IPG Mediabrands CEO, Consultant Push Pay-For-Performance Model

For the most part, marketers pay ad agencies an hourly rate for the work they do. But agency search consultant Avi Dan says that’s a bad idea that promotes less-than-stellar work. Dan says it’s time to jettison the fee-based agency compensation model and replace it with a standard that ties agency fees to client performance.

Compensation models have long been fodder for industry debate.

For decades, agencies typically received payment in the form of a 15% commission on the total billings they placed for a client. But 20+ years ago, clients began to wise up. As Dan notes in this week’s edition of his Forbes blog, the commission system was a bit of a racket for agencies. "When media inflation increased and clients had to spend more on TV, the agencies enjoyed a windfall without actually having to do more work for it," he noted.

The hourly fees that replaced commissions aren’t very efficient, either, Dan adds. The biggest problem with fees is that marketers end up paying as much or more for bad ideas as good ones. In fact, he adds, “because it takes more billable hours to get a bad idea revised before it is brought up front to customers, advertisers actually reward an agency more when it comes up with a bad idea.”

The solution, per Dan: Tie agency payments to performance benchmarks. He notes there are many ways to look at and define such benchmarks, which is probably why there’s been more talk than action on the performance compensation front up to now.

Some agencies agree that performance-based compensation is the best model. IPG Mediabrands CEO Matt Seiler has been pushing the shops under his purview to adopt pay-for-performance models for a while. Other pay plans, he said last year, are a “horrible disservice” to clients. “It’s simple -- if our clients don’t achieve their business plan, we don’t get paid.”

That said, others contend that many clients are still unconvinced that pay-for-performance is the way to go. Speaking at an event last fall, Hearst President and Publishing Director Michael Clinton said: “It’s a long way off before it's material to our revenue.” Clinton estimated that about two of every 100 advertisers want to talk about pay-for-performance compensation.

For those considering a performance-based pay model, Dan recommends a few key benchmarks, including brand advocacy, efficiency and “continuous gains in profitable sales.” These are good metrics to tie to agency pay, he argues, “because they relate to shareholder value creation. These measurements can trace the direct effectiveness of the advertising in the overall marketing mix, and therefore, provide a good guideline for agency compensation.”

Dan’s complete blog entry can be found here.

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1 comment about "IPG Mediabrands CEO, Consultant Push Pay-For-Performance Model".
  1. William Crandall from Della Femina , February 8, 2013 at 5:32 p.m.
    I have long believed in the role pay-for-performance might play in the total agency compensation mix. But you can’t throw the fixed-fee “baby” out with the bath. It costs big money just to staff an account and turn the lights on it every day. Moreover, agencies have little control over what client marketing groups do regarding many other aspects of the Brand sales and profitability equation, e.g., cost-of-goods, pricing, promotion, distribution, supply chain management, plant manufacturing, etc. To me, the ideal formula for agency compensation would be a balanced, equitable, and mutually agreed upon combination of out-of-pocket costs + fixed fee + performance incentives. That is, costs + fees to at least ensure agency break even; with realistically designed and clearly articulated performance incentives as the “carrot” for ensuring agency profitability on the account. With all of this framed upfront in a Year 1 written contract, then both parties can later revisit the arrangement at some point and decide if they want to keep doing business together. As to paying agencies for “bad ideas”, I don’t know of any good agency that deliberately serves up bad or mediocre work to clients – least of all, just to bill more manhours. Clients aren’t the only ones with brand reputations at stake! Bill Crandall