A recent workshop by the Association of Canadian Advertisers on ad agency compensation saw clients and ad agencies face off over the issue of compensation.
The workshop, held Nov. 5 at the Park Plaza Hotel in Toronto, debated the pros and cons of commission-based compensation, historically the way agencies have been paid by clients, and fee-, or value-based compensation, which some clients are fast preferring.
A 1992 aca study states that in 1970, 75% of clients paid their agencies with a 15% commission, compared with just one-third today.
The majority of clients which have moved to a fee system calculate the fee based on direct agency labor hours plus overhead and profit.
Others pay a percentage of the total advertising budget, plus production, over a 12-month period.
Some clients are using a form of incentive system which rewards innovation and productivity as part of the compensation package, and many others are considering it.
The incentive issue has evolved into a discussion of tying agency compensation to the client’s business performance.
The drawback to results-based, or value-based, compensation is that the performance of promotional campaigns is measurable, but there is no formula to assess image-building campaigns.
Each different type of advertising objective would then need a different compensation format.
Lowell Lunden, manager, marketing services for The Quaker Oats Company of Canada and aca chairman, says what is keeping the trend away from commission to a fee system from moving too quickly is that senior-level involvement is required to negotiate those types of deals.
Lunden says fair compensation is the objective and that means paying for the high calibre of people you need to accomplish your objectives.
Rupert Brendon, chairman of ad agency D’Arcy Masius Benton & Bowles, says that to operate effectively, agencies should receive 16% commission.
Brendon says the bottom line is that ad shops are in business to make a profit like any other company.
Monic Houde, vice-president communications for Bell Canada, says that monitoring the effectiveness of advertising is becoming increasingly important.
Houde says effectiveness comprises ‘one of the major factors to be evaluated when considering the development of new remunerative formulas for agencies.’
She says the trend is toward an incentive system of commissions, fees and bonuses, and that Bell will be examining a commission and bonus structure closely, particularly for special projects.
Houde says the fee system puts the onus on the client to better define the services needed and is also ‘more complex and time-consuming to negotiate and administer, and more subject to billing disputes.’
Value-based compensation can be linked to bottom-line results but it is not easy to assess long-term benefits of image campaigns.
Houde says that whatever the compensation package, it must be agreed to by the agency.
‘The formula must be clear, up-front and understood,’ she says.
Philip Rowlatt-Smith, vice-president, marketing Ontario Lottery Corporation, outlined the cost-saving benefits of the company’s creative resource pool system.
In 1991-92, Rowlatt-Smith says the pool saved the olc $875,000 and he projects savings of $1.4 million for 1992-93.
The olc pays only for the creative services required. Strategic planning and creative needs are assessed by the lottery corporation before agencies are briefed.
Jim Anderson, chairman and chief executive officer of McKim Baker Lovick/BBDO, says the fee system destroys the partnership between agency and client because as a cost-saving measure, clients gradually phase the agencies out of the planning process.
Anderson says a bad compensation arrangement hurts everyone.
‘We should all be working together to get the best results, and to meet our objective,’ he says. ‘And that takes trust, an open relationship and mutual goals.’
