Inside independent agencies driving change in industry compensation models

A rising tide of independent agencies is leading a monumental shift in how shops are compensated, overturning traditional pricing based on billable hours and costs per head that has been standard for decades but long lamented as antiquated. To name a few, Slap Global, Walrus, TDA Boulder, Bullish, Mischief @ No Fixed Address, Twentyrising, Vuja Dé Digital, X&O, Apollo Partners and Tilt Story are among the shops driving this change in pricing. See all of the 2024 Small Agency award winners here Fueling the shift are factors including the influx of new independent shops often started by former holding company executives who set out to do things differently. Since they can be more flexible than holding company agencies beholden to Wall Street constraints, independents are delivering new pricing to marketing clients increasingly craving these innovative compensation models. These are based on deliverables and value, performance, flat fees, bonuses and equity stakes, among other alternatives, according to 17 agency executives, marketers and consultants who spoke for this story. “It’s a shift in mindset,” said Lyndsey Corona, Slap Global partner and U.S. president. Slap offers various compensation models including ones that are value-based and, for new brands, the shop will have an equity or profit-sharing discussion. “For so many years, we’ve talked about the commoditization of our industry. This helps us push against that notion in a way that places value on what we deliver.” Many people who spoke with Ad Age said shops need to be considering alternative payment methods now more than ever as AI threatens to upend how everything operates—for example, if AI has the potential to reduce headcount and cut down on hours spent doing a project, there needs to be a change in how agencies are compensated. “It’s how we defend against this notion that AI is going to take everyone’s job,” Corona said, noting that it will be critical for agencies to place more value on creative ideas versus how much time it takes to get them. “AI will make us more efficient, but there is no way a machine can create the kinds of crazy, weird connections that those amazing, talented creative people can.” More agency news: Why ad agencies are launching design units Brands driving the change Brand marketers are in some ways driving the change to alternative payment models. Though some agency executives said conservative procurement teams still demand rate cards and traditional pricing, major marketers are increasingly seeing the value in alternative payment models. Molson Coors, for example, “started to shift to a deliverables-based model back in 2020, and since then we’ve seen greater flexibility in how we work with our agencies,” said Joshua Wexelbaum, the company’s senior director of creative services. “Our current model has helped us focus more on the quality and output of our work and less time reconciling hours so we can focus more of our time on the actual creative.” Wexelbaum said it’s been critical for Molson Coors to work with its agency partners, which include Mischief, and procurement teams on the shift toward deliverables-based compensation (more on that below). “Our model has allowed for greater flexibility to focus on the creative output, as well as push us to be even more specific and precise on what we need from our agencies,” he said. (Mischief last year expanded its years-long relationship with Molson Coors by becoming agency of record for Topo Chico Hard Seltzer, and producing campaigns such as the voicemail greetings takeover with actor and comedian Ben Schwartz below.) Twentyrising, a Berlin-based creative agency founded by former Media.Monks executives that works with clients such as Netflix, implemented a type of subscription-based pricing for the marketers it serves, according to Alkisti Stolp, its co-founder and chief brand officer. The agency “essentially” charges based on the expertise level of the team and adds in “hybrid subscription models,” which means clients pay a monthly fee for certain services, Stolp said. “You have an ongoing commercial agreement, which is all about either the daily business or the strategic framework, depending on the collaboration and the requirement from the client … [it’s not about saying] ‘OK, you will get three people that will spend five hours a month doing whatever.’” This model was praised by Twentyrising clients including ESL FaceIt Group, a gaming company. Fabio Tambosi, senior VP of global marketing at ESL FaceIt Group, said he prefers the payment model Twentyrising has introduced because it leaves the partnership feeling less transactional. “These agency features are built over time and based on building a thought-partnership model versus the classic vendor relationship,” Tambosi said. “We look for partners that can co-create, dream big with us and check the creative ego at the door. We are evolving the hourly-based model or retainers to look for partners that can bring expertise, skillsets and a hyper-collaborative mindset.” Value-based comp and flat fees Two of the most common forms of alternative payment methods are fixed fees and deliverables-based compensation. To get to the deliverables-based compensation that Molson Coors has implemented, Wexelbaum said the company had to find pricing that would be consistent as well as “mutually beneficial” for both client and agency. “On a deliverable-based model, we need to ensure we know exactly what we need early in the briefing process, so