Agency Compensation: How is it Changing?

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Agency CompensationHow is it Changing?

• By
• Pauline Evans
• Samveet Gulati

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What is it?

• Agencies use a variety of methods to get paid for
  their services
• Advertisers, agencies and media-buying services
  review their methods of remuneration for
  different reasons

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Overview of Compensations

• Traditional Methods
• Commission Based System
• Current Methods
• Fee Based System
• Payment by Results (PBR)

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Commission Based System

• A form of payment in which an agent or agency
  receives a certain percentage of media and
  production charges.
• 15 commission easy to administer

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Drawbacks

• Unlike a cost-based system, an agency may make
  profit on some brands while losing money on
  others.
• High risk on new product development work.
• Increased media expenditure

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Fee-Based System

• Fee Arrangement are of two types
• Straight or Fixed fee method
• Fee-commission combination

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Payment By Results (PBR)

• A service relationship in which some part of the
  remuneration is based on results
• As sales rise or fall, so will compensation
• Advantages
• Improved agency performance
• Improved client performance
• Goal Congruence

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The Principles of PBR

• Establish standards of performance
• Determine in advance how performance will be
  rated
• Pay is based on the evaluation

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Debate on Compensation

• Commission based systems were no longer working
• Lack of results on mediocre ads indicated the
  need to communicate more with agencies to build
  sales faster
• The traditional method became less popular
  through the use of nontraditional,
  noncommissioned media like the Internet and
  Relationship Marketing

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Debate on Compensation (contd)

• Fee-Based and PBR compensation systems created an
  incentive for businesses to work as a team
• Holding the agency accountable, when it shares
  the financial risks and the financial rewards,
  creates a full business partnership. That changes
  attitudes.
• BUT measurable performance goals, like sales, can
  be uncontrollable and unfair to agencies

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Procter Gamble

• Effective July 1 2000, PG will no longer pay
  agencies commissions based on what is spent to
  advertise products in television, magazines,
  newspapers and other media. From that date, the
  company will base compensation on sales
  objectives, with agencies being paid more if a
  brands sales increase and less if sales
  decline.
• -Business Times, September 1999
• Includes advertising for over 300 household
  brands

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Latest Trends

• According to 2004 Association of National
  Advertisers Agency Compensation Survey
• Only 10 of advertisers pay commissions
• 74 use fixed/hourly fees or a blended
  compensation model
• Performance based incentives increased to more
  than 50
• PBR measurement criteria included brand awareness
  (63) and brand perceptions (40)
• Based on 112 major advertiser respondents
  reflecting 575 agency compensation agreements

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Conclusion

• Current trends indicate that commissions are
  being eliminated
• Indicates that companies attempting to sustain
  fairness with agency compensation due to specific
  measurable criteria for PBR
• Means that there is no real formula for agency
  compensation
• Agency compensation terms will continued to be
  negotiated upon

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Thank You!