7 in 10 clients: changing remuneration models will improve relations with agencies

Stuart Pocock - Observatory International

Stuart Pocock Co-Founder & Network Operations February 1, 2019

Changing remuneration models will improve marketing agency relationships. With the use of performance and value-based remuneration continuing to rise as advertisers put greater emphasis on outputs

Most large companies believe that a different approach to the way they pay their agency partners will improve the client-agency relationship, according to the latest research by the World Federation of Advertisers and The Observatory International.

Seventy-one percent agree, including 19% who strongly agree, with the statement that “I feel that changing my current agency remuneration models would improve the relationships that I have with my agencies”.

The research, which looked at how advertisers are evolving the way they pay agencies of all types and in all markets, is based on responses from global/regional senior marketing procurement experts from 42 different companies with a total communication spend in excess of $84bn.

Types of agency remuneration model

Global Agency Remuneration 2018 found that 81% of respondents expected a continued shift towards performance-based remuneration models with a focus on outcomes. This will continue the ongoing decline of labour-based and commission-based models. One respondent said they had moved to ‘100% of payment based on incremental sales generated’.

The number of respondents currently using output-based fees as the main corporate remuneration contract has risen to 28%, up from 20% in 2011, when WFA conducted similar research, while a further 15% combine performance with a labour-based payment (up from 9% in 2011).

Over the next 12 months, 81% of respondents plan to increase the prevalence of output, performance and value-based remuneration models. This reflects a continuing trend, noted in WFA research during 2011 and 2014 when the percentage of pure labour-based contracts was the main model, currently at 36% down from 49% in 2014 and 54% in 2011.

However, there is still some way to go. Across all types of agencies, on average less than 20% of the total remuneration is linked to performance for 80% of the respondents. And for more than half of the respondents, less than 10% of remuneration is related to this. Performance payments also come in many shapes and sizes; earn back or true joint risk and reward, for example, represent very different outcomes for the agency involved.

Business contribution of agencies

Nevertheless, the increased recognition of the business contribution that agencies make to their clients is likely to be welcomed by most agencies but only as long as the framework used ensures that both parties interests are considered and balanced. Businesses must ensure they set realistic and achievable KPIs and there are robust methodologies in place to ensure appropriate measurement.

Changes in agency remuneration models used

The pace of change over the past seven years has been different among agency types:

Creative agencies have seen a 20% decrease in the use of FTE-based models and a 14% rise in the use of fixed/output-based models since 2011.
Media agencies have experienced a fall in the use of labour and commission-based models; 44% of respondents (compared to 16% in 2014) now offer a performance-based fee/bonus to their agencies on top of labour fee, while 7% have also started to use fixed/output-based remuneration models. Despite the recent furore about transparency, more respondents are ‘happy’ (77% from media planning and 69% for media buying) with their media remuneration models than any other agency type.
PR agency remuneration also see declining reliance on labour-based models in past seven years, with increasing usage of fixed/output-based models (up from 20% to 29% in seven years) and a small number are now using commission-based models (4%). PR outputs are notoriously difficult to measure and 41% of respondents are not happy with their arrangements.
Production house remuneration has been fairly consistent. The majority (67%) of respondents seem happy with their approach to remuneration in this area, with the majority sticking with output-based fees (41%) or labour-based fees (35%). Value-based remuneration has almost vanished from this area.

“Agencies are vital partners for many advertisers and the way they are paid is a critical step in establishing a productive relationship that delivers real return on investment while also offering agencies the chance to be rewarded for the success they help generate. The move to performance-based remuneration is a recognition that where agencies and advertisers are aligned, the outputs are more likely to be better for both,” said Laura Forcetti, Global Marketing Sourcing Manager at WFA.

Other findings:

Perceptions of the value delivered by agencies is very positive, with 87% of respondents feeling that they are getting genuine value for money from their agencies (up from 67% in 2011). In addition, nearly 70% agree that their agencies are now accountable for the value that they create.
Fifty-two per cent of respondents think they focus too much on remuneration and this has a detrimental impact on agency relationships. Creatively-oriented agencies would prefer to focus on return on investment, which delivers far greater value.
Transparency concerns remain, with more than half (52%) of the respondents not feeling that they are getting full transparency on their agencies’ costing models.
Getting sufficient detail on scope of work is a significant issue for respondents with only 31% believing they get a highly detailed scope from their marketing counterparts. This issue is the cause of the vast majority of issues with fee negotiations.

“Whilst there has been some positive change in approaches over recent years, many have yet to define the most appropriate remuneration model to deliver positively to all stakeholders. Advertisers need greater insight into the range of models being used, and what each delivers, if they are to develop the most appropriate model, one that can deliver positively against their specific business needs,” said Stuart Pocock, co-founder of The Observatory International.

Please get in touch for more information about the report: info@observatoryinternational.com