• by Larissa Faw , May 13, 2014

Everyone wants to know what other agencies are earning and how they structure their deals, particularly those that claim to be paid based on performance. Yet, there is little recent agency information about the prevalence of these arrangements, their structure, and their economic impact.

Now, the 4A's is releasing its first-ever Survey on Agency Performance Incentive Compensation Payment by Results (PBR) providing information on incentive compensation including prevalence, structure, and amount; correlation with business relationship and base compensation; agency-client relationship management; and performance incentive criteria.

“Agencies and marketers are interested in evolving legitimate performance incentive compensation,” said Tom Finneran, EVP, Agency Management Services, 4A’s. “But they haven’t cracked the code. The industry would be well served to focus on efforts expanding robust, formal two-way relationship management processes as the initial first step.”

Based on the report’s findings, incentive compensation arrangements are not prevalent in most agency-client agreements and do not represent, a significant impact on agency revenues.

Indeed, only 39% of agencies reported that they had any incentive compensation arrangements with clients in 2013. Moreover, for two-thirds of agencies that had these client incentive compensation arrangements, the impact on overall agency gross income (commissions + fees + incentives) was less than 2%.

The majority of arrangements with respondents’ largest clients were either annual retainer (45%) or a hybrid combination of annual retainer and project fees (41%). And the base compensation arrangements for respondents’ largest clients skewed toward labor-based fees (44%), fixed fees (24%) and hourly (12%) arrangements.

Still, more than half (53%) of the 2013 arrangements containing incentive pay terms were structured as “skin-in-the-game” arrangements, where the agency put some base compensation at risk in return for the potential to earn performance compensation. 

These agencies reported that weighting of 2013 incentive compensation income skews toward client business results (38%) and agency service levels (34%). At the same time, metrics varied by objectives.

Sales and market share, for instance, were viewed as the most relevant client business results criteria. Recall and brand health perceptions were thought to be the most relevant marketing activity performance measures. Within the category of agency service level performance, collaboration, strategic thinking, and timeliness were noted as very relevant standards. However, overall agency performance evaluation scores are viewed as “very relevant” by the most agencies (74%). And cost efficiency was noted as a relevant performance measure primarily in the media space.

Meanwhile, slightly less than one half (47%) of the 2013 incentive arrangements were structured as bonuses, which provided agencies with the potential to earn incremental compensation beyond the base compensation amount, predicated on performance. Potential maximum and target bonus ranges tended to be below 10% of base compensation, and actual earned bonus amounts were often below 5% of base compensation. Also noteworthy is that one quarter (26%) of 2013 bonus awards were not known until three to four months after the end of the year.

Ultimately, the approximate correlation between the 2013 amount of base compensation that agencies put at risk and the amounts actually earned seems to reinforce the mindset by some agency executives that many performance incentive arrangements are self- funded by the agency rather than by the marketer.