In its first study of global ad agency compensation, the Association of National Advertisers found that fee-based models prevail in most of the world while incentive-based compensation varies by country.
The “2012 Global Agency Compensation Survey” was based on an online survey of more than 80 global b-to-b and b-to-c marketing companies conducted in February and March.
While the ANA has conducted a study of U.S. agency compensation for many years, this year's report is the first to examine agency compensation models across different countries.
According to the new study, a fee-based structure, in which agencies are paid fixed or labor-based fees for services rendered, is the dominant form of compensation, with 57% of global marketers using that model.
For b-to-b companies, the percentage using fee-based compensation models is higher, at 77%. For b-to-c marketers, that figure was 64%. (The subgroup percentages do not align with the overall group percentage due to firmographic information that was not provided by some marketers, according to the ANA.)
Thirty-seven percent of global marketers use a combination of fees and commissions to compensate agencies, while only 2% of global marketers use commissions only.
“One key difference between [the U.S.] compensation system and [that of other countries] is that [other countries] are far more reliant on commissions,” said Bob Liodice, president-CEO of the ANA. “[The U.S.] has a 5%-to-6% range of commissions, while [other countries] are in the neighborhood of the mid-to-high 30% range.”
Liodice said that in some countries, such as Brazil and Japan, the use of commissions to compensate agencies is mandated by law or is the common practice.
In other survey findings, 48% of global marketers responding said they used a combination of centralized, regionalized and localized management to contract with agencies for compensation. Nearly one-quarter of respondents (24%) used a centralized approach for agency compensation; 15% managed locally (by country); and 9% managed regionally. Four percent of respondents said they did not know how agency compensation was managed.
“One-quarter of agency compensation models managed centrally is far higher than I expected,” Liodice said. “I thought regional and local management would be higher.”
Among b-to-b companies responding, 31% managed agency compensation centrally; 23% managed locally; 23% used a combination; 15% managed regionally; and the rest said they did not know.
“One thing we seem to be relatively consistent on is the fusion of procurement in the process,” Liodice said.
Nearly half (47%) of global companies said the procurement department negotiates agency compensation with the support of marketing; 28% said marketing negotiates compensation with the support of procurement; 10% said marketing is solely responsible; 3% said procurement works alone; 8% said another department had this responsibility; and 4% did not know.
Among b-to-b marketers responding, 39% said procurement negotiates agency compensation contracts with the support of marketing; 39% said marketing negotiates compensation with the support of procurement; 15% said marketing alone negotiates compensation; and the rest chose another department.
“There has been a rather abrupt, sudden wakeup call around the world for procurement to be integrally involved,” Liodice said. “Marketers have seemingly embraced procurement on a global basis. In our opinion, that's a good thing. Some of the incentives in a global compensation model will evolve as procurement influences a more hard-and-fast ROI approach in order to incentivize agencies.”
According to the survey, almost half (49%) of global marketers use some sort of performance incentive, or “pay-for-performance” model, in agency compensation agreements.
The top metrics used by global marketers to tie compensation to performance were: regular agency performance reviews (81%); media performance goals (53%); brand awareness (47%); sales goals (47%); brand perceptions (44%); and market share (44%).
In the U.S., the top incentive metrics were: regular agency performance reviews (78%); sales goals (72%); market share goals (34%); brand awareness (31%); and brand perceptions (28%).
“[The U.S.] is very much more in tune with sales metrics to incentivize agencies, whereas global metrics rely more on brand perception and awareness,” Liodice said.
The survey also found a wide discrepancy in the use of incentives by global b-to-b and b-to-c marketers: 68% of b-to-c companies use incentives in their compensation to agencies compared to only 38% of b-to-b marketers.
“When marketing budgets are larger and an agency is getting paid more, there is often more scrutiny on taking a portion [of the compensation] and tying it to results,” said David Beals, president-CEO of R3:JLB, created through a merger of R3 and Jones Lundin Beals, who helped the ANA analyze the survey results and who wrote the report.
“In some cases, b-to-b marketing budgets tend to be smaller than b-to-c budgets; so to some degree, there is some function of "Do we have enough critical mass to structure pay-for-performance as part of the compensation?' ” he said.