http://www.trinityp3.com/ Agency remuneration and compensation models are under pressure with a focus from procurement on marketing budgets. There are basically four types of agency remuneration being 1. Spend based (commissions) 2. Cost based (Head hours, overheads and profit multiples) 3. Output based (Pricing and fixed fee) 4. Outcome based (Performance payments and profit sharing). The last two are increasingly used together in a Value Based Compensation model which fixes the base fee for the agency's outputs and rewards the agency based on performance. This presentation provides an overview of the various advertising agency compensation models and provides guides and consideration to choose the right model for you.

1. TrinityP3
Agency Remuneration
TrinityP3 Pty Ltd
October 2010
Commercial in Confidence
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2. 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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3. 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:
Output / Outcome /
Input / Cost
Price Value
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4. Inputs vs Outputs vs Outcomes
Model Positives Negatives
Inputs / • Resource / Head hour • Simple to implement • Rewards increased
Costs based • Multiple points of volume rather than
• No direct link to volume negotiation including effectiveness
or scope of work salary cost, overhead • Based on head hours /
and profit timesheets which are
unreliable
Outputs / • Based on scope of • Values the output • Rewards increased
Price work / outputs / rather than the cost volume rather than
deliverables • Makes budgeting effectiveness
• Price agreed and set easier • Issues arise when work
on historical basis • Adjusting commissioned then
remuneration easier cancelled
Outcomes / • Based on the value • Links agency • Requires measurement
Value created by the activity remuneration to of marketing
• Either all or the bulk of outcomes / value effectiveness
remuneration / profit • Brings alignment • Difficult to get many
• More like profit sharing between suppliers agencies to agree on
than bonus and marketers if measures
correctly
implemented
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5. Principles of Remuneration
• It is generally accepted by the ANA and the AAAA in the US, the ISBA 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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6. 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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7. Commission Service Fee
• 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 all
external 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.
Advantages Disadvantages
• Simple in the case of mainstream • Based on volume of Media spend,
advertising. not scope of work.
• Easy to calculate and administer. • Inappropriate were Media is not a
• Parties focused on quality not major component of the output such
cost. as DM or Digital.
• A crude form of PBR with a higher • Does not encourage Media neutral
Media spend leading to greater solutions.
agency earning. • Cancellations of spend has a severe
effect on agency income.
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8. Resource Package Fees (Retainers)
• 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.
Advantages Disadvantages
• Agency knows its income and can • Requires the scope of work to be
resource appropriately. accurately defined.
• Advertiser knows cost and can • Does not allow for major changes in
budget appropriately. scope of work with falls costing
• Encourages more Media neutral advertiser and rises costing agency.
solutions. • Input based and therefore less
accountable.
• Often time consuming to negotiate
and administer. 8
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9. Variable Fees based on Actual Hours
• 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.
Advantages Disadvantages
• Relatively easy to administer, • Difficult for advertiser to budget.
provided agencies maintain
• Difficult for agency to resource.
accurate timesheets.
• Reflects advertiser needs and • Requires accurate time sheet
agency activity. process and requires audit in
• Allows flexibility should scope of disputes.
work changes. • Lack of accountability with no
• Allows agency return based on incentive for efficiency.
clearly defined process and actual
deliverables.
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10. Project Fees
• 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.
Advantages Disadvantages
• Easy to control expenditure. • Inclined to encourage a short term
• Often used to top up retainers for focus rather than longer term
work outside the agreed scope. relationships.
• Reflects specific advertiser needs. • Agency does not have the same
• Suits integrated or niche services. level of confidence in remuneration
unless scope of work defined up
front.
• Tends to come at a higher cost
compared to the retainer.
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11. 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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12. Less Common Models
Scale Fee Win Bonus
• Advertiser pays the agency a “salary” based on a fixed percentage of
either 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. 12
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13. Production Cost Considerations
• “Mark up” versus “At net”
• Traditionally external Production costs were marked up under the
commission 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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14. Performance Based Remuneration
• “Payment By Results” describes a service relationship in which some part of
any associated remuneration is contingent on results or other performance
assessment 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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15. 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, consumer
measures, 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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16. Performance Criteria
Business Performance Advertising Performance Agency Performance
• Sales Volume • Advertising Awareness • Agency Service
• Volume Growth • Brand Image Shifts delivery*
• Relative Brand • Attitude Ratings • Relationship
Performance • Ad enjoyment Management*
• Composite • Functional
• Brand personality
Performance competencies*
• Predisposition to buy
• Market/brand share • Contribution to
• Ad scores ‘branding’
• Customer loyalty • Persuasion index • Project management*
• Brand equity
• Brand profitability • 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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17. 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 the
process 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 needs
to 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 in
the 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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18. Critical Success Factors
• Incorporate a mutual performance review to improve fundamentals for
both parties. Conduct the performance reviews frequently (every 3 - 6
months), 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 together
and 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. 18
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19. Critical Success Factors
• Provide protection against plan changes. The agency’s commitment to
deliver results is based on the expectation that the advertiser will execute
it’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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20. 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
people@trinityp3.com
www.trinityp3.com
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