Commission Returns (With Twist)

More Agencies Get Paid a Percent of Billings -- but at Lower Rates Than in Past

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It's the return of the commission. Sort of.

For the first time since 1985, a survey of marketers' agency-compensation practices found an uptick in the amount of contracts that involved commissions, or a percentage of media spending, rather than pay-by-the-hour fee arrangements.
Consultant David Beals: 'You're asking an agency to place more trust in their own performance.'
Consultant David Beals: 'You're asking an agency to place more trust in their own performance.'
The commissions often stand as symbols of the agency business' golden days when their standard 15% take of media billings and production costs just about guaranteed a juicy profit.

But don't get too excited. The triennial report from the Association of National Advertisers, based on interviews with 98 marketers, offers a mixed review of the current agency-compensation picture. Fee-based systems, loathed by many agencies who balk at being valued by their man-hours, still dominate, and what commissions exist are mainly at media-buying shops and offer rates that are well below 15%. On the bright side, more and more marketers are adding performance-based incentives to their contracts. In those cases, agencies are rewarded for their effectiveness at reaching agreed-upon goals such as brand awareness or market share.

Making sense
Blame most of the muddling of the compensation issue on a familiar saw: the fragmented media environment and harder-to-reach consumers. As marketers and agencies customize their communications for a growing number of online outlets, their production costs may greatly outstrip media billings, and many agency rosters are ballooning, meaning that neither commissions nor fees may make a whole lot of sense.

"Our members are doing holistic, integrated marketing," said ANA Exec VP Barbara Bacci-Mirque, "and there's a feeling that time sheets don't work for that. If you use an old way of compensating agencies, there's a risk you're going to get an old way of thinking from them."

For a while now, the holy grail in this discussion has been tying compensation to some idea of the value an agency provides. Rather than just tacking on some extra dough when particular targets are met, it redefines the entire compensation package around what the agency delivers in terms of business results or some agreed-upon set of deliverables.

But for the value-based systems to work, agencies will have to be more comfortable with taking on more risk. Perhaps they'd have to surrender the guaranteed profit they typically get under fee arrangements in return for a more significant performance bonus. Or perhaps that bigger payout would come by relinquishing guarantees of having all their costs covered upfront. Said consultant David Beals, the author of the report, "You're asking an agency to place more trust in their own performance and if that performance isn't there, they could be in a position where they're not compensated in a way that covers their cost."

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Taking on this kind of risk would be especially dicey for agencies that are owned by publicly traded parents. Given all that, it's maybe not surprising that only 3% of the respondents said they used value-based compensation.

Sixteen percent of marketers are using commissions, up from 10% in 2003, the last time the study was fielded. Today's commissions, though, aren't necessarily as lucrative as they once were. Media-buying agencies, rather than creative shops, are registering the increase for two very practical reasons. A lot of their activity involves buying time for multiple clients at once, which makes separating the time spent for each client tough, if not impossible. And commissions offer a fairly streamlined, efficient way of doing business, compared to the messy time-sheet management of fee systems.

Media-buying commission rates vary by medium, with digital buying being the most lucrative at an average of 4.2% and all other media, from TV to out-of-home, coming in at around or under 2%. That's way off the 15% of yore when creative services and media planning and buying were largely bundled at full-service shops.

So maybe it's not particularly disappointing that Mr. Beals was far from predicting this as a trend on the upswing. "Commissions will hang in there for media buying but there won't be an overall upswell," he said.
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