by Charl Thom, Group MD, FoxP2 To date the advertising industry has still not figured out the perfect compensation model. One that ensures the agency is paid correctly, and in proportion to the value of the work it delivers for a brand, rather than just the time it took to deliver the work.
Right now an idea or campaign that turns around the fortunes of a brand and business would more often than not cost exactly the same as an 
idea or campaign that has had zero effect on a brand’s equity or sales. The opposite of that also holds true.
This is because in most cases the model is based on compensating an agency for a pre-agreed amount of marked up hours and the hard cost attributed to the work, not the actual value created, or in many cases, the actual quality of the creative work.
Why is this?
Well, even though the effect and efficiency of all forms of advertising has become infinitely more measureable since John Wanamaker uttered those now famous words around the turn of the 19th century “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half” there are still too many variables to make performance measurement of our work a perfect science.
Certain parts of campaigns, most notably the work we do in the digital channel, have become more accurately measurable. However, we mostly work across multiple channels with varying degrees of measurability and various measurement methodologies, and these channels all work synergistically to contribute to brand performance, along with many other touch-points that we have no control over.
It’s not a new problem. Earlier this year, Lee Clow, an industry veteran and legend, shared his view on agency compensation, something he’s grappled with for forty years.
While some of us may argue Mr Clow is getting somewhat long in the tooth, he makes some good points. What he doesn’t do however is offer up a solution. The reason for this, I believe, is because there is no silver bullet, no one size fits all solution to the compensation model question.
Tailor-made partnerships and individual compensation models negotiated with each of your clients requires you to be as creative as the work you will ultimately produce.
For one particular client we have delivered everything from above the line TV commercials and infomercials, to digital campaigns, to helping with the office design and layout. We are a part of their business brains-trust and play a meaningful role in shaping the direction of the company, along with CEO and his board, to ensure that they remain a part of popular culture through a relevant brand that generates sales. For another client, we delivered a corporate identity to help them introduce their fledgling company to the world. It varies so vastly and dramatically that a single compensation model was never going to do the trick.
Here are some thoughts on creating tailor-made agency compensation models that will hopefully help to move them closer to the ideal:
1) As a marketer, there are many ways to gauge the quality of an agency long before the first credentials presentation takes place. Look for consistent delivery of quality work and results in their existing partnerships. Great creative and business solutions that deliver tangible bottom-line results is a rare commodity, but you’ll know it when you see it (see my piece on the value of creativity).
Just like commercial film directors fall into A, B and C grade categories (creating a formal system for this remains a can of worms worth opening), so marketers should grade their prospective agencies, and expect them to be compensated in-line with this grading for the value that they will deliver.
Such a grading system is not without its complications, but it’s a necessary tool when assessing potential partners, because they are not created equal. To use an extreme example from the creative world of music, U2 and The Blarney Brothers are both bands, both Irish, and both could potentially sing Danny Boy at your wedding, but the price tag will differ.
As Lee Clow quite rightly points out, some agencies are simply better than others, and their people consistently deliver value that far outweighs the extra expense of a premium price tag. Whilst most marketers recognize this, many procurement departments don’t, and this part of the process is often handed over to them. Procurement officials have to be educated that they cannot procure an agency partner in the same way that they procure company stationary.
2) Ensure your agency partner has skin in the game. Some marketers express a fear that a retainer based model will make the agency lazy, because they mostly get paid regardless of the work that they do. It’s my view that you have bigger problems if you’ve chosen an agency partner that causes such concerns (see some of my thoughts on choosing an agency partner), but that aside, there are more relevant and exciting compensation models than a pure cost plus retainer model.
It’s basic human nature that even the most motivated individual or organization will stretch themselves even further beyond the call of duty if they are incentivised to do so in some shape or form. Essentially, the agency’s remuneration should be linked to the upside of the brand or business performance, but there are three factors to be considered here.
Firstly, this shouldn’t simply be an opportunity for the agency to earn what it would have earned under a normal cost plus retainer model, there needs to be the potential to earn various levels of meaningful upside reward if the work delivers significant value to the brand.
Secondly – this can only work if the potential value created is inextricably linked to the work on a number of different levels. The value of the agency’s work must be measurable and not be eroded by other touch points. No matter how ingenious that mobile app or television commercial the agency created, its value can be destroyed in a matter of seconds by an unhelpful sales rep, service consultant or check in agent. Who hasn’t had a run in at our national airline’s check in desk?
Lastly, the agency must have real input in the work that is approved and created, and need to be partners to the extent that they have a meaningful vote in the decision making process. Their livelihood literally depends on it. Not every brand is ready for this kind of partnership and it is often more suited when the two partners have worked together for long enough to earn each other’s trust.
3) Aim to work towards a value-based model that links residual compensation to the ongoing value creation delivered by an idea, especially if you work with an agency that is a true long-term partner in your business. It is, in my view, the holy-grail of tailor-made compensation models but will only be feasible in a number of cases where it allows brand and agency to share in the value created by an idea, in whichever form it is ultimately expressed. Again, how this value is created and measured will be uniquely different in each partnership.
However the final model looks, it needs to be clear and realistically measurable at all times. At the end of the day, the biggest challenge still remains, and always will remain, to make a brand’s voice heard in a meaningful and engaging way that delivers genuine results. This requires an insight-based creative idea, and as well all know, these are not created equal, and nor should they cost the same.
Reprinted from the blog of Charl Thom. Hear more from Charl. Get onto our weekly mailer.