"We're hoping to provide both agencies and marketers with a greater understanding of the nuances of agency compensation," said Bill Nicholson, exec VP-management services, 4A's. "If the principles are followed when developing a compensation plan, you don't have to wonder if someone is scamming you."
Said ANA spokeswoman Barbara Bacci-Mirque, "Agency relationships are one of our members' primary concerns, and compensation is a huge part of that relationship."
Produced by a nine-person joint committee of the two organizations over the past year, the position paper "Guidelines for Effective Client/ Agency Compensation Agreements" contains 12 principles on compensation programs as well as examples of best and worst practices in three types of arrangements: fee-fixed, hourly and cost-plus (payment for the cost of the service, plus a profit); incentive; and commission.
The paper does not recommend one type of arrangement. A 2000 survey by the ANA, however, found that labor-based compensation is now used by 68% of advertisers, up from 53% in 1997.
The recommendations emphasize using a common-sense approach. For instance, the first principle is "the best compensation programs are simple to understand and easy to administer." An overly complex agreement may yield debates over interpretation, which can hurt the relationship.
Another recommendation, to "align advertiser and agency interests and priorities" is simple. But, notes Mr. Nicholson, problems can crop up if a marketer sets as a goal building consumer awareness of a brand, then wants to compensate its agency based on sales performance.
The principles offer a roadmap, but by no means eliminate the prospect of agency-marketer friction. Compensation should be fair to both advertiser and agency, say the guidelines, but fair is not defined. "In the end," said Jerry Gottlieb, partner at Manhattan agency McCaffery Ratner Gottlieb & Lane, "it still comes down to supply and demand."
On staffing, another sensitive area, the recommended principle is to "match compensation with the resources required to do the work." But Dick Roth, head of consultantcy Roth Associates, notes that issues of "how many, of what level, and for how much of their time [are] often viewed differently." Examples of best and worst practices in fee agreements, such as trying to use an incentive program to fix a faulty base compensation plan, provide helpful specificity, said Joanne Davis, president, Joanne Davis Consulting.
Common types of plans:
* Fees Fixed, hourly, cost plus
* Commission Standard, reduced rate, sliding scale
* Incentive or performance-based