Agency Compensation: Where Are We Today? Fiction vs. Reality
Fiction #1: There is a single compensation method
that is ideal for all advertising accounts.
- ANA studies provide evidence from analysis of 300+ client-agency relationships,
no two agreements were exactly alike. - Conclusion: Each agency has the opportunity with each account to find a unique
compensation method to best serve the client and yield a reasonable profit for the
agency.
Fiction #2: The only objective of compensation negotiation is to minimize the agency income.
- Set objectives that infuse negotiation discussions with advertising quality and services issues.
- Make a point to clearly demonstrate the link between the cost of agency service and its value.
Fiction #3: Since advertising agency cost accounting systems are generic, advertising agency services are generic.
- Don't allow cost accounting data to become the dominant basis for compensation negotiation.
- Use it as a tool for understanding the service requirements.
- Never forget the value of an idea.
- Take the opportunity to set up performance measures of your own.
- Let your clients know what you can do for them.
- If you don't set the standards, your clients will.
Fiction #4: Advertising agency cost accounting data are now used to maximize efficiency.
- But not many agencies use cost accounting data to analyze the cost and
profitability of each account. - Conclusion: Get a handle on it.
- Be able to unbundle your services:
- Know where your costs are attributed.
- Know the manhours needed for various activities; different
categories of business. - Evaluate economies of scale.
- Avoid subsidizing small accounts through large ones.
- Reassess your smaller accounts and make them self-sufficient.
- Resign accounts that are perennial losers.
- Investment spend
- Put manhours to work on spec.
- Nurture – not milk – long-term relationships.
Fiction #5: The longer you put off discussing compensation with a client, the better off you're
going to be.
- It's asking for trouble.
- Put your cards on the table – let everyone know where they stand from the outset.
Fiction #6: Compensation is the exclusive domain of the agency CFO and CEO.
- Senior people, both account and creative, need to know your compensation
philosophy. - Train managers in pricing strategies.
- Examine internal approval processes for pricing contracts.
- Conclusion: Exude conviction that your clients receive outstanding value for the
money they pay.
Fiction #7: The best offence in compensation discussions is a solid defense.
- Be more forthcoming
- Compete on the basis of how big your ideas are, rather than how little you
will charge for your work. - For each of your clients, find a compensation system that exactly fits your
needs and the needs of your client. - Work to understand the relation of your costs to the excellence of your
product. - Give your organization knowledge of, and confidence in, the way you
price the product you sell. - Be positive and constructive in compensation discussions, rather than
reactive and reclusive.
Reality: What Agencies Can Do In The Future
- Unbundle services and charge realistic prices or fees for each service.
- Don't do small budget assignments for free.
- Don't give away ancillary services unless it's an "investment spend"
situation. - Be more innovative with your compensation plans.
- Study how other service organizations get paid.
- Value your ideas, not the labor involved.
- Change your perspective from being billings-oriented to being profit-oriented.
- Concern must be aimed at margins and absolute profit enhancements, not
unit growth. - Know that you're in the driver's seat.
- Restructure your thinking about costs.
- Find a relevant organizational mechanism for reducing hierarchies and
managing the service mix in an integrated fashion. The "team" approach. - Develop more powerful arguments for what is cost and what is profit.
- Push for bonuses for superior performance.
- If you do a great job – you deserve to make more money.
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