Agency Remuneration Principles

8/17/2019 Agency Remuneration Principles

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marketing management consultants

TrinityP3 Agency Remuneration

TrinityP3 Pty LtdOctober 2010

Commercial in Confidence


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Compensation or Remuneration?

Compensation: – noun

1. the act or state of compensating.2. the state of being compensated.

3. something given or received as an equivalent for services, debt, loss,

injury, suffering, lack, etc.

Remuneration: – noun

1. the act of remunerating.2. something that remunerates; reward; pay.

• Philosophically we prefer to call it Remuneration – to reward the agencies

and suppliers rather than making good for loss, injury and suffering.


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Moving from Input/Costs to Outcome/Value

• Most of the existing models are input / cost based that reward volume of

work and not effectiveness.

• The current best practice is to move to an output based / pricing model

that fixes the value based on output.

• The leading trend is for a value based remuneration model where the

reward is based on the value created or contributed.

• Therefore the global remuneration trend is summarised by:

Input / CostOutput /

Price

Outcome /

Value


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Inputs vs Outputs vs Outcomes

Model Positives Negatives

Inputs /Costs

•

Resource / Head hourbased

• No direct link to volumeor scope of work

•

Simple to implement

• Multiple points of

negotiation includingsalary cost, overhead

and profit

•

Rewards increasedvolume rather than

effectiveness

• Based on head hours /

timesheets which are

unreliable

Outputs /Price •

Based on scope ofwork / outputs /

deliverables

•

Price agreed and set

on historical basis

•

Values the outputrather than the cost

•

Makes budgetingeasier

• Adjusting

remuneration easier

•

Rewards increasedvolume rather than

effectiveness

•

Issues arise when work

commissioned then

cancelled

Outcomes /

Value

•

Based on the value

created by the activity

• Either all or the bulk ofremuneration / profit

•

More like profit sharing

than bonus

•

Links agency

remuneration tooutcomes / value

• Brings alignment

between suppliers

and marketers if

correctly

implemented

•

Requires measurement

of marketingeffectiveness

• Difficult to get many

agencies to agree on

measures


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Principles of Remuneration

• It is generally accepted by the ANA and the AAAA in the US, the ISB A and

the IPA in the UK and the AANA and the Communications Council in Australia, that agency remuneration agreements should be:

1. Simple to understand and easy to administer.

2. Fair to both advertiser and agency.

3. Aligning advertiser and agency interests and priorities.

4.

Finalised before agency resources are committed.

5. Recorded in a ratified advertiser / agency contract.

6. Flexible enough to accommodate changes in the future.

7. Involving senior management stewardship, with principles clearly

communicated to the teams on both sides.

8. Capable of standing the test of time and being understood by any future

Marketing Director.

9. Based on agreed and understood terms and definitions.

10. Inclusive of specified tracking and review dates.


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Remuneration Models

• Most common remuneration models:

•

Commission & Service Fees•

Resource Package Fees (Retainer)

• Variable fees based on actual hours

• Project Fees

• Hybrids

• Less common remuneration models:

• Scale Fee & Win Bonus

• Concept Fee

• Licensing Fees

•

Other remuneration considerations: •

Production mark ups

• Payment by Results (PBR)


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Commission & Service Fee

Advantages

• Simple in the case of mainstream

advertising.

• Easy to calculate and administer.

•

Parties focused on quality notcost.

• A crude form of PBR with a higher

Media spend leading to greater

agency earning.

Disadvantages

• Based on volume of Media spend,

not scope of work.

• Inappropriate were Media is not a

major component of the output such

as DM or Digital.

• Does not encourage Media neutral

solutions.

• Cancellations of spend has a severe

effect on agency income.

• Based on the traditional media commission paid by the media proprietor (10% or

11.1% mark up) and a service fee (7.5%) compounded to over 19% paid on allexternal costs including production to cover the full service offering of Creative

concept, Media planning and buying.

• Continued to be used primarily in Media buying and to a less extent Media

planning remuneration.

• When used, is used in combination with other models such as project fees or

head hours.


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Resource Package Fees (Retainers)

Advantages

• Agency knows its income and can

resource appropriately.

• Advertiser knows cost and can

budget appropriately.•

Encourages more Media neutral

solutions.

Disadvantages

• Requires the scope of work to be

accurately defined.

• Does not allow for major changes in

scope of work with falls costingadvertiser and rises costing agency.

• Input based and therefore less

accountable.

• Often time consuming to negotiate

and administer.

