OBSERVATIONS: Agency Theory as a Framework for Advertising Agency Compensation Decisions

R Susan Ellis, and Lester W Johnson,
University of Sydney, Australia

Advertising agencies have historically received the majority of their compensation either through commissions or through some sort of fee structure (Shimp, 1990). Under the commission system, a flat percentage (traditionally 15 to 16.67% but now sometimes lower) is paid to the agency on the value of all advertising placed in the major media (broadcast, print, and outdoor), and a similar commission is added onto the cost of producing the advertising and to out-of-pocket expenses. In contrast, the fee system results in the agency being paid either a fixed fee or an hourly rate for services performed and in some cases a mark-up or commission on outside services. Each of these types of compensation plan can, under certain circumstances, lead to friction between the advertising agency and its client (Zeltner, 1981; Shimp, 1990).