Execs Talk Compensation at Festival of Media

Agency CEOs Say It's Time to Alter Payment Model, Relationships With Clients

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VALENCIA (AdAge.com) -- While they weren't listed as session topics on the conference agenda of last week's 2009 Festival of Media in Valencia, Spain, agency compensation and payment cycles were clearly on the minds of the high-ranking agency players in attendance.

Festival of Media

DISCUSSING THE ISSUES: CEO panel at the Festival of Media.

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As the economy continues its assault on marketers, many have extended or just flat out delayed their payments to media owners, resulting in media agencies holding the bag and incurring some significant expense risks on behalf of their clients. Mainardo de Nardis, global CEO of Omnicom Group's OMD Global, said his biggest concern was the "the number of clients who are asking for unreasonable terms of business, like longer delayed payments."

Worse, they've watched the already vicious game of follow-me-to-the-bottom that characterizes so many media reviews get so bad that many concede privately that they're doing a lot of work for profit margins of zero-point-something.

Maria Luisa Francoli, global CEO of Havas' MPG, said her agency is contending with these issues. She said she believes it's time the compensation model start moving from a commission-based one to a value-based model built around a campaign's success, with the "key indicators of success" decided upon by the agency and the client. "In the last few years we have seen it moving in this direction," Ms. Francoli said. "It's a good thing to share that risk with the client and have part of your compensation linked to success."

In a session featuring four global CEOs -- Nick Brien, president-CEO of Interpublic Group of Cos.' Mediabrands; Jack Klues, managing partner at Publicis Groupe's Vivaki; Dominic Proctor, CEO of WPP's Mindshare Worldwide; and Mr. de Nardis -- compensation came up in the first few minutes. Mr. Klues said this is the time for media agencies to reframe the client/agency relationship and compensation structure to a more outcome-based model, but said that requires data from both sides.

The 'shackles of commission'
"We have taken on some initiatives ourselves," Mr. Klues said. "But we are going to have to take on a shared responsibility with our clients to make sure we have the data to which we can base such remunerations on."

Mr. Proctor said that while he doesn't love the phenomenon, media agencies have to accept that some reviews are going to be about little more than driving down prices at the behest of procurement executives.

During that session, two panelists suggested groups such as the American Association of Advertising Agencies take more of a stand on the compensation issue. Nancy Hill, 4A's president-CEO, was in the audience for the session and told Ad Age the organization is constantly working with its agency members on the issue. She added that it's time for media agencies to find a way to break the "shackles of commission" and look beyond it as the only compensation model.

"Many of our members are doing that," Ms. Hill said. "It's our job to bring people together to share best practices, not to try to get one solution but to see what works in one situation. What is best for both sides of the equation is to get to a place where clients feel like they are paying for value and agencies feel like they are paying for their value."

The other concern voiced by media agencies was the issue of having to deal with a client's media expenditure they can't afford to pay.

Risk is nature of industry
"It is becoming more difficult to deal with some of the requirements that advertisers have," Ms. Francoli said. "Specifically regarding payment terms like asking for a longer payment term, which may put a financial strain on the agency. The agency's only option is to finance that or share part of it with the media owners, which is a difficult decision, because we are the middle man between those two parties, so that's a risk."

Her advice to agencies struggling with similar situations is to approach media owners and discuss the possibility of allocating the expense between the two. But she also warned that agencies will encounter some media owners who are not very open to the idea of sharing that expense. And if an agency can't find someone to help bear the brunt of its client's delayed payments, she suggested getting recognition for the risk assumption from clients in other parts of the agency/client compensation agreements.

In the CEO session, Mr. Brien addressed the risk factor, calling it the nature of the industry. "We are always going to be taking a certain amount of risk," he said. "If we continue to compartmentalize between agency, client and media owners and not have the conversations we need to, we will not get a level of effectiveness to resolve these issues."

Ms. Francoli said MPG has a rigorous risk analysis it performs for every client to determine if the agency should float its media expenditures. "Sometimes we have had to say no if we don't feel comfortable with the risk level, and there's no insurance company that was willing to insure the cost," Ms. Francoli said. But before saying no, she said the agency will offer clients a "pre-payment plan, which is the same thing as having the client pay directly."

As for the conference, the 550 attendees seemed happy not to have to deal with overpriced water taxis and an impossible transportation setup like they did for the past two festivals in Venice, Italy.

But some felt it was a repeat of last year in terms of the industry talking to itself, with too many sales pitches coming from media owners and vendors. "I didn't come out of here at all thinking: I never thought of that or that's something new that never occurred to me," one attendee said.

MPG's Ms. Francoli said she agreed there were no "great revelations" but said she felt there were good moments of reflection. "And it was interesting to hear what these people had to say and how they said it," she said. "It depends on the level of expectations you have going in. While some of them were not revealing others were very insightful and expressed, in an intelligent way, things that have been on our minds."

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