iACA study 15% still on wane

In canada, the 15% commission system of advertising agency compensation - a method of payment that goes back to the days when there were few ad agencies and space salespeople were really agents of the media - is continuing to erode.Only...

In canada, the 15% commission system of advertising agency compensation – a method of payment that goes back to the days when there were few ad agencies and space salespeople were really agents of the media – is continuing to erode.

Only 25% of the members of the Association of Canadian Advertisers, the organization that represents the bulk of national ad spending, use the 15% commission system, according to a study conducted this spring.

The figure marks a continuation of a trend that has been building over the past 20 years.

In 1970, 76% of clients used 15% commission. That dropped to 57% in 1977, and to 37% in 1985, the last year that such a study of aca members was conducted.

‘The commission system is on its last legs at the very least,’ says Bob Reaume, aca vice-president marketing.

Compensation, in general, is a key issue in the client/agency relationship.

Of the 101 aca members who responded to the study, 20% said they have changed their compensation arrangement with their agency over the past year.

Reaume says early response from the industry to the aca’s November workshop on agency compensation indicates that concern is running high.

More than 15 agency ceos had already registered for the workshop two months in advance. The session is being held Nov. 5 at the Four Seasons Hotel in Toronto.

The study, conducted by Toronto-based The Long Group, shows the traditional 15% commission system is more likely to be used by larger advertisers.

Among those with budgets of more than $10 million, 36% pay their agencies on the traditional 15% commission basis.

As in 1985, when the study was last conducted – also by The Long Group – a majority of advertisers (54%) use either a fee-based compensation system or a combination of fee and commission.

But the percentage of advertisers who compensate their agencies solely on the basis of fees has risen sharply from 30% in 1985 to 39% today.

The study also shows a dramatic shift in the way media is bought.

More than one-third of advertisers now use a media buying service, more than double the percentage in 1985.

The study states: ‘Several respondents pointed out that the term `full-service agency’ has become a misnomer in some cases. Their agencies don’t directly offer media buying services.

‘A move to a media buying service may necessitate a review of agency compensation,’ it states. ‘Some of these advertisers elected to pay fees for account service and creative development and commission for media.’

Other key findings and conclusions show that:

- Advertising budgets have not kept pace with inflation since 1985. Declining budgets have had an impact on agency profitability, prompting a change in compensation agreements in some cases.

- The recession may also be forcing some advertisers to re-examine the value of the services provided by their agencies. Some advertisers said they are seeking to tie compensation more closely to services provided.

- There is evidence of the growing importance of ‘below-the-line’ activities in the extensive list of services which are billable on a fee basis under many commission systems.

- While only a small percentage (11%) of advertisers use an incentive-based compensation system, others expressed interest in doing so in the future. Many are seeking to redefine agency performance in terms of the client’s business success, and compensate accordingly.

- Since 1985, there has been a large increase in the number of advertisers who use a formal agency evaluation. Conversely, the number of agencies who review account profitability with their clients has decreased.