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Warc Briefing: Agency Remuneration
Definition: Agency remuneration typically comprises commissions, fixed fees, payment by results or a combination of these.
History and future outlook
Traditionally, advertising agencies in developed markets were paid a commission by media owners, calculated as a
percentage of the value of the ads they placed for advertisers.
The most common commission rate was 15% of the gross cost of the advertising buy, or 17.65% of the net cost. Over time,
however, media planning and buying became a specialist discipline, handled in isolation from the creative or strategic side of
campaigns.
As a result of this unbundling, clients in most markets priced media and creative operations separately, and a greater variety of
remuneration packages developed. These can be categorised into commission based, overheads-based and value-based.
They include:
l Fixed commissions, usually based on a rate of 15% or lower, still exist, though many agencies are moving away from
them.
l Variable commissions depend on elements, such as the size of the budget.
l Fixed fees are normally based on the time spent by the agency on work for clients. Agency and advertiser agree on the
rate charged for the work of each member of the agency team and use this to negotiate an annual fee.
l The hybrid approach features both fees and commissions. Sometimes hybrids involve a "base fee" for the agency that
covers basic costs and a "bonus" or reward once the campaign has aired.
l Payment by results (PBR) provides an incentive for agencies since they get rewarded for the work that generates
revenues for client. Typically, agencies will receive an extra fee or commission when agreed targets are achieved.
In recent decades, there has been a marked trend for client-side procurement teams to oversee and negotiate these types of
marketing contracts, occasionally to the chagrin of agency chiefs. Among media agencies, consolidation and globalisation of
accounts have also reshaped the market.
However, despite a flurry of novel arrangements and important remuneration policy changes by large advertisers such as
Coca-Cola and Procter & Gamble, the basic dynamic of discussions has remained remarkably constant.
Clients want greater transparency and accountability for their marketing expenditure. Agencies need robust and beneficial
partnerships on which to build their businesses. And both sides have been under margin pressure, particularly in mature
Title: Warc Briefing: Agency Remuneration
Source: Warc Exclusive
Issue: November 2010
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3. consumer markets.
An international comparison (see chart below) suggests some of the diverging practices between markets, and agency
networks servicing multinational clients in different territories often find themselves operating with a variety of arrangements.
Method of advertising agency remuneration, Japan vs. UK and Germany
Among clients, there are varying degrees of satisfaction with these practices. In a recent report, for example, 34% of
advertisers who used fees said they were satisfied, compared to 75% who used PBR.
While there is a widely held view that agencies and clients need to find flexible, long-term arrangements that reward both
parties for the creation of value rather than the delivery of marketing outputs, practical difficulties remain in achieving such a
system.
Key challenges
All of the above approaches have proponents as well as detractors.
For instance, critics claim fixed fees encourage agencies to waste time and may not accurately reflect the time needed to solve
a problem on an account. According to this view, the economic interests of an advertiser and its agencies are not aligned by
fixed fees. The agency is insufficiently rewarded if its campaign helps grow a client's profits, and the client may even decide to
advertise less as a result of a successful communications strategy.
The most contested remuneration package is fixed fee or "cost plus", which covers agency overheads and agreed hourly rates
for a finite allocation of time. It is a commonly used package, but its detractors claim it is neither in the client's nor the agency's
best interests.
Nonetheless, agencies have often resisted giving up fixed fee remuneration because they have the potential to earn more, the
more time they bill to the client if projects over-run. It is claimed that agencies with fixed fee contracts have little incentive to
streamline their work processes, and if staffing levels swell unnecessarily, decision-making can slow down.
Partly in reaction to fixed fees, Payment by results has become a more accepted value-based model. Some of these
arrangements appear to work well, but it is often hard to quantify value when it comes to intangible properties, such as ideas.
There are no definable metrics for value, and little agreement, for instance, on what constitutes the kind of "good idea" for
which an agency could be rewarded. How do agencies claim ownership of an idea? And when drawing up contracts, how can
both sides factor in the many changes a communications idea will evolve through during a campaign?
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4. Whatever the difficulties, it seems likely that value-based arrangements will grow in acceptance, especially if they can be
simplified.
When attempting to create a value-based price, several questions must be answered:
l What is the financial impact of the desired outcomes?
l Is the agency working to create short-or long-term value?
l How strong and differentiated is the brand?
l How much responsibility will the client assume?
l Who will own the intellectual property?
l How much influence can the agency have on the outcomes?
l How much risk is the agency taking?
Ultimately, such questions can only be answered by a dialogue between agency and client that is frank, transparent and
continuous.
Related concepts
Client-agency relations; budgeting; briefing the agency
Further reading
Articles on Warc:
Should you take the Plunge?
John Wolfe, The Advertiser, February 2007, pp.40–43
The future is now
Tim Williams and Ronald J Baker, The Advertiser, October 2007, pp. 109-112
Paying the agency: a better solution?
Tim Williams, Admap, June 2008, Issue 495, pp. 19-21
Paying the ad agency
Roderick White, Warc Best Practice, February 2007
Old agency models die hard
Paul Feldwick, Admap, April 2009, Issue 504, pp.9
Paying for Advertising in Japan
Jonathan Lace, Warc Exclusive, January 2009
Payback and Remuneration in the Era of Accountability
Les Binet and Peter Field, IPA dataMINE, Marketing in the Era of Accountability, 2008, pp.103–112
I want my agency to make a profit
David Wethey, Market Leader, Issue 35, Winter 2006, pp.60–62
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