Brands move away from paying agencies for time as output models gain ground

Global brands are moving away from traditional labour-based agency remuneration, with fewer than one in five multinationals now using it as their standard payment model, according to new research from the World Federation of Advertisers (WFA) and Agency Mania Solutions.

The proportion of companies using labour-based models has fallen from 54% in 2011 to 17% today, down from 33% in 2022 when the research was last conducted. At the same time, fixed-fee and output-based models have grown from 20% to 35% over the past 15 years, while labour-plus-performance models have more than doubled from 9% to 23%.

The shift is expected to continue. Performance-based fees have the strongest projected growth, with 58% of respondents expecting to increase their use, followed by value-based models at 43% and fixed-fee or output-based approaches at 36%.

Don't miss: By 2026, can agencies rewrite the playbook fast enough to survive? 

In addition, AI is also expected to accelerate the move away from time-based remuneration, as agencies become able to produce more work in less time. However, brands are still catching up: only 20% of respondents said they have already evolved their commercial models in response to AI, while 61% intend to do so.

The findings come from 69 multinational companies across six industries, representing a combined global marketing spend of US$147 billion. Some 71% of respondents work in global marketing procurement.

Despite the growing interest in outcome-linked models, performance-based remuneration currently accounts for a relatively small share of agency fees. Across most disciplines, between 64% and 80% of respondents said performance-based remuneration makes up less than 20% of total agency compensation.

Adoption is highest in media-related disciplines, where performance is generally easier to measure. Labour-plus-performance models account for 41% of media planning, 34% of media buying and 30% of paid social arrangements.

The research also highlights differences by region. Asia Pacific has the strongest orientation towards fixed-fee or output-based remuneration, at 44%, compared with 32% in Europe and 29% in the US and Canada. Labour-based models remain the most common approach in the US and Canada at 38%.

The shift in how agencies are paid is also taking place alongside longer agency relationships. Average tenure has increased across creative, production, media and paid social since 2018, with paid social seeing the largest increase from two years to 4.3 years.

However, 36% of respondents said agency relationship management has become more difficult, compared with 12% who said it has become easier. The report points to more stakeholders, increasingly complex scopes, faster timelines and greater expectations around data, technology, integration and transparency.

For the first time, the research also examined what contributes to agency performance beyond remuneration. Great briefing ranked highest at 5.6 out of six, followed by respect and trust at 5.2 and high-quality feedback at 5.1.

Financial incentives scored 3.9, suggesting that remuneration is not viewed as the primary driver of agency performance.

The report also found a gap between perceived value and transparency. While 89% of brands said they receive value for money from their agencies, only 45% said they have sufficient transparency into agency costing and profitability.

Global contracts are becoming increasingly common for media, with 67% of respondents using global contracts for media planning and 61% for media buying. By comparison, 49% to 52% use global contracts for integrated creative and creative AOR relationships.

The findings suggest agency remuneration is moving towards a broader definition of value, with brands increasingly looking beyond hours and headcount while also placing greater emphasis on clearly defined outputs, performance and the quality of the agency relationship.

The shift away from time-based agency remuneration has been building for years. MARKETING-INTERACTIVE reported in 2019 on earlier WFA research showing brands were already experimenting with different remuneration models, as agencies and clients looked beyond traditional labour-based approaches to better align fees with the work delivered.

The question of how agency performance should be measured has remained a challenge. In 2022, MARKETING-INTERACTIVE reported that while agencies and clients were placing greater emphasis on performance and feedback, defining and measuring the right KPIs remained an issue. The latest WFA research suggests that conversation is now moving further towards how brands define value itself, with output, performance and value-based models gaining ground as AI changes how agency work is produced and priced.

Related articles:    
Media pitch fatigue: Malaysia’s agencies call time on silent RFPs and uneven pitch practices 
The pitch imperfect: Why client feedback is the missing note 
Analysis: Procurement's growing role in marketing pitches in times of budget crunch