we created our own internal scoping tool,” he said. “This tool helps guide our marketing teams to pre-determine a scope based on their campaign objectives so that they’re able to customize deliverables based on [the brand’s] business needs. This has helped our teams get sharper on their asks, but also has created more efficiencies with our agencies through more precise briefs.” Kerry McKibbin, partner and president of Mischief, said the agency has had success billing by deliverables or fixed fees. The services are agreed upon upfront and delivered. “We don’t do hours and rate cards because we strongly believe that that’s a race to the bottom,” McKibbin said. “And, ultimately, it’s one that hurts clients and marketing teams. We have found historically with our clients, and with us, [deliverables-based pricing] offered much more clarity and fairness in terms of tracking and reconciliation. Clients are happy because they get a very clear, whether it’s a project or an AOR, set of services; a clear set of ‘you get this for that.’” The way in which X&O operates in sprints bodes well for alternative pricing. The agency, founded by two former Stagwell-owned Anomaly executives, relies on a network of freelance executives such as chief marketing officers, creative leads and strategy experts to work on client projects on an as-needed basis. For a fixed fee, X&O answers client briefs in “sprints,” with campaign ideas delivered as quickly as in one week. X&O offers clients the option to purchase one of three packages, said Co-Founder Brett Banker. For a “small” package, the shop produces seven ideas in seven days, and it involves a “clear brief [that] doesn’t need a lot of strategy.” The “medium” package involves a “big platform with multiple ideas within it” and the “large” package is “more multilayered” with needs for creative ideas, brand positioning and strategy. The small package costs between $50,000 and $150,000, the medium costs between $150,000 and $225,000 and the large package costs more than $225,000, Banker said. “It always depends on the ask.” Co-Founder Eric Segal said that X&O’s model helps place more value on the creative output, while also providing transparency for the client and allowing the shop to be compensated for its ideas. “A lot of agencies deal with scope creep,” Segal said. “Those rounds that just exhaust an agency and start crippling those margins. Also, procurement on the client side actually enjoys talking with us because it’s so simple.” There is some argument over whether the type of payment model X&O has implemented would commoditize creativity—and if that’s truly a bad thing. Banker countered that there’s value in seeing ideas as a product that agencies can sell, and it also makes it simple for clients to invest in. “Easy to grasp. Easy for procurement,” he said. “We’re doing something that a lot of agencies would call heretical. We’re going, ‘We want to make it approachable, affordable and commoditize the end product.’” Lawrence James, co-founder and CEO of Tilt Story, which has had success in introducing alternative payment models such as fixed fees, argued that it will be hard to fully commoditize creativity, no matter what payment model you deploy. “The client wants original thought, new ideas; it’s very hard to commoditize that,” James said. A need for more transparency Jonathan Schoenberg, co-owner and executive creative director of TDA Boulder, said his Boulder, Colorado-based agency transitioned from blended rates to mostly flat fees about two years ago. He said it’s allowed for more transparency with clients. “We don’t mark up on production, which many agencies do,” Schoenberg said, noting that his shop made the shift in response to clients’ needs. “The change has really come because they’ve asked for it.” Marketers are increasingly looking for more transparency in pricing in a world where they’re being squeezed, especially as concerns of a recession once again creep up due to a recent stock market plunge. On the media side, this is especially true, as new transparency issues in the buying process keep emerging even after media agencies received backlash in 2016 following a report out of the Association of National Advertisers that revealed they were receiving certain rebates from media companies and not disclosing or passing them back to their clients. For example, there’s recently been renewed scrutiny over principal-based buying, where media agencies buy media and resell it to clients because marketers often don’t know their agencies are doing it. Eric Perko, founder-CEO of independent full-service agency Apollo Partners, said he started his shop five years ago to offer more transparency to clients, especially in the media buying space, and that has included moving to more deliverables-based pricing. “We are really just aiming to change the game in media and offer a service that we would want if we were clients,” Perko said. “We have had a lot of success in changing compensation models. We think of it as, we should be incentivized to do really high-quality work and do it quickly, which is at odds with the standards of this industry and making everything hourly based. Our preferred model is very transparent, very value-based. Our business objectives with the client should be aligned.” Apollo Partners also doesn’t take a commission of the media buy, which is standard practice, Perko said. “Agencies can make a lot of money off commission, but I just don’t believe in it from a philosophical standpoint.” Matt Seiler, head of executive services for