How Do Agencies Get Paid?
- by Ken Liebeskind , May 10, 2001
As advertisers move to the Internet and other non-traditional forms of advertising, the way they pay agencies has moved, too, from commission-based to labor-based compensation.
Sixty-eight percent of the respondents to an Association of National Advertisers survey of advertisers say they now use labor-based compensation, an increase of 15% over the past three years. Only 21% now use commissions, compared with 35% three years ago. In 1994, only 35% used labor based and 61% used commissions, so this year's numbers demonstrate a major turn around, according to David Beals, president/CEO of Jones Lundin Beals, the Chicago advertising consulting firm that performed the survey.
The findings were announced at the ANA's financial management conference in Laguna Niguel, CA today.
"The main reason for the change is the move to non-traditional resources, as advertisers use the Internet, event marketing and direct response which aren't easily compensated by commission," Beals says. "Advertisers are looking for common methods of compensation across all disciplines. Labor based deals allow for more flexibility."
For years, advertisers paid standard 15% commissions of the amount they spent to the agencies, but it began to change in the late '70s and '80s during recessionary periods when advertisers looked at their budgets and thought agency costs were too high. When they started to look at labor-based methods, which pay according to the actual work agencies do, the agencies were resistant, Beals says. But they changed their tune when they realized commissions would be low during a slow period, so they embraced labor deals "as a better assurance of profit," Beals notes.
Indeed, he says, "All evidence suggests that agencies are better off under the new method of compensation. They may not make some of the windfalls they made in the past, but they avoid the downfalls. Agencies are comfortable with labor based agreements and are making a decent profit."
Beals says the figures are consistent among all kinds of advertisers, from package goods to durables. "There's no real difference across the board, the trends hold up."
But he says advertisers may make different agreements with different agencies, paying different ways and different rates to each agency.
The other big trend announced in the survey is that performance incentives are being used frequently. Thirty five percent of advertisers are paying performance incentives that start agencies at a lower rate and increase the amount based on the results of the program. Performance incentives can be used with labor based or commission compensations. Performance incentives benefit advertisers, because if the agency doesn't do well they don't have to pay a high fee. But if it does do well, both parties benefit.
- Ken Liebeskind may be reached at kenrunz@aol.com
