Incentive increase

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[Scottsdale, Ariz.] Marketers are paying agencies to perform, offering more incentives pegged to specific measures, according to the Association of National Advertisers' new agency compensation study.

The survey of advertisers found 38% of respondents give performance incentives to agencies, up from 35% in 2000. Bigger advertisers are the biggest believers: 56% of marketers with $100 million-plus ad budgets offer incentives vs. just 18% of marketers with budgets below $15 million.

More than two-thirds of advertisers offering incentives said the programs led to improved agency performance. The most popular criteria for incentives are performance reviews and brand/ad awareness. Sales goals, the most favored metric for incentives in 2000, slipped in the new survey to the third most-used measure.

The study found only 10% of agency agreements today rely solely on commissions, a radical shift from 1988, when commission-only pay was in place in two-thirds of contracts. Fee-only deals are used in 74% of contracts today. Fee/commission combinations and other approaches account for the remaining 16%.

The every-three-year survey, fielded in December and released last week, drew responses from 112 advertisers reporting on 575 agency compensation agreements across 10 marketing-services disciplines. The study, done with David Beals of consultancy Jones Lundin Beals, will be published next month in an ANA book.

The study showed the clout of purchasing departments, with procurement playing a role in reviewing agency costs and negotiating compensation at more than one-third of advertisers. More telling: Procurement gets involved in agency pay at more than half of large advertisers.

Mr. Beals unveiled the study here at the ANA's Advertising Financial Management Conference, where agency pay was a hot topic. Laura Desmond, CEO of Publicis Groupe's MediaVest USA, suggested incentive pay should be based in part on multi-year goals to give agencies more incentive to take risks and strive for innovations that could benefit clients in the longer term.

As it is, incentives generally are limited. Keith Reinhard, chairman of Omnicom Group's DDB Worldwide, said incentives now account for less than 2% of DDB revenue. (Ad Age has estimated DDB's 2003 revenue at $943 million; 2% would be below $20 million.) Mr. Reinhard would like to see more weight put on incentives, saying: "If the relationship is right, we ought to be putting [some] profit at risk."

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