Agencies Should Keep Media Commissions

Ad Industry Might Be Better off If Shops Aren't Paid Like Accountants and Lawyers

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Maybe there wouldn't be so much bad advertising if ad-agency compensation were still based on the commission system.
In most cases, the media still pay 15% commissions, but agencies rebate some or all of it to their clients. Most agency compensation these days is based on fixed fees -- man hours marked up. Burtch Drake, president of the American Association of Advertising Agencies, told me he's "been waiting years for some media owner to say it's ridiculous" for the media to continue to pay what amounts to fictitious commissions, since in most cases agencies don't keep them. Other people have said the media keeps up the charade to inflate its sales figures.

So nowadays, agencies get paid for their work like accountants and lawyers do -- based on a negotiated fee. They get paid whether their ads run or how much their client spends. In most cases, they get paid the same for good advice or bad advice -- just like lawyers do.

Fifty years ago, when the 15% agency commission was the way agencies got paid, agencies had a very tangible incentive to create advertising that worked -- the more it ran, the more they got paid.

Hal Riney's piece on Ernest Gallo brought that thought to mind. The wine impresario embraced the 15% agency-compensation system. "Ernest thought this was eminently fair because to him it meant that until he saw something he liked and was willing to put into print or TV, he didn't have to pay a cent," Mr. Riney wrote. One time Mr. Riney was in New York and Mr. Gallo called him to insist he return to California. "He insisted I come back immediately, as he had plenty to spend on advertising, and since I hadn't recently given him any advertising he cared to spend it on, that money was just 'sitting uselessly in the bank.'"

Can you imagine that scenario today? Advertisers pay their agencies by the hour, and agencies rack up revenue just keeping the account up and going. Ed Ney, the legendary agency man who ran Young & Rubicam for many years, finds the current system "terrible, horrible." Too often, he told me, the client's CMO, who has a tenure of just a couple years, spends his time reducing the fee paid to the agency, which sounds good to the CEO but doesn't do much for great advertising.

Ed doesn't buy my thesis that the fee system has an adverse effect on creative people themselves. "They stay up all night" trying to produce breakthrough advertising, Ed says. "They don't think about how they're paid."

Agencies aren't putting their major firepower behind advertising anyway. The big holding companies now get less than 50% of their income from ad agencies. Design companies, direct-response firms, digital initiatives are where the money is today.

Who would pay a commission for a direct-mail piece? The paper companies? And would Google pay an agency commission for search listings? You don't even need an agency for that!

It was 50 years ago last year when the 4A's and five media associations signed a consent decree prohibiting the 4A's from requiring that its members charge a 15% commission. Burtch said "the practices that were prohibited in the 4A's decree had not been occurring for many years prior to the decree itself, but that is not to say that the Justice Department initiation of a proceeding to investigate the industry was insignificant."

The man who negotiated the agreement at the Justice Department was Victor Kramer, who died earlier this year.

As the 4A's gets ready for its annual conference in Naples, Fla., it's interesting to speculate whether the industry would have been better off -- more flexible on both sides -- had the consent decree never created such a house of cards on the commission system.

I agree with Burtch that it doesn't make much sense for media companies to continue to pay commissions -- since agencies no longer get to keep much or any of that money. But if agencies did get to pocket the 15%, maybe they wouldn't beat up the media so unmercifully on rates, and the ad-sales figures wouldn't be such a work of fiction.
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