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Compensation Dialogue Process 

In survey after survey, marketers and marketing service providers indicate a high degree of skepticism about foundational assumptions, economic parameters, and contractual terms that result from even the best-intended good-faith negotiations. It is no surprise that many marketers and agencies are frustrated with the compensation process.

There must be a better way, and there is—a logical, bipartisan process for evolving dialogue between advertiser and agency that can add credibility to compensation discussions, demystify compensation parameters, and restore confidence in working relationships between marketers and their agencies.

The ANA and 4A's recommend a four-step process that includes:

  1. Goals and objectives;
  2. Scope of services and scope of work;
  3. Compensation framework; and
  4. Compensation particulars.

We believe that diligent and good faith dialogue regarding these four steps will improve the effectiveness of client-agency relationships.


Step #1 Goals and Objectives

Prior to discussing the specific terms of compensation and prior to developing a well-defined Scope of Work (SOW), the marketer and the agency should have a comprehensive discussion of the goals and objectives of the marketer’s business and marketing plans.

The discussion of goals and objectives should include, but not be limited to, a dialogue on the following:

  • The client’s business goals and marketing objectives, both short term and longer term—What is the core deliverable expected from marketing initiatives? For example: awareness, attitudinal shifts, trial, compliance, price elasticity, category growth, market share, cross merchandising, etc.
  • The role and responsibilities of both client and marketing service providers in the marketer’s business processes.
  • Any special or unique issues or requirements: technical, category, regional, global, etc.
  • The factors and considerations that the agency should understand about the advertiser’s business or about the way the advertiser works to be an effective business partner.
  • The marketer’s processes for approving communications strategy recommendations and creative executions.
  • The program development, measurement, and research assessment procedures that will be utilized.
  • Agreement on performance expectations. How the marketer will define and measure success—for the marketer’s business? For marketing programs and components? For the agency?
  • What client resources will be available to support the marketing program? For example, marketing budgets, sales and distribution efforts, channel or retail activities, etc. (i.e. other critical aspects of the four P’s: product, price, place, and promotion)?
  • Critical path and time frame considerations.


Step #2 Scope of Services and Scope of Work

Once marketer and agency have a clear understanding of the business goals and objectives, the parties should discuss scope of services and scope of work.

What types of services will the agency provide for the marketer? Will the agency’s responsibilities include:

  • Strategic planning
  • Market research
  • Creative development, execution for all (or selected) media and non-media venues
  • Production, casting/talent, licensing, traffic, art buying
  • Media planning, research, buying—for which media and in which markets?
  • Internet/interactive, search, Web site—strategy? Design? Programming?
  • Public relations, public affairs
  • Database, direct marketing, crm
  • Sales promotion, channel marketing, in-store, sponsorships
  • Experiential marketing, events, trade shows, exhibits.

What services are the sole responsibility of the agency? If responsibility is jointly handled by the agency, client, and/or other services providers, how will integration and transfers be managed?

What consumer segments, customers, media types, geographic markets, and other marketing considerations require definition so that the scope of agency services are mutually understood?

Once scope of services has been delineated, the advertiser and agency should estimate and agree on quantity and level of agency services, i.e., the scope of work. Quantity of services should align with core deliverables and service expectations and with the overall scope of service (i.e., include the number or range of initiatives, events, campaigns, executions, mailers, etc., including specifically defined deliverables that are expected during the performance period). Level of services should also include discussion related to expected stewardship and administrative requirements, rework parameters, and alternative marketing planning and execution considerations.


Step #3 Compensation Framework

There is no singular compensation approach that fits every individual advertiser–agency relationship. A number of methodological compensation structures are available, such as Media Commissions (on marketing expenditures), Fixed Fees, sales-based royalties, Cost-Plus and Labor-Based arrangements. Any one of these methods can work effectively when the parties’ interests and priorities are aligned. Both marketer and agency should discuss their compensation-related goals and expectations prior to selecting either a method or a level of remuneration.

—Advertiser goals and expectations: All advertisers want superior creative/thinking/strategy, but further conversation on the price value relationship needs to occur. Do you want the most-senior/costly staffers working on the account, or are you willing to work with less senior/less costly talent in an effort to reduce cost? How does the advertiser prioritize revenue dynamics? Can some fluctuation in costs be tolerated in order to be economical? Do you value a predictable fee versus the lowest-possible fee? How much time is the client willing to spend in order to administer the compensation arrangement?

—Agency goals and expectations: What is the growth opportunity on the account? Can you minimize costs now in hopes for future growth, or is this relationship “mature” and must it be profitable on its current terms?

—Are the agency and the advertiser willing to take some risk in order to maximize the potential for mutually beneficial upside income?


Step #4 Compensation Particulars

Prior good faith discussion of goals and objectives, scope of services/work and compensation framework should help facilitate an effective, balanced, and mutually satisfactory dialogue on compensation particulars.

The specifics of each advertiser-agency agreement will vary depending upon a host of factors, including the magnitude of the programs, the level of investment, the design of the compensation arrangement, the sensitivity and predictability of underlying assumptions, and the duration of the agreement:

—In Cost-Plus or Labor-Based arrangements, there should be agreement on the definitions of cost as well as the determination of whether actual or estimated hours, labor, or multipliers will be utilized.

—In performance-based arrangements, the measurement criteria, range of performance, and payment schedule will require calibration.

—For Media Commission or sales-based arrangements, rates and structures should be codified.


Summary

The proposed process for evolving a comprehensive dialogue on compensation is consistent with, and builds upon, the guiding principles that were endorsed by the ANA and 4A's in 2002. The guiding principles that underpin the best compensation programs include:

  • Establish clear goals and objectives up front.
  • Align advertiser and agency interests and priorities.
  • Establish agreement on key compensation definitions and terms.
  • Match compensation with the resources required to do the work.
  • Are simple to understand and administer.
  • Are fair and equitable for both advertiser and agency.

As business goals, priorities, expenditure levels, and scope of activities change, the marketer and agency will need to incorporate those changes into their future dialogue on compensation.

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