A great number of column inches have been dedicated to agency compensation over the last few years and this post seeks to bring some clarity to the area of discussion for clients and agencies alike.
As a marketing procurement consultant, my aim when I work with clients is to help them achieve the maximum value for their marketing investment. This does not mean the cheapest cost! In fact, more often than not, paying slightly more can deliver a significant increase in the value delivered by the service being provided.
The key is to look at the money spent on these services as an investment rather than a cost – when we take this view it changes the whole picture for the client AND the agency. If the client is willing to invest a little bit more in order to secure a greater level of performance from the agency then both parties win in the long run.
In a recent article on agency compensation from AdAge there was a lot of negativity written about the use of Incentive Based Compensation for agencies in the US. This was particularly disappointing as it came from the 4As' Tom Finneran who is in a position that commands significant influence in the US advertising market. The statistics shared by Mr Finneran at the ANA conference highlighted many negative aspects about Performance Based Compensation without highlighting any positives – of which there are many examples.
Interestingly, the IPA (the UK’s version of the 4A’s) held a conference last year in which their top man, Ian Priest, took a totally opposite stance. By highlighting the opportunities that exist through the use of Performance Based Compensation, the IPA is actively encouraging clients AND agencies to evolve their commercial agreements. This article in Marketing highlights some of the positive approaches that are being taken in the UK by leading advertisers and their agencies, which is very encouraging.
The evidence that Performance Based Compensation is on the rise is demonstrated in this study carried out by the WFA with 66% of survey respondents stating that they intend to link agency compensation more closely to their own performance in the coming year.
In my view, clients that use Performance Based Compensation enjoy a competitive advantage that will deliver significant benefits and help create a sense of partnership that every client strives for with their strategic agency partners.
A few key points to bear in mind when exploring this with your agencies:
- Investment not Cost – by having this mindset from the start you are much more likely to create a successful relationship with your agency
- Be clear on the goals of the investment – shared understanding of exactly how you are expecting the agency to contribute will help you define measures of success. If you don’t know this you shouldn’t be spending the money!
- Incentivize from Day One! – Starting the relationship with a clear agenda of rewarding excellence will set you both up for success. Waiting until year two will likely result in it never happening
- You want the agency to earn it all - the objective of these models is to see the agency earn all of the available compensation because, if they do, that means you have both achieved the goals of the relationship
- Budget for 100% - it is imperative that the client budgets for 100% success. When this is not done it undermines the relationship and the commercial structure that underpins it
- Keep it Simple – Use three/four key pillars of performance that can be easily measured and reported on throughout the year
- Consistency – Aim to have shared goals across your key strategic agencies. If your media agency and creative agency have a shared goal they are much more likely to achieve it together rather than point the finger of blame when it gets tough
The reality is, traditional agency agreements that are based on the payment of a retained fee are still very popular for many reasons. The problem with these agreements is that they do not incentivize the agency to over perform on your account.
Under these agreements, the agency’s biggest concern is retaining the account, which can have the perverse impact of making them more conservative and ‘playing it safe’. When you are looking for innovation and a way to win in your category, surely you want an agency that is aligned with those goals.
Incentive Based Compensation can be a tool that gives you an advantage – isn’t it about time you talked to your agency about it?
I’d love to hear your views on this topic – feel free to comment here or reach out to me directly at email@example.com
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