Banff, is an industry veteran who is a former IPG Mediabrands CEO and ex-managing director of ad consultancy Raines International. Seiler said he has always been a proponent of a model where agencies are compensated for the performance they deliver their clients, and said that would solve a lot of transparency issues. If agencies have real “skin in the game,” meaning they are not paid if the client doesn’t make money and they’re rewarded handsomely if the client has an exceptionally strong year, the shop will truly do whatever is in the best interest of the client, Seiler said. There are obvious risks to this model given the agency isn’t making money if the client underperforms. Agencies within publicly traded holding companies need to be especially cautious of taking such risks because they are beholden to shareholders. “Independent agencies are much more in control of profit and margin,” R3 Senior Consultant Moya Fry said. “They can afford to be flexible and try out new pricing without fear of not hitting numbers [Wall Street] has set with layoffs.” Still, some holding company agencies have had success moving to alternative forms of pricing, including performance-based compensation. Seiler implemented a performance-based compensation model with some clients as early as 2008 when he was CEO of IPG Mediabrands. IPG’s Huge also has implemented alternative pricing, including flat fees and performance-based compensation. “Over the last two years, we’ve seen that many clients prefer fixed-price models because it often gives them defined deliverables at a predetermined price and deadline,” Huge CEO Lisa De Bonis said. “Other clients are dealing with more nuanced challenges that require a value or performance-based model to really address their needs.” De Bonis acknowledged the challenges holding companies, in particular, have in adopting different pricing models. “Let’s be honest. People don’t like change,” she said. “Especially when that change is built around traditional models like hourly billing and other legacy procurement practices. This way of working is deeply ingrained in many of the larger organizations that holding companies work with, making a shift to newer, more flexible payment structures challenging.” Ad Age Agency Report 2024 Revenue and analysis for agency companies Click here Equity stakes Equity stakes are another pricing model some shops are offering. These can be enticing for new brands looking for investors and can be profitable for the agency if the company takes off. Of course, it’s also one of the more risky pricing options for the agency. Independent performance-driven media agency Vuja Dé Digital offers equity stakes in some scenarios, said Co-Founder Todd Juneau. “Instead of paying us 20%, [we say] ‘pay us 10% the cash value [and] the other 10% we’d like to invest in your company.’” But the agency has been “burned many times. We have relationships that have ended where large sums of money were owed to us or equity promises that were never paid off,” Juneau said, noting he used to enter these agreements more liberally with the previous agency he co-founded in 2015 and has since been more cautious with Vuja Dé Digital, which was founded in 2018. “We take a lot of risk on placing bets and what it’s forced us to do is really look deeply at the people that we’re willing to place a bet with, as much as they’re looking at us,” Juneau said. It does work out in some cases. TDA Boulder invested in Justin’s Nut Butter early on and ended up working with the company for about 10 years, Schoenberg said. “It was a real payoff.” Digital agency Bullish often invests in its clients. “We have a few methods; the most audacious is Bullish will invest a few million dollars for equity with the aspirations of seeing a strong multiple on that return a few years out,” said Bullish Managing Partner Michael Duda. “For bigger brands, we develop scopes of impact that focus on business outcomes versus the price of making strategy or creative outputs. Bullish puts forth a fee where we will reallocate between 7.5% and 25% of our fee into a bonus pool that aligns to what our client sponsor is compensated with the upside of potentially getting three times the money we give up.” Clients are compensated, depending on the company, through “areas related to revenue, market share and profitability growth,” Duda said. “So, instead of charging $1 million for a straight [or] guaranteed fee, we would be willing to give up $75,000 [to] $250,000 into a bonus [or] performance situation. The goal would be to have the ability to generate three times the amount, $225,000-$750,000, based on agreed-to metrics.” Duda said Bullish has seen “over a decade of success and learnings and [developed] a 71-point criteria diligence checklist to guide a discussion between our brand, creative and investment teams,” but acknowledged the risk in operating in the way that it does. “The chance of not seeing any returns is real,” he said. “There are no guarantees of success. Agencies can get seduced by the potential. Our job is to find opportunity. And for a million reasons, things can happen that torpedo the promise. It’s unfortunate, but very real.” Introducing usage fees Increasingly, agencies are introducing innovative ways to maintain control of their ideas and to be monetarily compensated for them far beyond what gets used in an immediate campaign. Agencies are, for example, trying to enforce usage fees, which means a brand agrees to pay an annual fee if it plans to continue using a creative idea from an agency in its marketing