The MEDIA Roundtable: Agency Compensation

It's become the great economic paradox of the media services business: Media agencies have spun themselves off from full-service ad agencies to become financially independent - with their own P&Ls - only to see their profit margins shrink as clients demand more sophisticated service, but with lower rates of compensation.

It's a real dilemma for media shops, which arguably are providing better service than ever before, and in a vastly more complicated and work-intensive media environment. But a variety of factors have conspired to put the media services industry between a rock and a hard place. Part of it is historical and has to do with the way revenues were allocated to media departments under Madison Avenue's traditional full-service agency structure. Part of it is the rise of corporate financial accountability, which has put every aspect of a marketer's outsourcing costs, including media service, under the strict oversight of corporate procurement and sourcing departments hell-bent on extracting what they perceive as extraneous costs from of its service providers. And a good deal of it is the fault of media agency managers themselves, who either have been willing to accept ever-reduced rates of compensation for the work they provide or have done a poor job of marketing the value of those services to their clients.

That last trend has been exacerbated by the rapid consolidation of the media services industry into a small handful of players who, despite their relative financial autonomy, still report to larger, publicly traded agency holding companies that are driving their media units to demonstrate growth to shareholders. That has made new business wins and net billings growth a more critical factor for some than healthy internal margins.

As vexing as these trends have been, new developments, including the rapid emergence of media auditing and so-called media performance reviews, are making media agencies even more accountable to their clients for results and are raising new implications for compensation - both good and bad, depending on whose perspective you take.

These developments are more than just an acute irony for an advertising industry that began with agencies that were initially just media agents, not the full-service branding shops of today. It's putting acute pressure on the relatively young field of unbundled media services agencies and testing their fundamental business models. What is becoming increasingly clear is that how media agencies are compensated determines everything from how they provide research, planning, strategy and buying services for its clients to ultimately, what kind of media get bought.

These issues became all too clear last month when MEDIA hosted a forum on the topic of media compensation, the first of a yearlong series of executive roundtables designed to elicit thoughts and strategies for tackling critical industry issues. During the freewheeling and candid conversations, the chief executives of several top media agencies, as well as top consultants representing marketers on compensation and media auditing issues, weighed in on the current state of media compensation: What's wrong about it; what's right about it; and what needs to be changed if media shops are to continue providing the level of service their clients are calling for.

"What you always hear is they're being asked to do more for less," says Arthur Anderson, president of Morgan Anderson Consultants, a top management firm advising marketers on agency service issues, including compensation, and the moderator of the MEDIA roundtable discussion. To a certain extent, Anderson says, that statement can be true, which is one of the reasons his firm has begun advocating a new "deliverables-based" method of compensation in which agencies are rewarded based on "outputs" as opposed to inputs. The goal of the new approach, he says, is for client and agency to establish a fair rate of compensation for an agreed-upon deliverable. These formulas may also include incentive models that enable agencies to reap higher levels of compensation for delivering above and beyond the base.

The timing of this approach couldn't be better, as marketers and agencies have essentially abandoned their historic media-billings-based commission models and are seriously challenging the labor-based fee approaches that replaced them. Next month the Association of National Advertisers will release the 2004 edition of a periodic study on agency compensation, and it is expected to show a pronounced shift toward performance-based methods and away from simple cost-plus-fee approaches.

Currently, Morgan Anderson estimates that 11 percent of advertisers utilize commission-based compensation. But the firm projects that by 2010, only 5 percent will use commissions, with 50 percent using labor-based fees and 40 percent using deliverables-based compensation.

Not surprisingly, this trend is expected to coincide with the growth of so-called media performance audits that will enable marketers to determine not just whether their media agency delivered the media they planned to deliver, or even that they delivered it for the prices they negotiated. Instead, these services are going to the next level of media performance to determine if the media agency's strategy was sound and if it performed at the level they planned.

"What we're doing as a company is trying to help create those metrics that help the client and agency head toward the same goal, deliver the goal, and be able to put incentive compensation against it, so they can see an increase in revenue this year and next year, not five years from now when they get the ROI model really in place," says Mike Lotito, president of Media IQ.

Media IQ is one of a crop of new media performance auditors to emerge in the U.S. marketplace, which is following a pattern established in Europe, particularly the U.K., where marketers routinely conduct performance reviews to determine not only what media they bought, but what the results of those buys were. Another one of those firms, Media Performance Monitor America, is a U.S. subsidiary of Billetts, one of the auditors that pioneered the field in Europe. Lotito says many media agencies still don't understand the role that media performance audits are playing and how it ultimately will affect their compensation. But he asserts that it would largely be a positive change for those agencies that are generating strong results.

"Take the way we buy broadcast today. It is pretty simple," he says. "We go buy a mix of programs and we get a CPM for that program, and right now the only repeatable number that we can look at every year is CPM. But everybody knows that to get the CPM to stay low, all you do is change the mix a little bit. You buy a little less quality media. Nobody really looks at it close enough. It's very hard to tell because the programs change so much. How do you compare mix year to year? We've built this system that is developing a repeatable metric for mix. We call it the inventory quality delta - IQD. When you put IQD and CPM in an incentive compensation agreement, now you can say, 'I don't want my mix to degrade by any more than 5 percent a year, and I don't want my CPM to raise any more than 5 percent a year.' If you deliver both of those, I want there to be a real compensation agreement, a real bonus that gets handed out to media agencies that they can count on."

Media agency executives acknowledge that they are still struggling how to demonstrate their value to clients and get clients to develop "fair" compensation formulas that reward them for achieving the kind of deliverables-based goals that Morgan Anderson is championing. Most say they have developed models of their own to measure the impact media service has on their clients' bottom lines. But as sophisticated as these models are, they all have one ironic Achilles' heel, and it's not media performance, but advertising creative.

"It's too nebulous," says John Gaffney, COO of Havas's MPG unit. "There's hundreds of different variables that can go into an individual model, but creative is not one of them. If you look across a broad enough spectrum you will iron out all your highs and lows of creative. We're trying to figure out that next step because it's an important step."

It's important, he says, because without the ability to separate the effects of creative and media on an advertiser's bottom line, media agencies will remain beholden to creative shops for their clients' results and, indirectly, how they are compensated for their media work.

But things may be changing as media becomes more of a pure play service, says Charlie Rutman, president of Carat USA, a pure play media agency that is not affiliated with any creative shops. "From day one we've been independent of creative, so that was not an issue for us," he says. "When we go to our clients and ask them what they want from their media agency, they actually can tell us a little bit better, and I think that they can grab on to a more precise definition of innovation. A lot of clients have set some very high benchmarks, and while they may be somewhat subjective, in their minds - and they're the ultimate judge and jury - they feel pretty confident that they can challenge us and judge us, and we feel confident that we can be fairly judged."

[See April print issue of MEDIA for a complete Chronology or Agency Compensation, plus excerpts from roundtable panelists.]

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