What’s the right way to reward agencies? Richard Bleasdale, Managing Partner, Asia Pacific at The Observatory International, explains why change is coming.
Money makes the world go round. And when we don’t get our fair share, everyone feels demotivated.
Money issues are most likely to damage relationships between advertisers and their agencies. Typically, they occur when agencies have an ill-defined or changing scope of work, there are poor, time-consuming briefing and evaluation processes, issues relating to time-based fees approach or when hourly rates/margins have been set artificially low (whether by the client or even the agency, if they’re looking to win now, recoup later).
Getting it right isn’t easy. The best Agency Remuneration models are designed to be both fair and motivating and that means looking at four key areas and balancing the different needs of all parties.
- What behaviour are you trying to drive? Is it efficiency, effectiveness or something else?
- What resources do you want on your account? Specify the talent level and type as well as issues such as service levels.
- What can the business afford? Be clear about both your budget and the levels of risk you can accept.
- What level of administration do you require? How much reporting on issues such as transparency are you asking for? g. what level of simplicity or transparency?
Current payment models
Most clients look at one of three primary payment models, those based on time, commission or some form of pre-agreed outcome.
The Time-based construct has the widest range of variants and while many lock key talent into the account, they can fail to differentiate in rewarding between good/bad performance.
Commission-based contracts are simple to understand and enable a focus on quality but are generally not media neutral and can lack transparency.
The Outcome/Value-based payment model is generally more accountable but also requires significant negotiation and adds complexity to payments.
Each has its own advantages and many brands often combine elements of each to create a hybrid that suits their particular needs. Many brands use a retainer or FTE approach combined with project fees or commission and an Incentive/Performance component.
But while these models have stayed relatively static over the last decade, they are being increasingly challenged to demonstrate they are the best way forward.
As marketing spend becomes a more regular C-Suite topic, driving greater oversight and scrutiny, the search is on for new models that can deliver on a number of potentially competing objectives, including:
- The push for simplification is encouraging a re-evaluation of commission-based compensation.
- Greater expectations on transparency are having real impact on rebate expectations and contractual commitments across both. media/production planning and buying.
- Higher demands for efficiency/speed are seeing the introduction of agility incentives and bonuses. Real-time/always-on marketing combined with multi-versioning and optimisation are creating new demands on agency teams.
- The push for value or outcome-based remuneration is offering agencies the opportunity to take on higher risks but potentially also higher rewards. Agencies, for example, are pushing for greater idea ownership/’skin in the game’ through licensing or usage-based IP/equity/joint ventures.
- The growth of decoupling is encouraging a split between ‘thinking/ideas’ and ‘doing/delivery’ – each of which typically has a different strategic value to the client and, therefore, requires a different price tag.
- The move to a project-based approach is seeing growth in companies with a roster of agencies to call on.
- Zero-based budgeting as an in-vogue financial approach is causing issues for agencies as they struggle to match committed, long-term continuity of resource for clients to a short or mid-term scoping and budgeting cycle.
All in all, there’s a clear need for innovation in remuneration strategies and frameworks. As the digital revolution transforms both the opportunity and the output that advertisers require from agencies, it seems remarkable that payment models have changed so little.
But pressure for change is unlikely to be resisted for long. The future could be bright for brands and their agency partners who are willing to be bold and rethink how and what is worth rewarding in 2018 and beyond.