instead, the two sides brokered an unusual deal that called for the Miami agency to receive a minority equity stake in the client, an arrangement, sources said, that further illustrates a growing desire among agencies to “put skin in the game,” with a focus on results.

“We think it’s a wonderful thing for your partner in business to really be a partner,” said Croncota. “It’s a turnaround, and we love those,” added Jeff Hicks, president and CEO at Crispin. “We’ll be involved in as many places as we can.”

Ever since the standard 15 percent commission gave way to the fee-based compensation plan, agencies have dabbled in various forms of compensation. Pay for performance, which includes incentives for agencies based on client results, was touted by several leaders for years but never seemed to catch on industry-wide. And during the dot-com delirium, many agencies lined up for a chance to take a stake in oh-so-promising Internet companies, a move that often left them with worthless stock.

More recently, as agencies seek to be paid more for their ideas than the time they spend executing them, the new debate about compensation is gaining steam.

“We have as many different deals as we have clients,” said one senior agency executive. “They are almost all customized to a certain degree,” although he admits nearly all are based on some variation of a fee-based system.

It’s arguably easier for a smaller boutique or a consultancy to pull off unusual compensation deals. Said Carl Johnson of Anomaly: “We’re more entrepreneurial by nature, so our mindset is to look for business development roles. You have to be able to share the downside and the upside. Most agencies are too afraid to take that risk.” Anomaly has taken an equity stake or a percentage of sales from two clients: PayPal and Virgin America.

A snapshot of other agencies that have done the same includes GSD&M (for Support, Sugartown Creative (Il Palagio), new media shop Denuo (Brightcove, Lightningcast) and the London office of Saatchi & Saatchi (Dr. Martens, Bottle Green wines). CEO Rishad Tobaccowala said a major reason he felt the need to keep Denuo separate from other Publicis Groupe agencies and position it as a consultancy was to change the compensation model. It has taken stakes in at least six start-ups in exchange for helping them understand the ad market. The idea is rather than venture capital, they’re providing “advisory capital.”

Last week, Bartle Bogle Hegarty unveiled a division called Zag that will create new products in exchange for a single-digit percentage of sales over a 5- to 10-year period. Zag already is talking to three of BBH’s existing global clients and two prospective clients about potential projects, said unit CEO Neil Munn. Saatchi London launched a similar product invention unit last May, Industry@Saatchi, that’s paid at times through equity and met its two-year revenue goal in just six months, office CEO Lee Daley said.

“The FTE model does not really fit either party’s purpose,” said New York lawyer Rick Kurnit, referring to the full-time equivalent measure of agency labor. Kurnit, a partner at Frankfurt, Kurnit, Klein & Selz, added, “The old model of compensation has broken down. Paying for execution doesn’t work.”

Said Foote Cone & Belding CEO Steve Blamer: “Hours are irrelevant. What would you care if a plumber takes two or 22 hours to fix something? You’ll judge the job by its success.” FCB is working with an existing client to launch a new product, and the IPG agency will be paid a percentage of the product’s sales, though Blamer wouldn’t identify the client.

Omnicom’s GSD&M waived its fee for an equity stake in The shop also earns a performance bonus for its work on the U.S. Air Force account, with recruitment targets as the key criterion. “One of the problems with alternative compensation is determining how much influence advertising has on performance,” said agency representative Eric Webber. “I think it’s a good way to do business, but there are so many factors that come into play.”

Jon Bond, co-chairman of MDC’s Kirshenbaum Bond + Partners, which has taken stock from clients such as Martha Stewart as an element of compensation, sees numerous advantages to having a stake in a client’s business. “The client treats you like a partner and not a vendor,” Bond said. “No. 2 is economics: If you have the ability to impact a client’s bottom line and you have the ability to make geometrically more money, you do what’s good for you. If I make a client a boatload of money and I get the scraps of the compensation, it’s not fair.”