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.