after the partnership ends. It’s a fairly progressive move, considering marketers have traditionally never paid shops for their ideas after their partnerships ended, and it’s not a payment scheme that many agencies are having tremendous success with yet. “That usage idea is always something we talk to clients about,” Slap’s Corona said. “I’ll be honest with you, it’s not something that we’ve had a lot of success with in getting clients to agree, because I think that there are some standards in our industry where [clients] pay you to develop an idea and want to use that idea for marketing and advertising, and then transfer [that] ownership and use it in kind of perpetuity.” Frances Webster, CEO and co-founder of Walrus, said she has had success getting clients to sign usage fees. Walrus has gotten clients to agree by negotiating “a slightly lower upfront fee,” she said. “But if that campaign is running two or three years down the road and it’s performing, Walrus gets paid. If we can come up with a lower upfront fee, that changes the conversation … weave in usage fees into pricing options.” The usage fee, for Walrus, kicks in one full year after a retainer relationship ends. On a project, those fees kick in as soon as a campaign airs and will continue to be paid as long as the campaign is in market, Webster said. Negotiating tactics Schoenberg said TDA Boulder, which typically offers flat fees for work, will tell clients that the shop doesn’t offer rate cards if they ask for them. He said he’s unwilling to compromise on price, and that in a world where many marketers are trying to get more out of their agencies for less, more shops have to start taking a stand. “Everybody is trying to squeeze agencies right now,” Schoenberg said. “And at a certain point, we just say ‘We can’t do it; we’re out.’ We’re not going to negotiate because we can’t. There’s this sense of agencies compromising right now. They won’t be around in six months if they keep compromising.” Webster said she understands why agencies, especially those that are independent, feel the need to compromise sometimes and said every shop needs to weigh the risks and rewards of taking hard stances. Clients will respect an agency leader who is firm and clear, she said. “Explain the terms you’re setting.” Webster also advises getting a good legal and financial team to back your agency up in negotiating master service agreements (MSAs) where pricing comes into play. “My biggest piece of advice is don’t be afraid to defend your agency,” she said. “It’s negotiating, so you’re going to have to give a little. You have to be flexible, and procurement teams are really good people. Realize where they’re coming from.” Juneau said Vuja Dé Digital often negotiates to add bonuses to its contracts, meaning the agency will receive a financial bonus every year if the client performs well. He said clients are typically hesitant of this tactic, being cautious of how many years the agency’s pay would then have to increase. But Juneau said he’s found success negotiating for bonuses by challenging clients to see the agency as another employee. “We try to position it as, ‘If you were to hire us as an employee with a salary, you would pay us X amount of dollars and if we crush it in that first year of work, we’re going to probably get a good review and we’ll get a raise,’” he said. “Now we’re positioning ourselves more like ‘We’ll give you a range that you can pay us that you think is valuable for the exchange.’” Seiler said getting clients to see agencies as an extension of their marketing departments helps them agree to performance-based compensation. One concern marketers often voiced to him in negotiating such terms when he was CEO of IPG Mediabrands was whether agency employees would work as hard on their account if the company wasn’t performing well, and therefore the agency wasn’t being paid. “My response was always ‘Is that what happens at your company? Do your employees abandon ship?’" he said. Why this change is critical now Shrinking margins, the move to project-based work, increasing transparency issues and, of course, the threat of AI, have agencies under the gun. Moving to new compensation models could help shops better create value for creativity. R3’s Fry said the biggest threat when it comes to AI is its potential to commoditize creativity. “If the machine can make a translation of something for one price, it starts to set the market value for that and it will be harder for agencies to prove their value on top of that cost,” Fry said. McKibbin said agencies need to do a better job of placing value on the human who can take a 100-page market report on “chicken sandwiches” that AI will eventually spit out in two minutes, and connect the dots from it to create “insights and amazing ideas.” Those ideas are “the hard thing,” McKibbin said. “What I want to price as an agency is the hard thing. That only reinforces for me why deliverables-based pricing is the right way to do things.” She said agencies have to keep fighting for these alternative compensation models and brands have to keep demanding them for the industry to see lasting change in how shops are paid. “Things need to break before they can get fixed,” McKibbin said. “But if more clients like Molson Coors begin to see the value in it and adopt it, that is going to be the thing that drives the change.” See all of the 2024 Small Agency award winners here

Inside independent agencies driving change in industry compensation models

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