Successful client-agency relationships hinge on equitable and appropriate compensation as much, if not more than on open and constant communications, clear goals and strategies, and sound stewardship of the relationship. “Money talk,” however, can easily create feelings of insecurity that can erode an otherwise solid relationship.
To understand why we need to look back. For nearly half a century, agency compensation was basically a non-issue. The majority of advertisers paid a standard 15% commission based on media spending, and that was that. But as today’s compensation arrangements have become much more diverse and more complicated, the same basic condition – that is, both sides must feel comfortable and content – has become critical to the success of the relationship.
So what are the nuances of developing agency compensation? What defines an equitable contract? Three key factors must be determined and defined, in detail and in advance.
- Alignment– First, and most important, are the agency’s explicit responsibilities to meet the client’s clearly-defined needs. The advertiser and the agency together should determine critical – and measurable – marketing goals and objectives, as well as how the agency will meet them. Goals must be aligned with compensation; if they’re out of sync, problems can develop. If a marketer sets the goal of building consumer brand awareness, for example, then wants to compensate the agency based on sales performance, both sides are likely to be disappointed. Clearly aligned marketer goals, coupled with a clearly defined agency scope of services and deliverables, will result in a more appropriate and mutually satisfying compensation plan.
- Assignment– Second, the defined scope of work and compensation must be matched with appropriate agency staffing, systems, and resources. And both partners should keep in mind that the advertiser’s scope of work, and the agency’s commitment in response, will often change throughout the year but both must be very conscious of avoiding scope creep. This match will help eliminate situations where a marketer feels that it is over-compensating an agency for what it receives, or where an agency feels that it is being under-compensated for its commitment of staff and other resources. To maintain a fair balance, it is essential to periodically review the scope of work in order to be certain that both the client and the agency are reaching their mutual goals.
- Encouragement– Finally, a reward system for both parties should be built into any compensation plan, since both contribute to the end result. The growing use of performance-based compensation, which allows the agency to feel that it’s a stakeholder in the business, leads to better relationships and better services, resulting in stronger and more efficient partnerships and increased ROI. Bear in mind that performance should be calculated on the basis of hard measures (i.e. sales growth), intermediary measures (i.e. brand awareness) and soft measures (i.e. value of the relationship) – all of which should be spelled out in the contract. In sum, compensation should not stand in the way of a potential or existing relationship. It should not cause a relationship to fracture. Instead, an equitable compensation plan will help develop stronger, more sound and rewarding client-agency relationships where both parties value each other.
THINGS TO CONSIDER WITH CREATING A COMPENSATION PLAN:
- Are clear objectives established up front? The advertiser and the agency together should determine short and long-term marketing objectives in order for the agency to establish defined and measurable communication goals.
- Is the compensation plan equitable? The value of the services provided by the agency should be equal to the compensation received.
- Is it simple? A compensation plan must be simple and clear so everyone involved in the process can understand its details and be able to execute the plan.
- Does the compensation plan match the resources? The defined scope of work and compensation plan must match appropriate agency staffing, systems, and resources.
- Are there incentives? A performance-based compensation plan allows the agency to feel like a stakeholder in the business and encourages greater efficiency and productivity in the relationship.
- Can it endure over time? Instituting these guiding points can ensure a well-established plan that can endure over time.
AAR Partners is a prominent agency search consultancy for almost 40 years. For information on your agency relationships or potential agency search, please call or email Lisa Colantuono at 212-400-1470 / Lisa@aarpartners.com for a confidential conversation.