The key flaw of a compensation system tied to the price of "traditional" media is the lack of a consistent relationship between income generated and the cost of providing the services required by the client. This flaw will become more pronounced as the emerging new media techniques come on stream.
Agencies must find ways to align their compensation arrangements with their role as sales people, not as buyers of media. To do so they must become as creative and imaginative in selling themselves as they are in promoting their clients' products and services.
Unlike traditional media, compensation tied to the "media price" of emerging new techniques will likely bear only a distant relationship to the cost of the work involved.
While each agency will tailor its approach to its own style and personality, the following steps can form the basis for compensation arrangements that are realistic for the agency and more responsive to client concerns.
For compensation purposes, encourage the client to think of the agency as an employee.
Prepare and get agreement to a job description for the agency-as-employee. A clear definition of the job is one of the strongest ways to clarify expectations, and at the same time establish a solid basis for discussion of compensation.
Take the mystery out of agency costs and compensation. Costs can be identified, and they can be managed. Match estimated agency costs, including expected profit, to the services to be provided as defined by the job description.
Use the cost of basic services as a platform on which to build additional compensation tied to contributions to client sales. If the agency can be paid a wage based on cost of services, it can negotiate additional compensation through mechanisms similar to those used by companies to reward senior executives.
Look beyond cost to value and focus on issues of reward-for-performance. Clients are often put off by agencies proposing set fees, asking, "Why should I take all the risk?" The answer lies in linking agency profit goals to agreed-upon performance standards. An agency's pay might be enhanced by a bonus pool that rewards objective measures, e.g., increased sales, share, profits of the client-as well as subjective measures, possibly similar to the client's own personnel evaluations.
In this vein, some agencies have voiced interest in the concept of establishing a form of "equity" tied to clients' marketplace results. In such cases the client might expect the agency's investment in that equity to take the form of reduced or delayed profit targets pending results. Why not establish "shares" in the venture "purchased" by the client's marketing dollars and by the value of agency services provided (at the sacrifice of profit), with their bonus pool funded by the "worth" of these shares? Distribution would rest on a formula arrived at by the two parties.
An example: A typical agency profit target is 16% to 20% of its gross income. It could accept an initial fee that includes 8% to 10% profit, with a like amount consigned to a bonus pool, to which the client also earmarks funding. Then the degree to which sales, profits, market share, communications goals-or some combination-are attained determines the agency's bonus each year.
Whatever the form, variations of these ideas will spring from these simple truths:
1. Advertising is selling.
2. Top sales people deserve to be rewarded for their efforts.
3. The interests, needs, even the demands of marketers from their communications agencies require enlightened perceptions of cost, value and reward.
4. Open-mindedness and creativity will be needed on both sides of the table as marketers and their agencies examine new approaches to agency compensation.
Mr. Beals is managing partner of Jones-Lundin Associates, Chicago, advertising management consultants.