Reset Password| Help|
  • Print |
  • |
  • Share

Agency Compensation: 4A's Agency Compensation Transformation Doctrine--Strategic Pillars 

Adobe  Download This Position Paper as a PDF


I. Objective

It is time to transform the marketing services industry’s approach to agency compensation.

Client demands for cutting edge agency services have never been greater, however the compensation amounts that clients expect to pay to agencies is under relentless scrutiny. Agencies are facing intense client pressure on compensation including demands for arbitrary cuts in fees and extended payment terms. Agency executives indicate that marketing services firms are increasingly being treated like commodities and client pressure on agency
compensation is worse than ever before.

In order to facilitate the transformation of agency compensation, the 4A’s has developed an industry guidance doctrine that is based on four strategic pillars:

1) Agency Principals should lead the transformation of agency compensation.

The lack of agency management commitment to transform pricing strategy and compensation discussions with clients will result in the continued deterioration of agency compensation arrangements and agency profitability.

Agency compensation will continue to deteriorate unless agency management gets involved in pricing strategy and client compensations discussions. 4A’s urges agencies to evolve pricing as a core management competence.

2) Agency Principals have an opportunity to reframe marketers’ value orientation to highlight the scope of business benefits that marketers derive from superior marketing innovation and execution.

Agencies have the opportunity to reframe clients’ definition of value by orienting agency compensation discussions on the scope of client business benefits (e.g., sales growth, market share gains, brand equity and brand valuation improvements, etc.) that an agency creates for a client’s business rather than on the agency’s costs and fees. Agency Principals are positioned best to lead the discussion of scope of client business benefits that an agency creates.

The foundation for all agency compensation discussions should be a value discussion. 4A’s recommends that all compensation discussions frame agency value creation and scope of benefits as the pre-requisite for discussing agency services, compensation and proposals.

3) Agencies should adopt a principles-based approach to compensation and terms.

In order to help agencies consistently negotiate appropriate arrangements with clients, the 4A’s recommends that agency management actively develop and adhere to internal standards, benchmarks, threshold/minimums and policies to guide the agency when negotiating arrangements with clients.

4A’s recommends that agencies establish internal agency standards on critical servicing, compensation, intellectual property and contracting principles prior to initiating negotiations with clients and prospects.

Inculcating agency principles and standards provides a foundation to guide an agency’s negotiations with clients. Each agency’s principles and standards need to be routinely affirmed in communications that are disseminated to, and endorsed by, agency heads and key client service directors in addition to finance staff and legal counsel.

Agency management should also develop negotiating expertise, pricing data, benefits-based value metrics and benchmarks that facilitate enterprise compliance with the agency’s principles-based approach to agency compensation.

4) Client marketing and Agency account management should be included in all agency compensation discussions.

Most large advertisers now have expert and experienced procurement departments that are skilled in negotiating lower prices for marketing services. Agency compensation discussions often segregate agency finance and client procurement in negotiations that decouple the value of the agencies services and the benefits of superior marketing from the discussions of scope of work and the level of agency remuneration.

In many instances the client’s marketing and procurement functions are not aligned on the goals, objectives and metrics of success for their agencies. Negotiating with client procurement in isolation will, more often than not, lead to a discussion that is primarily focused on cost savings.

Agency compensation should not be negotiated in silos. Compensation discussions should include all key stakeholders i.e. client marketing and client procurement along with Agency account management and agency finance.

Your agency should develop a team-based approach to articulating your agency’s value proposition, discussing alignment of economic interests and negotiating equitable agency compensation arrangements.


II. Background

The proliferation of communications and content possibilities has increased the complexity of the business and challenged agencies to add new talent, invest in data, build infrastructure and redefine creativity. Concurrently, clients are mandating that agencies do more with less. The pressure from clients is being led by procurement but client marketing is also now pushing for reductions in all expense areas because CMOs are under pressure to improve ROI and reducing cost is a predictable way of improving ROI.

Agency financial executives have expressed concern about the lack of systematic support from their agency operating management and holding company colleagues who seem to be primarily focused on defending existing client assignments and gaining new client revenue streams even at terms that are sub-optimal.

