New Agency Compensation Model Explores Value Over Cost

In a recent The Drum post, Julia Hammond, president of MDC Global, together with MDC Global Senior Director Kelly Phillips, outline the case for much-needed change in how marketers purchase, pay for and incentivize their agencies.

I am probably not doing justice to their well-articulated collection of ideas, but it summarizes roughly as follows:

  1. Marketers should move from cost/fee-based compensation models to outcome-based models (that incentivize the agency for delivering on business and marketing outcomes rather than lowest cost).
  2. Marketers should pursue and invest in automation to allow for meaningful tracking and reporting of outcomes.
  3. Marketers and agencies should “embrace the sprint” and be comfortable with project-based cost models.
  4. Marketers should place a premium on diversity.

I am always a big fan of new ideas that challenge how marketers and agencies structure a fair and motivating compensation model. I agree with Hammond and Phillips that responsibility to reimagine agency compensation and incentivization lies both with the marketer and agency.



They write: “Outcome-based compensation models create a culture of accountability, so they’re better for clients and for agencies. New commercial models must leverage automation to evolve our business. How do we scope time and materials when it might be more efficient to use products instead of people? Time and materials incentivize agencies to resist innovation and the ’future of work,’ prioritizing talent over technology when we need to blend talent with technology.”

This is a really good point that notes some potential challenge to the model. Yes, there are scoping tools out there to capture and define time and materials that are very precise at calculating cost, and even provide a benchmark cost to assess the fairness of what is being charged. But precisely because time and materials are fairly easy to predict and calculate, they make great sense in automated cost/scope models. Talent and value/outcome are much harder to capture in a cost. Not the talent per se, as each person comes with a defined cost of salary, overhead, margin, etc. But what comes out of the talent’s hands or brain is much harder to value.

Years ago, I was part of the Coca-Cola Company’s exploration of “value-based compensation” as its agency compensation model. VBC puts the focus on the value of a deliverable to the company, rather than the actual cost of creating it.  For example, is the ask a strategic priority for Coca-Cola?  If so, its value is higher than “run of the mill” work (that also needs doing but is less “make or break” for the success of the business). Industry dynamics are another variable: Is the agency being briefed uniquely qualified to do the work, or are there other agencies that could do it equally well? If so, cost is likely to be lower. 

The industry lauded the ideas behind the model, as it did away with margin and overhead discussions. Coca-Cola was prepared to pay for what it considered valuable, no questions asked, when the price could be justified.

That's also where the problem lies. Value is a relative term, and the variables driving value up or down can become subjective, and clash with MDC’s ideas of being able to automate the calculation.

I don’t think we have an automated solution yet that can determine the value of ideas. Perhaps it's better that way.

4 comments about "New Agency Compensation Model Explores Value Over Cost".
Check to receive email when comments are posted.
  1. Ed Papazian from Media Dynamics Inc, April 16, 2021 at 1:24 p.m.

    Maarten, unfortunately, it's fine from an advertiser's viewpoint to pay an ad agency based on "outcomes" aka sales results, however, the agency has virtually zero control ove rthe many aspects of product development, packaging, performance and distribution, so it's taking a huge---and unwise---in my opinion----risk in accepting such a deal.

    As a compromise, if the agency was paid a fair fee that covered it's legitimate out-of-pocket costs plus a modest profit and then allowed to share in the profits---calculated honestly---that resulted in brand product sales as a result of its efforts, that's a horse of a different color. The problem is how do you evaluate both of the agency's key services---"creative" and "media"? And, how do you calculate the incremental sales garnered by the client as opposed to sales that would have been gotten anyway? These and related questions about how to share in the outcome are the main stumbling blocks to such deals. Invariably, the client bean counters will tilt things in the client's favor and the agency gets the shaft.

  2. David Vawter from Doe-Anderson replied, April 16, 2021 at 1:56 p.m.

    Not to mention the agency's lack of control over the things they actually do do. Come on, man!

  3. John Grono from GAP Research, April 19, 2021 at 9:02 a.m.


    New Consumer Compensation Model Explores Value Over Cost.

    American motorists recently valued a gallon of gasoline at $2.45 rather than the current $3.20.   I assume the marketers in gasoline companies would eagerly accept this compensation model ... said no-one ever on the planet.

    What a myopic idea.   (And of course I made the numbers and scenario up ... but the point holds.)

  4. Kevin McCollum from None replied, April 19, 2021 at 9:35 a.m.

    Might be able to pull off some aspects of this with direct response marketing, but agree with Ed that there is too much risk involved with base pay.  This sounds good in today's environment when the economy is about to explode, but would the sentiment be the same one year ago?
    A good compromise for media agencies is to pay a base fee, then profit/bonus based on outcomes, but must be real, measurable media-based outcomes, such as sales due-to media from market mix modeling.

Next story loading loading..