Incentives Rise in Agency Compensation Deals, ANA Finds

But These Payment Structures Aren't Always a Good Thing, Shops Say

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Performance-based incentives for U.S. agencies continue to gain popularity among marketers, according to a new survey, despite mixed reviews from agency executives on how much difference they really make.

The study was released by the Association of National Advertisers and consulting firm R3:JLB at the ANA Financial Management Conference in Scottsdale, Ariz.

Compensation plans that place a value on agency work separate from the labor or media spending involved have essentially disappeared despite being talked about with much fanfare several years ago by Coca-Cola Co. Even media commissions, the old industry standard that 's largely disappeared, are now in 5% of agency agreements, vs. no value-based plans reported among the 100 ANA member respondents in this year's survey, said David Beals, CEO of R3:JLB. He blamed the lack of readily available objective data for determining the value.

Labor-based or project-based fees remain the dominant compensation arrangement today, accounting for 75% of the 1,000 agreements covered in the survey.

Still, there are some positive signs that suggest more marketers are experimenting with different kinds of payment structures for agencies. In all, 61% of respondents said they use performance-based incentive too, up from 46% in 2010 and 35% in 2000. The incentives are bonuses 56% of the time, with the rest being a combination of risk-reward or agencies having to "earn back" some of their fees. Such things as sales, market share and brand-awareness metrics figure into incentive plans.

Bryan Wiener
Bryan Wiener

Despite growing use of incentives, agency executives differed on how much difference they make. In a May 7 session, Rick Brook, senior VP-client operations of WPP Group said incentive payments make up less than 2% of the holding company's revenue and are seen as largely insignificant. A day earlier, however, MDC Partners CEO Miles Nadal said incentives make up 5%-7% of his holding company's revenue and are welcome in deals.

Mr. Beals, in an interview before his presentation, said the difference may simply boil down to how well the two holding companies do at hitting their metrics, or to how their deals are structured. One bit of good news for agencies: While procurement is now involved with agency relations in 82% of respondent companies, up from 59% in 2010, the percentage of companies looking to reduce agency costs has declined the past three years.

However they craft deals, marketers may actually be sabotaging themselves by giving agencies and their own executives perverse incentives around digital marketing, according to Bryan Wiener, CEO of digital shop 360i, who also spoke at the conference.

Mr. Wiener cited efforts, still driven by many chief financial officers and other executives, to maximize the ratio of so-called "working" or media spending to so-called "non-working" or agency creative and production outlays.

It's a notion that refuses to die despite growing use of digital- and social-media campaigns where creating the work often costs much more than distributing it. Case in point was 360i's work for Mondelez's Oreo during the Super Bowl blackout, which generated 525 million "earned media" impressions on zero media outlay, Mr. Wiener said.

The result of the working/non-working approach has been "perverse incentives," where digital agencies are encouraged to buy banner advertising that 's increasingly ineffective in order to make the ratio work, Mr. Wiener said. He added that he believes the working/non-working issue has been the primary impetus behind media companies adding creative units in recent years, allowing the creative and media outlays to be bundled as part of the media costs.

Similarly, by crafting contracts that put all risk from patent litigation with agencies, Mr. Wiener said, "Marketers have created unintentional incentives for agencies to bring only safe ideas to the table." He and 4A's exec VP Tom Finneran called on the ANA to talk about patent indemnification and join a coalition of groups fighting so-called "patent trolls" who buy patents and file lawsuits against agencies.

"We are working with the 4A's to address indemnification issues," ANA CEO Bob Liodice said in an e-mail, "but have not decided to join the coalition that seeks a legislative solution. We will have that answer in the upcoming weeks."

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CORRECTION: An earlier version of the story said Mr. Wiener believes the working/non-working issue has been the primary impetus behind media agencies adding creative units in recent years. While it wasn't spelled out in the speech, he was referring to media companies, not media agencies.

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