Fees remain the chief form of agency compensation, although performance-based incentives are on the rise, according to the Association of National Advertisers' “2013 Trends in Agency Compensation” study.
The study, now in its 16th edition, was based on an online survey of 98 client-marketers conducted in the first quarter by the ANA and search consultant R3:JLB.
According to the survey, 81% of marketers use some fee-based model, such as labor-based fees and fixed fees, to compensate their agency partners.
Labor-based fees are the most common fee-based format, used by 65% of marketers, up from 46% in 2010, the last year the survey was conducted. Fixed fees, which are set for a specific project or time period, are used by15% of marketers, down from 20% in 2010. A combination of fixed- and labor-based fees is used by only 1% of marketers, down from 6% in 2010.
“Fees have been the predominant form of agency compensation for a long time, but they have now reached a new high at 81%,” said Bob Liodice, president-CEO of the ANA. “Concurrently, the level of commissions has continued to decline.”
Sales commissions paid to agencies have declined from 15% in 2010 to 5% in this year's survey. At the same time, the use of performance incentives grew from 46% in 2010 to 61% this year.
“Performance incentives have increased substantially,” Liodice said, noting that their use has tripled since 1994, when only 19% of marketers used them.
“We want to ensure that agencies are fairly compensated, make sure we cover their costs and give them a reasonable incentive to improve. A great creative agency, or media agency or digital agency is worth its weight in gold,” he said.
Among companies that use performance incentives, 69% base the incentives on both the performance of the agency and of the client, up slightly from 66% in 2010. Only 15% of marketers base incentives solely on the performance of the agency; 16% base incentives solely on the client's performance.
For those marketers using performance incentives, the top criteria used to measure agencies were: agency performance reviews (75%), brand or ad awareness metrics (54%), sales goals (48%), profit goals (35%) and brand perception metrics (31%).
Other measures used to evaluate agency performance include media performance goals (25%), digital/online communications goals (25%), market share goals (23%), copy test results (19%) and other criteria (13%).
Sixty-two percent of marketers that use performance incentives agreed that they have helped to improve agency performance.
One-quarter of marketers surveyed indicated they were “very satisfied” with their current agency compensation model, and 59% said they were “somewhat satisfied.” Thirteen percent reported they were “not very satisfied,” while 3% said they were “not at all satisfied.”
Between one-third and one-half of marketers said they are considering a change to their agency compensation models. The top reason cited for changing such a structure was to improve agency performance (39%), followed by cost-cutting (27%) and simplifying administration (6%).
Another significant finding from the study was the increased use of procurement departments in reviewing and negotiating agency compensation plans. This year, 82% of companies plan to include procurement or purchasing departments in their agency compensation reviews, up from 56% in 2010.
“[Clients] are becoming more savvy and understanding that [marketing] is not a commodity; it's both an art and a science, and needs to be treated that way. It's not simply about dollars and cents,” Liodice said.
“Marketers, agencies and procurement departments don't always see eye to eye—there is a big divide between the three. This has been ameliorated as more time is spent understanding each function and making sure that quality as much as quantity has been built into that discussion. Companies have been increasing their use of procurement departments as a primary vehicle to ensure both expertise and efficiency in evaluating both the agency and agency compensation.”
Other groups that are increasingly involved in agency performance and compensation reviews are: brand management (67%), advertising (58%) and corporate senior management (52%).
In 2010, only 47% of companies involved brand management in agency compensation talks, 56% included advertising and 51% included corporate senior management.