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With our thanks to Tim Williams from Ignition Consulting Group for this article

It surprises most agency professionals to learn that many advertisers are intensely interested in exploring a value-based compensation arrangement with their agencies.  A recent position paper from the Association of National Advertisers (ANA) states it clearly:  “Traditional metrics used in today’s cost-plus compensation agreements (usually based on time) have no relationship with the external value created for the client in today’s intellectual capital economy.  Therefore, pricing should instead be based on results and value created."

Fee-Based Compensation Dominates

In a recent survey by the Association of National Advertisers "2013 ANA Trends in Agency Compensation, 16th Edition" one of the key trends is the inexorable rise in compensation agreements to use labor-based or fixed fees as the primary basis for agency compensation.

This year 81% of all client-agency agreements are fee-based, up from 75% in 2010.

This is even more pronounced in larger advertisers (spend > $500 Million) where a full 94% use fee-based compensation as their primary model. 

We attended the AAAA Financial Conference in New York on Wednesday and much of the debate was again around the issue of Value-based compensation. This in the well publicised context that agency margins have been under considerable pressure as the basis of remuneration has swung away from commissions towards ‘cost plus’ pricing.

With the AAAA being the peak agency body it was interesting to contrast their views with those from the client side which we have been party to recently.

Value Based Compensation: Who cares?

We do!!! Value Based Compensation Matters

Please excuse the inflammatory headline, above because I am guessing that a lot of people, including myself are very interested in the opportunity to incorporate metrics of 'value' in agency compensation arrangements.