Rethinking Agency Compensation.

Be that as it may…

It’s an issue that comes up in the trades every time there is a change in the economic climate, or when a very large media account goes from one enormous media commodities broker to another for reasons of cost.

As most of you know, the old standard way of clients compensating their agencies is fee based on some percentage of spend. Sometimes this percentage is fixed; sometimes it scales with the spending. It used to be that a full-service agency saw 15% of gross spend for a client’s advertising campaign. Over the years, clients drove their advertising like T Boone Pickens did shareholder value, by cutting human capital and discounting knowledge workers. Without a need for personal with an accumulation of practiced knowledge and the strategies born therein, media became highly commodified. As a result of these ostensibly downward cost pressures, percentages agencies could charge for media buying and planning went down dramatically. Budgets going up dramatically also had something to do with it. After all, does an agency really need to earn 15% of $300 million?

Any of you who grew up in the traditional agency world, or were weaned in a traditional agency setting are so familiar with the percentage of spend compensation structure that you can’t open a spreadsheet without plotting out which column and cell is going to be populated with the compensation variable.

There are some shops out there that have experimented with the pay-for-performance compensation structure: some form of base compensation plus bonuses for X number of units sold. This may be a common and popular fee-for-service structure, but I feel like I’d have heard more about it if it really caught on.

After all, it would come as no surprise that agencies like cost-per-action deals as much as publishers do.

About 5 years ago or more, I worked at a young, new agency that was then called Left Field (has since become Tonic 360 and Exile on Seventh). A very exciting, busy, hot shop that was doing online creative and media for clients that have since become household names.

And they did not get compensated based on a percentage of spend. They were paid like consultants, with flat retainers that would be renegotiated on a semi-regular basis, depending on how much work was being done on the account. This helped to cover costs and preserve margins in most instances. Sometimes you make more on an hourly basis, sometimes less; but if it ever seemed too extreme, then that’s when you’d go back to renegotiate the fees.

Clients would still work the shop into ground beef sometimes, but they almost always respected their perspective and, for the most part, thought of the agency as consultative experts and treated them accordingly.

I think that decades of percentage-based compensation have helped to, in a very sublime way, contribute to clients’ perceptions that agencies are to be used and abused, which leads to both their poor treatment and their inability to cover costs. Clients have essentially come to accept that it is all right to treat their agencies like a lot of agencies treat sales representatives. The perception is that if someone is compensated based on a percentage of spend, then the incentive of that entity is to boost spending, not do a good job or provide insight and intelligence or make a better product or put together a better proposal.

This isn’t necessarily overt, but I do think that over the years, agencies have come to assume the mantle of being no better than hucksters when looked at through the eyes of clients.

This is not true in all cases, of course. There are some agencies out there that have the respect they deserve from their clients for their expertise and good work. But there really is a quiet yet pervasive sense that agencies are starting to become superfluous middlemen who make their living persuading clients to spend money they don’t need to be spending on things that are more an agency’s special interest rather than what is in the best interest of the client.

Perhaps if agencies started charging their clients more like lawyers or consultants charge their clients, agencies might be able to reclaim their role as partners in marketing rather than just plug-and-play tools that perform the task you want based on the buttons you’ve pushed.

By Jim Meskauskas
Courtesy of http://www.MediaPost.com