• Based on an agreed detailed scope of work and a resource plan for a defined

period, reflecting the workload requirement of the agency.• Based on salary costs of the required number of people at a % of their annual

billable hours by an overhead factor and the agreed profit margin.

• Usually this base formula is agreed in the contract and only the scope of work

and the associated resource requirements are calculated and adjusted annually.

• Calculated annually and paid monthly.

•

Most common remuneration model in the market.


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Variable Fees based on Actual Hours

Advantages

• Relatively easy to administer,

provided agencies maintainaccurate timesheets.

• Reflects advertiser needs and

agency activity.

•

Allows flexibility should scope ofwork changes.

• Allows agency return based on

clearly defined process and actualdeliverables.

Disadvantages

• Difficult for advertiser to budget.

• Difficult for agency to resource.

• Requires accurate time sheet

process and requires audit in

disputes.•

Lack of accountability with no

incentive for efficiency.

• Fees are based on actual time spent using an hourly charge out rate for

individual staff.•

Charge out rates calculated to cover staff salary, plus overhead factor and

agreed profit margin.

• Fee is paid after work is undertaken based on actual recorded hours.

• More common in marketing services contracts such as Sales Promotion, DM

and PR, rather than Creative agencies.


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Project Fees

Advantages

• Easy to control expenditure.

• Often used to top up retainers forwork outside the agreed scope.

• Reflects specific advertiser needs.

• Suits integrated or niche services.

Disadvantages

• Inclined to encourage a short term

focus rather than longer term

relationships.

• Agency does not have the same

level of confidence in remunerationunless scope of work defined up

front.

• Tends to come at a higher cost

compared to the retainer.

• Project fees is an alternative to fixed annual fees, determined and paid on an

individual project basis.•

Often used for simply ad hoc projects, pre-agreed project fees can be paid either

on completion of the individual project or for projects completed in the month,

quarter or year.

• Used extensively for specialist services such as Direct Marketing, PR and Sales

Promotion.


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Hybrids

• Very few advertisers use any one of these remuneration models exclusively.

• There are a number of components in the services required including:

• Account management

• Strategy development

• Creative concept development

• Creative production supervision

•

Production management

• Production

• Channel planning

• Media planning

• Media buying

• The application of the remuneration model needs to be defined across the

services included and excluded. Eg. Account Management and Strategy may

be retained, the Creative concept may be paid as a project fee, while the

Production may be paid based on hours.


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Less Common Models

Scale Fee & Win Bonus

•

Advertiser pays the agency a “salary” based on a fixed percentage ofeither sales or annual marketing budget. Win Bonus is built into the

sales model with increases in sales leading to increased agency fees

and must be added as a more traditional PBR for the marketing budget

model.

Concept Fee • One-off fee to cover the development of the Creative concept. Fee

based on the estimated value to the advertiser’s business and its

anticipated use in an agreed context over an agreed period of time.

Used where the work falls outside the current advertiser - agency

agreement or in ad hoc projects.

Licensing Fees

• The advertiser pays the agency a reduced concept development fee

and then agrees to pay a license fee for use of the concept once it has

been approved. Rather than the advertiser owning the rights, the

agency retains the rights.


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Production Cost Considerations

• “Mark up” versus “At net”

•

Traditionally external Production costs were marked up under thecommission and service fee model. The majority of remuneration

agreements today have the external production costs at net.

• The increasing diversity of agency networks means that often agencies

have affiliate or subsidiary relationships with companies that may

superficially appear as external suppliers.

• Variable versus Fixed

• The market is split between the use of fixed cost rate cards and variable

head hour rate cards.

• Agencies typically prefer and encourage variable rate cards, but these

rely on proper and robust recording of head hours and reconciliation to

actual from the approved estimate.•

Increasingly the market is moving to fixed fee rate cards, especially in

situations of high volume, as they make it easier to budget, reduce

estimating time and do not require reconciliation of internal agency

resources.


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Performance Based Remuneration

• “Payment By Results” describes a service relationship in which some part of

any associated remuneration is contingent on results or other performanceassessment measured against pre-determined criteria.

• Benefits:

• Improved agency performance.

• Improved advertiser performance.

•

Goal alignment and congruence.

• Types:

• Bonus - additional to the agreed profit margin.

• Cost recovery - represents all profit.

• Shared risk and reward - agency puts % of margin at risk and advertiser

meets that % in pool.

• Earn back - agency puts % of margin at risk to be paid in results.