Lack of agency management and agency client service director involvement in, and commitment to, agency compensation negotiations is viewed as a significant industry problem. Agency CFOs have commented:

  • “Agency senior management and client service ARE the problem and sometimes give away more than necessary in exchange for what they hope will be a long-term relationship.”
  • “Due to the oversupply of agencies and low barriers to entry in this industry, we continue to kill each other on pricing. Our industry’s problem is our inability to demonstrate value on a regular basis or to remind the client about this value on a regular basis. Somehow, this gets lost in the negotiation process with procurement.”
  • “Internally, when agency finance and account management are not aligned in their objectives it is a problem.”
  • “It is critical to keep agency leadership and client service directly involved in the negotiating process with procurement. Negotiations cannot be left only to finance.”

When agencies negotiate compensation and terms with sophisticated clients more often than not the client will involve professional buyers in the negotiation and contracting process. Client professional buyers may have titles that read procurement or sourcing or supply chain management. Whatever their title, it is likely that these professional buyers are well schooled in the strategies and tactics of negotiating.

Client procurement takes the view that they have a corporate responsibility to their shareholders to conduct in-depth, due-diligence vendor reviews, bids and audits. The supply chain management mindset is to negotiate everything, simply because they can.

Given that agencies are increasingly dealing with professional buyers, agencies must become adept at anticipating procurement’s agenda. Agencies must plan for the processes and methods that sourcing will use to standardize and commoditize you as a vendor. Your agency must prepare how, if and when the agency will respond to procurement demands and power moves.


III. Considerations: Process and Principles

Client focus on quantifiable improvements to marketing ROI has exacerbated the attack on agency compensation. This focus on reducing agency compensation has created an economic paradigm that often defines value in terms of lowest cost rather than optimal benefits, which will over time diminish the industry’s ability to attract and retain talent and thwart efforts at alignment of agency-client economic interests to the ultimate detriment of clients.

Fortunately, the 4A’s and ANA collaborated to map a process that can help abate the trend toward defining value based solely on lowest cost. The ANA and 4A’s recommend a four-step compensation process that includes:

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

Agency client service directors should insist that all agency compensation discussions and marketing expenditure proposals begin with a management-to-management dialogue on the client’s business goals and marketing expectations.

Transparent discussion on the scope of expected benefits is critical to helping the client and agency frame the business-building, value-added expectations and metrics for any marketing investment, including the potential amount to be paid to the agency.

Agency management should embrace the ANA-4A’s “Rules of Engagement-Compensation Dialogue Process” guidance that is incorporated in the ANA/AAAA Compensation Guide.

In advance of any specific client negotiation, every agency’s management team should develop principles and business standards that are strategically constructed to reflect the agency’s values, beliefs and core requirements. The declaration of the agency’s principles should be constructed to persevere over time, transcend short-term fads and operational pressures, yet allow for client-specific opportunity assessment or opportunistic investments.

The types of policies, metrics and standards that can be prudently documented in comprehensive agency policy guidelines include, but are not limited to, the following:

  • Compensation principles, expectations, preferences and requirements
  • Strategies and parameters for aligning agency and client economic interests including reward-risk and term-of-engagement expectations
  • An agency point of view on performance-incentive compensation, i.e., can establishing performance based compensation agreements help to align client and agency interests and demonstrate the agency’s commitment to achieving agreed upon results
  • Critical contract terms including two-way performance evaluation, ownership of ideas and contract verification/audit guidelines
  • Data that the agency will disclose upon request as well as confidential or proprietary information that the agency will not disclose
  • Client transparency of business results information and marketing program expectations and metrics that the agency requires in order to be able to fairly assess the opportunity and formulate proposed terms
  • The agency negotiating plan, including the expected roles of key agency and client participants
  • Billing, credit and payment policies
  • New business policies
  • Policies and practices for dealing with competitive conflicts.

Developing agency principles and policies is the easiest part of the process. The more challenging aspects of inculcating a principles-based approach to agency compensation and terms involves senior management’s commitment and adherence to these principles, persistent education of agency managers on the rationale for and nuances associated with the agency’s principles, and illustrating the practical consistent application of those principles to a real world negotiating environment.


IV. Best Practice Guidance: 4A’s Agency Compensation Transformation Doctrine

The 4A’s believes that the roadmap for agency compensation transformation entails industry adoption of a “Transformation Doctrine” that is built on four foundational strategic pillars.

