What's wrong with agency compensation?

REPORT ON ANA ‘AGENCY/CLIENT FORUM’ – NEW YORK (JULY 2007)

I have just returned from the ANA Agency/Client Forum and here is a top line summary of the interesting agency compensation discussions that were held.

I will expand on some of these topics in a series of articles over the next month.

Razor thin margins

A recurring theme in the Agency/Client Forum held by the ANA in New York on July 19^th was agency compensation. The concern from the agency perspective is the switch in recent years from a commission-based payment system to one based more on costs (head hours) that, they argue, has both removed the incentive to produce great work and led to razor thin margins.

Best and the Brightest?

In turn, the argument continues, this has undermined their ability to recruit the best and the brightest. The recruitment problem appears to be worst in account service where it was asserted that salaries for MBAs in advertising are way below those offered by other professions.

What agencies want is ‘value pricing’ whereby remuneration better reflects effectiveness rather than efficiency, or value rather than cost.

What to do?

Agencies clearly want to retain their preferred status with clients as ‘partners’ rather than just suppliers. They want to share in rewards where their work has been particularly successful. Clients seem receptive to these desires but are less certain about how to proceed. Not least of the problems is how to identify exceptional performance? How can clients easily measure performance?

Increased Sales vs Agency Performance

On this point, an interesting difference in position was reported between clients and agencies. According to survey findings, clients are more interested in rewarding agencies based on improvements to agency performance than on improvements to sales. By contrast, agencies are more interested in rewards being based on sales increases! Other considerations are the extent to which incentive compensation should be based on Management By Objectives (MBOs) as well as ‘softer’ measures like processes and qualitative measures.

The One Number

What clients want is a system for measuring agency performance that can be tailored to their specific needs, can be easily implemented, and leads to a single score that all participants can accept as final and fair outcome.

Ship and the Iceberg

But aside from incentive compensation, an agency participant noted that an added benefit of performance evaluation was early identification and correction of problems. Here an analogy was drawn with a ship and an iceberg. Early identification of the danger requires only a small correction by the ship but late recognition requires a wrenching adjustment!

Author: Derek Groom (Decideware)