Weighing Risks With Reward in Agency Compensation Models

As many of you know, and as many of you have seen from various articles recently, the world of agency compensation is changing dramatically.

I referenced an article a few months back from Fortune that spoke to the increasing use of procurement departments as the primary point of contract negotiation and there was a very well written editorial in Ad Age this past week that dealt with this same topic. The obvious issue is how do agencies continue to grow in an environment where their fees and margins are being whittled away?

Many agencies are moving towards incentive plans, much like professional athletes. Athletes get paid for achieving special benchmarks in their careers and agencies are being held to benchmarks of their own.

These programs are based on the increasing accountability for marketing dollars and are tied to actual performance of the campaigns that we develop. There can be great upside to these types of deals, but one of the issues that arise from setting up a performance-laden package is that it creates a battle between innovation and more conservative opportunities.



On one side of the argument, agencies are incentivized to try to find the high risk, high reward opportunities that have the biggest impact on performance. If a truly unique idea is brought up and sold through to the clients, and if the idea is successful, then the agency benefits from increased return on investment (ROI) on their campaign.

On the flipside of the argument, if you know there are basic ways to increase the ROI, and that taking a large risk on the creative or the media may not pan out, then this type of innovation might be discouraged as it potentially impacts the type of return an agency will see in their fees.

Determining which of these two arguments wins out rests solely on the heads of the agency themselves. I would certainly argue that innovation always wins out over conservativism, but there are many people who might not agree with me.

That being said though, there is one thing that everyone will agree on. If your agency is being paid on a performance incentive model, then you need to trust their opinion and allow them to break the mold from time to time.

The basic theory behind an incentive model is that the agency is asked to try new things. If the client continuously vetoes new ideas or rejects the riskier concepts, then the agency can be hog-tied and unable to truly spread its wings and fly into uncharted areas.

If you want your agency to be successful, they need to be able to take risks. Risks are a necessary part of the game. Not uncalculated risks, but risks that are based on a strong support rationale. Risks that are measured or have a fundamental principle behind them that creates the likelihood of their success to be higher.

The agency world is full of smart, ingenious minds. We will undoubtedly find new ways to grow our business in an ever more competitive environment, but we need to be able to tap into our full range of creativity. The best clients and the best publishers will realize this and support and encourage it. Ask yourself if you are encouraging or discouraging this type of action in your marketing partners.

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