Ad Agency Compensation Study Shows Marked Increase In Labor-Based Agreements.

More than two-thirds of major U.S. advertisers use Labor-Based compensation agreements with their advertising agencies (up from 53% in 1997), according to a new study just released by the Association of National Advertisers, Inc. (ANA). During the same three-year period, usage of Billing-Based agreements (including both fixed-rate commissions and sliding scale rates) declined to 21% in 2000 from 35% in 1997. The remaining 11% used “other” types of agreements, typically Fixed Fee or Labor/Billing combination programs, about the same percentage as in 1997.

More than three-quarters of advertisers indicated that they are generally satisfied with their current agency compensation agreements, a level nearly unchanged since 1997.

Incentive compensation provisions are employed by 35% of the respondents, up from 30% in 1997 and 19% in 1994. These incentives are most often linked to sales goals (73%), agency performance reviews (58%) and brand/advertising awareness goals (50%). While the use of incentives continues to grow, the rate of increase appears to be slowing during the past three-year period.

These and other key findings come from the ANA’s twelfth triennial Trends in Agency Compensation study, which reflects data collected from 136 corporate respondents. The survey, which was fielded online for the first time in December 2000 – January 2001, has a 36-year history. David Beals and Robert Lundin of Jones Lundin Beals, a Chicago-based advertising management consultancy, authored the study, which is sponsored by ANA’s Advertising Financial Management Committee.

“The ANA’s agency compensation study is a comprehensive and unique benchmarking tool, widely referenced by our members and their agency partners,” notes John J. Sarsen, Jr., ANA’s president and CEO.

“The domination of Labor-Based compensation agreements and the consistently growing interest in incentive compensation indicate increasing advertiser demands for improved accountability and value for their agency compensation dollars,” observed David Beals, president and CEO of Jones Lundin Beals.

Other key findings of the ANA study include:

The use of Labor-Based agreements has increased across advertisers in all spending and industry categories.

Nearly half (49%) of respondents reported making a change in their compensation agreements during the past three years, up from 38% in 1997. Of those who made changes, 42% were Packaged Goods advertisers (up 8 percentage points) and 27% were Services (up 8 percentage points).

Less than a third (31%) of respondents report employing a standard compensation agreement across their U.S. and non-U.S-based agencies. Of those advertisers with global agency compensation agreements, the vast majority (69%) use Labor-Based agreements – nearly the same percentage as U.S.-based agency compensation agreements. Over half (52%) say they that their agreements vary by country rather than region (21%).

Increasingly, advertising production costs are billed to advertisers at net cost, a trend that continues since 1997. Among those advertisers still using Billing-Based compensation, 50% compensate their agency at a 10% rate of commission or less for production.

Responsibility for media planning and buying continues to be handled by advertisers’ primary agency for 83% of respondents, trending gradually down from 89% in 1997 and 91% in 1994. Of those using their primary agency for media planning and buying, Labor-Based compensation is used most often (59% for media planning) and (52% for media buying).

Although 69% of respondents claim that they will work with their agencies to ensure they are profitable, 43% are not clear about what their agencies believe to be a fair profit and 14% believe their agency’s profit goals are clear but excessive.
The use of specialized agencies to provide advertising services is very high, with over 90% of respondents using a different agency from their primary agency for Multicultural advertising; over 80% using specialist agencies for Event Marketing and Promotions; and 62% using an Interactive/Internet advertising agency. In the majority of cases, Labor-Based compensation agreements are used in these in these relationships, similar to the overall compensation trend.

Among the compensation issues causing advertisers the greatest concern are whether they are receiving fair value from their agencies and the extent to which agencies are monitoring and working to control labor and other costs.

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