Agency Compensation – A Seat at the Table

Agency compensation is not a new topic. There have been numerous articles written about it, countless hours spent discussing and debating various methodologies and much agency hand-wringing with every submitted rfp.   Commission, cost-plus fees, billable hours, value-based initiatives?  More and more time is devoted to figuring out how to price what we do and quite frequently, how to continue to do what we do for less and less.  How did we get ourselves into this situation?  And what can we do to get ourselves out of it?   So far there doesn’t appear to be a clear answer to the latter, but perhaps it would be worthwhile to take a look back to get some perspective on the former.

Admittedly, this may be a somewhat oversimplified account, but the story seems to begin in the early 80’s when a venerable NY full-service agency was sold.  The CEO of the agency did quite well.  So well, apparently, the CEO of one of the agency’s major clients decided 15% commission was too much to continue to pay and cut the rate.  Other major advertisers followed suit at agencies around the country, thus quite rapidly ending the days of set commissions and substantial agency profits.  At around the same time, client CEOs began to look for corporate growth outside of the traditional paths of new product development, new distribution channels, new markets, line extensions, all of which were core strengths of their agency partners and to whom they looked for advice.  Faster growth than was typically available through these channels was needed and mergers, acquisitions, spinoffs and other corporate strategies became critical to the CEO.  These growth strategies were outside of the agencies’ core strengths, so as the client CEOs turned to the management consultants and banks, the agencies lost a key position at the table.  Agencies quickly went from being valued partners to expense items.

This confluence of events has taken its toll.  We are operating in an environment of significantly reduced revenue and margins frequently dictated by clients’ procurement departments, whose personnel often don’t understand what we do or the value that our organizations can bring.  In fact, I was once negotiating a contract with a procurement director who wanted an upfront guarantee that anything we did would work.  I explained that we could offer no such guarantee, but would work out an incentive program that would reward us for achieving certain results.  He was adamant that an upfront guarantee was required.  It took quite a while to explain to him that the nature of our services (our product) differed greatly from that of a vendor supplying fiber optic cable!  Granted, this was early in the involvement of client procurement in our business, but it was a good lesson.

So where do we go from here?  Was the commission system perfect?  No, but it was inherently self-regulating and rewarded great thinking and great work.  Generally, the better the work you did for your clients, the more sales they achieved.  More sales resulted in more money being spent on advertising.  Of course there were exceptions, but the system worked reasonably well.  One certain benefit was that with a standard industry commission rate, decisions on agency selection were based in large part on the quality of the thinking and the work.  Not on who would do it for the lowest cost.

FTE-based fees?  Widely in use today.  Does this system work well?  In many ways, yes.  It provides clients with clarity as to who is working on their business and when tied to a scope of work, pretty much exactly what they’re paying for.  And with an incentive component, there is certainly a financial reason for agencies to strive for great results.  Unfortunately, in many ways it also commoditizes what we do and all too often, as the number of hours is highly debatable, keeps agency employees “doing” (productive hours on an account), with little time to truly think about their clients’ businesses.  This system also treats every hour an employee spends on an account equally.  Whether an hour is spent reading a report, or, in a flash of genius, coming up with a new product line, the name for a new brand, or a spectacularly compelling communications idea.

A value-based compensation system?  Pretty new and probably too soon to tell.  Two large advertisers are trying it out.  Certainly rewards great thinking based on the results achieved.

Is there an ideal compensation system?   One that can help level the playing field, stop us from undercutting one another and drive the differentiation between agencies back to strictly the quality of the work and the quality of the people; one that rewards the agency for great work and encourages great thinking; one that provides the financial clarity necessary for clients in today’s world?  Given the volume of data that now exists and the tools we have to help prove the efficacy of our programs, I would think we could develop one that would come close.

But perhaps equally important, if not more so, is how do we use the data and tools at our disposal to regain a seat at the CEO table.  To reverse the commoditization of our services, to again be seen as a truly valued partner providing a unique perspective on our clients’ businesses.  If we’re able to do that, the compensation discussion should come far more easily.  I don’t pretend to have the answer, but I hope to have the time to really give it some thought.  We all should.  We owe it to ourselves and to our industry.

- Matt Kasindorf, EVP Managing Director