1) Agency Principals Should Lead the Transformation of Agency Compensation
The important dimensions that agency management can bring to the negotiating table include:

  • Agency management should aggressively lead the dialogue on aligning the economic interests of the agency and the advertiser.
  • Agency management must articulate the way that the agency’s operations work, the cultural dynamics of the organization and any process requirements, thresholds or core relationship attributes that foster successful sustaining alliances.
  • Agency management must calibrate the staffing plan and service standards needed to accommodate the agreed upon scope of work.

Agency compensation will continue to deteriorate unless agency management gets involved in pricing strategy and client compensations discussions. 4A’s urges agencies to evolve pricing as a core management competence.

Agency management should deploy some of their proven problem solving skills and innovative thinking to break the gridlock of formulaic compensation structures.

2) Agencies Have an Opportunity to Reframe Marketers Value Orientation
The foundation for all agency compensation discussions should be a value discussion. If your agency expects value to be defined based on the scope of benefits (rather than based on lowest cost) then the discussion should be focused on brand equity, business growth and marketing innovation rather than on agency time and costs.

The foundation for all agency compensation discussions should be a value discussion. 4A’s recommends that all compensation discussions frame agency value creation and scope of benefits as the pre-requisite for discussing agency services, compensation and proposals.

Industry thought leaders have the opportunity to communicate the business building value of advertising in marketer discussion forums and industry events. Concurrently, agency leaders have the responsibility to articulate the distinctive value-added services that their organization provides and to document the business rationale for the client’s investment in marketing and marketing services.

3) Agencies Should Adopt a Principles-Based Approach to Compensation
Agencies have a responsibility to shareholders, employees and to other clients to maintain the integrity of the firm’s business operations and to negotiate arrangements that over time ensure fair and reasonable contribution to the well being of all agency stakeholders.

4A’s recommends that agencies establish internal agency standards on critical servicing, compensation, intellectual property and contracting principles prior to initiating negotiations with clients and prospects.

Adoption of a principles-based approach will help frame core attributes and minimum thresholds that are needed to sustain successful relationships.

Agency management should establish the principles by which the agency will operate, set the standards of what constitutes acceptable risk and rewards, and be the ultimate arbiter of what constitutes a fair and reasonable agreement.

4) Client and Agency Management Should be Included in All Compensation Discussions
It is essential to have agency account management and client marketing participate in compensation discussions.

Agency compensation should not be negotiated in silos. Compensation discussions should include all key stakeholders i.e. Client marketing and client procurement along with Agency account management and agency finance.

Agency compensation discussions are too important to be delegated solely to agency finance managers, client procurement groups or attorneys that do not possess the requisite skill sets and client-specific business acumen to adequately frame the dimensions of success or have conflicting personal priorities and objectives.


V. Agency Compensation Transformation Doctrine–Strategic Pillars Summary

There is an opportunity to transform the industry’s approach to agency compensation. The foundation for change will require senior agency management commitment and leadership.

Clients are under pressure year in and year out to reduce marketing expenditures. Marketplace realities strongly suggest that the context for the agency business model of the future must reframe value in terms of both efficiency and effectiveness. Furthermore, given the dynamics of buyers and sellers of marketing services, in order to sustain the transformation of agency compensation the agency go-to-market offering must be built on consistent adherence to sound principles.

A journey of a thousand miles begins with a few simple steps—it is time to begin the journey of transforming agency compensation. The 4A’s Agency Compensation Transformation Doctrine features four strategic pillars that can help the industry begin to move in a positive direction.


Approved by the 4A’s Board of Directors, September 2010.

  • Print |
  • |
  • Share
My Notebook

My Notebook

PR Forum:
24/7 Always On Communications

May 14 | JWT, NYC
The industry’s top journalists, agencies and brand managers will convene for an open conversation about what's going on and what's next.
> Learn More

NY Seminar:
Strategy For Account Managers

May 15 | NYC
Send your account managers to improve their new business pitches and gain digital strategy insights.
> Learn More

More Seminars & Webinars
Spring 2014 | Nationwide
We have dozens of professional development events scheduled...
> View All Events

PR Forum 2014
Untitled 1
 
Login error. Please try again.
Sign In