• Combination - usually a mix of earn back and bonus.


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Performance Criteria

Business Performance (Hard)

•

Examples include: sales, traffic, profit, market share, volume growth, etc.These can be measured by the same criteria that the advertiser uses for

their internal bonus systems.

• Agency often claims that business results may not be within their ‘span of

control’ as many factors besides advertising can affect business outcomes.

Advertising Performance (Medium)

•

Examples include: product awareness, ad awareness measures, consumermeasures, attitude ratings, persuasion, purchase intent, awards, brand

equity, image, effectiveness awards, etc.

• This kind of performance assessment is vulnerable to research technique,

statistical anomalies and discussions of creative ‘philosophy’.

Agency Performance (Soft)

•

Relates to the evaluation of agency functional areas: account services,creative and media in terms of: performance, service, relationship, cost

efficiencies, etc.

• This is highly subjective and may be affected by ‘entertainment’ on the

upside and personality problems on the downside.


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Performance Criteria

Business Performance

• Sales Volume

• Volume Growth

• Relative Brand

Performance

• Composite

Performance

• Market/brand share

• Customer loyalty

• Brand equity

• Brand profitability

Advertising Performance

• Advertising Awareness

• Brand Image Shifts

• Attitude Ratings

• Ad enjoyment

•

Brand personality•

Predisposition to buy

• Ad scores

• Persuasion index

Agency Performance

• Agency Service

delivery*

• Relationship

Management*

• Functional

competencies*•

Contribution to

‘branding’

• Project management*

• Administration*

• Cost Efficiency*

• Pro-activity*

• Collaboration*

* Can be measured, managed and maximised using Evalu8ing. Find out more at www.evalu8ing.com


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Critical Success Factors

• PBR is not suitable for all client/agency relationships. Implementation

may not be possible or suitable for a number of reasons; however theprocess of examination and discussion can still be very beneficial.

• There must be TRUST and mutual respect.

• There must be a fundamental acceptance of fairness and equity. PBR

is not a means to reduce agency revenue and margins. The agency needsto be fairly remunerated and make a fair margin before PBR is considered.

• Consider the current client/agency relationship. PBR is not a

prescription for improving advertiser / agency relations (even though

relationships are said to improve under PBR).

• Be very clear on the objectives, measurement criteria and performance

standards that will determine the PBR bonus.

•

Recognize that there may be some difficulties involved, particularly inthe early stages of implementation, the negotiation process can be

protracted and there can be disagreements on the risk/reward, measures,

objectives, methodology, size of the PBR pool, weighting, etc.


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• Incorporate a mutual performance review to improve fundamentals for

both parties. Conduct the performance reviews frequently (every 3 - 6months), particularly during the early adoption of PBR.

• Clearly establish roles and responsibilities for both partners, through

development, implementation and monitoring.

• Keep it simple - develop greater complexity as you move forward togetherand increase learning.

• Start out with a lower level of PBR remuneration, then grow the

percentage over time.

• Establish ‘hard’, quantifiable measurement criteria to the extent

possible and control ‘soft’ qualitative measures.

• Give serious consideration to drawing down the PBR ‘pool’ as

frequently as possible.

• Continually refine and enhance the process, criteria, measurement,

weightings, etc.

• You will need greater communication, openness and transparency.

Training of the participants can be an important element in success.


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• Provide protection against plan changes. The agency’s commitment to

deliver results is based on the expectation that the advertiser will executeit’s plan in terms of media spending, product introductions, distribution

initiatives etc. If the advertiser wants to make unilateral changes to the

resources supporting the business, and if those resources are likely to have

a material effect on the agency’s ability to deliver results, then the PBR

scheme must be re-visited and modified.

• Incorporate the PBR agreement, criteria and measurement into the

agency contract and ensure that advertiser’s senior management are

aware and involved.

• Ensure there is top management sign-off at the advertiser and that the

accumulation of upside bonus monies and their payment are ‘in the budget’.

In schemes with ‘downside risk’, payment schedules should allow more

frequent payment as milestones are reached through the year – protecting

the agency’s cash flow consistent with performance.

• Consider using an independent, objective mediator to facilitate and

manage the process.


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For further information please contact…

TrinityP3 Pty Ltd

Sydney

+612 8399 0922

Melbourne

+613 9682 6800

London

+44 7880 910 064

Wellington

+64 21 515 650

Hong Kong

+852 3589 3095

Singapore+65 6884 9149

[email protected]

www.trinityp3.com

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