Changing remuneration models: Is it leading to better client-agency relationships?

According to a Global Agency Remuneration 2018 report by the World Federation of Advertisers (WFA) and The Observatory International, majority of the companies believe that a different approach to the way they pay their agency partners will improve the client-agency relationship. 71% of the respondents in the research said that changing the current agency remuneration models would improve the relationships with their agencies.

In the report, 81% of respondents expected a continued shift towards performance-based remuneration models with a focus on outcomes in the next 12 months. This was also said to continue the ongoing decline of labour-based and commission-based models. The number of respondents currently using output-based fees as the main corporate remuneration contract has risen to 28%, up from 20% in 2011. While, a further 15% combine performance with a labour-based payment, an increase from 9% in 2011.

The research was based on responses from global and regional senior marketing procurement experts from 42 companies with a total communication spend in excess of US$84 billion. The research looked at how advertisers are evolving the way they pay agencies of all types and in all markets. The findings, said WFA, reflects a continuing trend, noted in WFA research during 2011 and 2014 when the percentage of pure labour-based contracts was the main model, currently at 36%. This decreased from 49% in 2014 and 54% in 2011.

Across all types of agencies, on average less than 20% of the total remuneration is linked to performance for 80% of the respondents. However, more than half of the respondents and less than 10% of remuneration is related to this. Performance payments also come in many shapes and sizes; earn back or true joint risk and reward, as it represents different outcomes for the agency involved.

Businesses have to ensure realistic and achievable KPIs are set and that there are methodologies in place to ensure appropriate measurement. The report said that the increased recognition of the business contribution that agencies make to its clients is “likely to be welcomed” by agencies. However, this is only if the framework used ensures that both parties interests are considered and balanced.

The pace of change

The pace of change over the past seven years has been different among agency types. Creative agencies have seen a 20% decrease in the use of FTE (full time experience)-based models and a 14% rise in the use of fixed/output-based models since 2011. Meanwhile, creatively-oriented agencies would prefer to focus on return on investment, which delivers far greater value.

Media agencies have experienced a fall in the use of labour and commission-based models. Around 44% of respondents (compared to 16% in 2014) now offer a performance-based fee/bonus to their agencies on top of labour fee, while 7% have also started to use fixed/output-based remuneration models. Despite the recent furore about transparency, more respondents are ‘happy’ (77% from media planning and 69% for media buying) with their media remuneration models than any other agency type.

PR agency remuneration also see declining reliance on labour-based models.

In addition, PR agency remuneration also see declining reliance on labour-based models in past seven years, with increasing usage of fixed/output-based models (up from 20% to 29% in seven years) and a small number are now using commission-based models (4%). PR outputs are notoriously difficult to measure and 41% of respondents are not happy with their arrangements.

Production house remuneration has been fairly consistent. The majority (67%) of respondents seem happy with their approach to remuneration in this area, with the majority sticking with output-based fees (41%) or labour-based fees (35%). Value-based remuneration has almost vanished from this area.

“Agencies are vital partners for many advertisers and the way they are paid is a critical step in establishing a productive relationship that delivers real return on investment while also offering agencies the chance to be rewarded for the success they help generate. The move to performance-based remuneration is a recognition that where agencies and advertisers are aligned, the outputs are more likely to be better for both,” Laura Forcetti, global marketing sourcing manager at the WFA said.

“Whilst there has been some positive change in approaches over recent years, many have yet to define the most appropriate remuneration model to deliver positively to all stakeholders. Advertisers need greater insight into the range of models being used, and what each delivers, if they are to develop the most appropriate model, one that can deliver positively against their specific business needs,” Stuart Pocock, co-founder of The Observatory International said.

Moreover, the study also found that perception of the value delivered by agencies has been positive. 87% of respondents said that they feel that they are getting genuine value for money from their agencies (up from 67% in 2011). In addition, nearly 70% agree that their agencies are now accountable for the value that they create. About 52% of respondents said that focusing too much on remuneration has a detrimental impact on agency relationships. The report also highlighted that transparency concerns remain with more than half (52%) of the respondents not feeling that they are getting full transparency on their agencies’ costing models. Getting sufficient detail on scope of work is a significant issue for respondents with only 31% believing they get a highly detailed scope from their marketing counterparts. This also has been highlighted as the cause of the majority of issues with fee negotiations.