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Now that the 15% commission is dead and buried, advertisers are killing off commissions entirely.

That's one finding of the Association of National Advertisers' "Trends in Agency Compensation" study released last week. The survey, compiled by Jones-Lundin Associates, Chicago, was last conducted in 1994.

This year's survey found only 9% of clients currently use a 15% commission and fully 75% of respondents said their agency compensation amounts to less than a 15% commission.

But commissions overall are on the wane, with more than half -- 53% -- of respondents stating their compensation to agencies is instead labor-based. That's up significantly from 1994, when labor-based compensation was used by only 35% of advertisers responding.

The use of billings-based compensation has fallen sharply, with 35% of advertisers using it in 1997 vs. 61% of advertisers three years earlier.

The remaining 12% of respondents favor either fixed fee payments or labor/billings combinations, a trebling from 4% in 1994.

The 15% commission, however, still has usefulness, the survey found.

"It is interesting to note that while only 9% of respondents still use the old standard 15% commission, nearly two-thirds of them reference it as benchmark to evaluate their current agency compensation agreements," said ANA President-CEO John Sarsen.


The most significant finding of this year's survey, said Jones Lundin President Robert Lundin, is the rapid rise in incentive compensation agreements, now used by 30% of the advertisers responding, up 11 points from the prior survey.

"I'm really challenged by the rapid growth in incentive compensation; it's more significant, in my opinion, than the other trend data," he said.

He added that incentive compensation "can resolve some sources of agency-client deterioration and help them operate in a positive, sustaining way."

O. Burtch Drake, president-CEO at the American Association of Advertising Agencies, also said the upswing in incentive compensation is a positive development, noting the increase hints that clients and agencies have resolved the key question of how to measure a campaign's success.


"I think [clients] are making agencies more accountable, which agencies have been willing to do," said Mr. Drake. The incentive-based pay acknowledges the agency's contribution to the client's business success, he said.

According to the survey, the majority of incentive programs are linked to labor-based compensation (53%), with another 23% linking them to a fixed percentage compensation rate. Another 9% offer sliding scale incentive payments and 15% use another, unspecified method to offer incentives.

As a result of the jump in labor-based programs, production costs are being increasingly billed to advertisers at net costs without markup, the survey found. Where billings arrangements are in place, however, production markups average 15.88% for fixed-rate agreements and 16.54% for sliding-scale agreements.

There are exceptions, however. Mr. Drake said the increase in billing production costs to advertisers at net cost is worrisome. While not a problem if it's part of a labor-based compensation agreement, he said at least one major advertiser recently switched to netting production costs within a commission structure, which amounts to a pay cut, he said.

Production can be a significant part of costs within some accounts, so the cut can be sharp, he said.

Although he wouldn't identify the client, Kraft Foods announced in March it would no longer be paying commissions on "non-working media," such as talent, production and residual costs.

One factor in the survey largely unchanged from 1994 is media planning and buying compensation. The overwhelming majority -- 89% -- of respondents used general agencies for media planning, bundling it in the compensation package. About 47% use a separate payment system for media buying.

Respondents using a media buyer other than their general agency are most likely to have a media agency of record (49%) or use an outside buying service (27%).

More than half of advertisers, 59%, reported they review account profitability with their agencies. And 20% said they guarantee their agencies a profit, up from 15% in 1994.


But fair profit remains an issue -- 60% of respondents said they lack clarity on how to determine what agencies believe to be a fair profit.

Still, the lines of communication are improving; 65% said there was little clarity on the issue in 1994.

While 71% of respondents said "we pay about the right amount" for agency service, up slightly from 69% in 1994, another 23% of respondents said "we pay more than we should," flat with the response two years ago.

Advertisers also report concerns about how to pay for interactive media, how to develop incentive-based programs and how to structure optimal compensation agreements for global assignments.

But even as advertisers are tightening up compensation programs, satisfaction is declining.

While 78% of advertisers responding reported being "generally satisfied with their current compensation agreements, that's a drop from the 86% who reported satisfaction in 1994.

The 1997 survey reflects responses from 113 ANA members to a printed questionnaire distributed last summer.

Contributing: Mercedes M. Cardona.

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