Consultants Panel: New Ways of Looking at Agency Fees

Agencies feel pressure on their profit margins. Procurement thinks advertising fees are too high. Marketers must deliver results and expect agencies to perform fast miracles.

How to make everyone happier? Debbie Morrison of ISBA UK and David Wethey of AAI UK are developing a guide to agency remuneration for the U.K. market and hope to field a team of advertisers and agencies to provide thought leadership on the issue. They gave consultants a sneak preview of their work at AdForum Summit 2005 on a panel where Dick Roth of Roth Associates provided the U.S. perspective.

Acknowledging that a single global compensation model is impossible, the guide by Wethey and Morrison focuses instead on a workable process in which the client sets clear goals and negotiates the scope of work with the agency. The agency in turn develops a work plan based on people hours and the client adjusts the scope of the work if the budget amount is inadequate. The two sides agree on a specific dollar amount and profit margin. A method for performance and compensation review gets determined too, all before the contract is drafted.

The panel also discussed pros and cons of different compensation models: commissions, people hours, payments by results, incentives, bonuses, and joint ventures where the agency has some "skin in the game." Among the newer trends noted in the U.K. were licensing intellectual property-where an agency sells ideas rather than hours-and scale fees, based on a percentage of sales, which create a built-in bonus if sales go up.

After declaring commissions dead in the U.S., Roth said that incentives were becoming more common in new contracts, but they were often too small to make a difference to the agency. He suggested that agencies needed to focus more on the profitability of accounts than on revenue. Panelists and participants agreed that any compensation model creating implied incentives to have more people take more time on the work was unsustainable.