Why Agencies -- and the Media -- Are Reluctant to Bet It All on Value-Compensation Systems

A Look Inside This High-Stakes Poker Game

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Rance Crain
Rance Crain
Value-based compensation in the agency world has about as much chance of catching on as it does in the media world.

Our family publication seemed aghast when it reported a few weeks ago that agency-compensation trends were stuck in the Dark Ages because less than 1% of pay agreements were based on the value the agency brings to the table. But the same story said almost half of all compensation plans involved performance incentives. That sounds to me like agencies are indeed being measured by how well they achieve a set of predetermined goals.

So why does our headline say that marketers are still paying agencies in the "same old way"? And exactly what's the difference between value–based compensation and performance incentives?

David Beals, president-CEO of consulting firm Jones Lundin Beals, wrote a sidebar column on the Association of National Advertisers compensation study. Mr. Beals advised agencies to embrace value-based compensation schemes and "put your money where your mouth is by putting some significant skin in the game. Few marketers ... will be interested in paying more because your ad ran in more countries or won some awards.

"A focus on significant and measureable results (e.g., sales, improvement in brand preference, qualified lead generation, etc.) and a compensation proposal structured on a 'you pay for results' basis will get more serious attention from most clients."

But don't both value-based and performance-based compensation schemes incorporate that "pay-for-results" criterion? What's the difference? Here's how Mr. Beals explained it to me.

"Performance incentives are typically structured as an additional component on top of a fee or commission structure. A portion of the agency's fee revenue or commission percentage is tied to meeting or exceeding the performance goals. But, he emphasized, "it is just a portion. The agency will typically still earn a modest profit even if the incentives are not achieved.

"Value-based, in theory, ties all of the agency's compensation (not just a portion of it) to a mutually agreed definition of the 'value' of the work and services the agency is providing. The 'value' is not supposed to have anything to do with the cost of the agency staff and time (labor-based fees) or the cost of the media/production spending (traditional commissions)."

Mr. Beals went on to say that almost every client he's spoken with on the subject "believes that a value-based compensation method has to be tied to concrete and measurable performance goals, either sales-related and/or quantitative (awareness, brand preference, lead generation, etc.)."

Yeah, but so does a performance incentive plan. The only difference, as Mr. Beals explained it, is that with value-based plans, the agency's entire remuneration is at risk.

That's high-stakes poker. No wonder there are few takers.

I asked him if value-based plans have caught on in other service industries. He said they're being discussed but there don't seem to be many examples of it actually happening.

The media, I've discovered, are equally reluctant to bet the farm on pay-for-results schemes. I've argued that newspapers should embrace per-inquiry ads and even revenue-sharing because they only prove the pulling power of the medium. But I'm quite sure they won't.

Time Inc. is getting ready to test performance guarantees tied to ad-recall and -response levels. And The Week is guaranteeing that ads will get reader-recall scores that rank in the top third of all magazines in the marketer's media plan.

But the magazines aren't willing to forgo payment if the ads don't hit targeted results (they will give the advertisers make-goods if the goals aren't reached), and agencies aren't going to put their compensation on the line either.

As David Beals put it: "It is unreasonable for agencies to bet the farm on value compensation if they have had no say in the compensation discussion and if they don't feel the compensation is structured in a way that truly reflects the client performance that they can influence with their work and thinking."

And examples of that are few and far between.

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