Warc Blog

Agency payment models prove slow to change

4 May 2010
NEW YORK: Agency remuneration models in the US have been slow to move towards the value-based approach championed by companies such as Procter & Gamble.

The Association of National Advertisers, the industry body, reached the conclusion after surveying 75 of the largest marketers in the country, with its results covering partnerships with 1,039 agencies.

Overall, 75% of client–agency relationships employed fee-based remuneration structures, a total which compared with the figure of 63% posted in the last such poll in 2006.

More traditional payment models centred around commissions – which were essentially dominant until the mid-1990s – recorded a decline from 16% to 13% in the same period.

The number of contracts which contained performance incentives also decreased slightly from 47% to 46% compared with the ANA's last report.

However, value-based agreements had been established in just 1% of cases, despite the heightened emphasis on return on investment that accompanied the onset of the financial crisis.

Procter & Gamble, the consumer goods giant – and the world's biggest advertiser – has attempted to implement this kind of approach in an effort to drive more effective marketing communications.

Coca-Cola, the soft drinks manufacturer, has pursued a similar strategy, which is said to be already delivering impressive results.

The obstacles that are possibly discouraging the broader uptake of this means of payment are said to include a potential lack of clarity and the complexity of reaching terms that are satisfactory to both sides.

"Part of the reason it's not taking hold is that people don't know really what it means. Knowing how to estimate the value created is difficult," Brad Brinegar, the chairman/ceo of McKinney, said.

Such a trend particularly applies during the downturn, when it is possible for brands to increase their market share even though their actual sales have contracted.

The greater involvement of procurement departments in pitches and renegotiating agreements may also have exerted an impact.

"It can be hard for clients when procurement is involved; I think it's slowing down the process a bit," Brinegar added.

Looking forward, Brinegar suggested that the progress being made in this area was still likely to be a precursor of the future shape of the industry.

"What I would like to believe is, just as it took the agency 30 years to get out of a commission system, we're in the middle of another shift.

"One percent is the tip of the iceberg, and there's a lot of work going on beneath the surface in terms of moving the compensation conversation to a better place."

Data sourced from AdAge; additional content by Warc staff

 
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