Fair reward for creativity
Alex Hunter, finance director, IPA, says restricted but more effective activity cannot be rewarded simply by curtailed fees…
You’d have to be over 50 to recall the days when agencies were rewarded according to what they spent on behalf of the client – the long standing commission basis of agency remuneration. For the next generation, the norm has been to be rewarded for activity, that is by fees based on the cost of providing the work. Hence the need for timesheet systems, and hence debates with clients’ procurement folk over the charge out rates!
However, for the current generation, the use of fees alone is gradually reducing. This is not to suggest that fees will go the way of commission. A retainer is, by definition, to secure the services of a valued partner, not an ad hoc supplier. If an agency is retained by a client then it must be doing a reasonable job. If it isn’t, then the client can call a review and dispense with that relationship. But within that retainer context there is room for a more sophisticated approach to remuneration and hence the move towards being rewarded more for performance in a number of different ways and for a number of reasons.
In essence, in a people business, a retainer provides the steady cash flow to meet the monthly payroll cost (and hence the importance of 30 day payment terms, incidentally) and a minimum margin to survive. This can lead to an assumption that the cost of that retainer equates somehow to the value of the contract. In other words, it is assumed that the cost of input is related to the quality of outputs or value of outcomes.
For the more mechanistic simple campaigns, that correlation may well apply. So, for example, work that needs next to no creativity could be sourced by an e-auction, where the client gets what it has paid for. For the more creative complex campaigns, though, it would be too crude a basis.
The current recession has obviously meant clients have had to do more for less and that has been true of their agencies. To achieve that, agencies have not only become as lean as their clients but also have had to review their business models. There is no one-size-fits-all approach to realigning the processes and structures, but one thing is common: you cannot successfully change your business model without changing your remuneration model. Restricted but more effective activity cannot be rewarded simply by curtailed fees.
We know that the growth of new media has spawned more complex, often more integrated, campaign offerings. One product of this trend is that more time will be spent post launch on such aspects as tweaking the focus/direction, monitoring the reaction and measuring the result, than before. A remuneration model has to include recognition of that keener involvement with the outcome.
In response to these pressures remuneration models are increasingly hybrid in their composition. A retainer remains a valid basis of a collaborative relationship, and also underpins the stable, longer term relationship on which outcome-related remuneration can be based. Accordingly there has been a growth of remuneration contracts that include Payment By Results (PBR) schemes, whereby success-related fees are determined by mutually agreed goals (ISBA’s Paying for Advertising found this in 69% of creative agency agreements in 2009).
The concept of PBR covers a wide range of schemes, not all of them geared to provide the bonus benefit one might expect from the terminology. Nevertheless the concept that remuneration should reflect that an agency is about adding value to a brand and not merely part of the client’s supply chain, is a welcome development.
Certain clients have moved further in this direction than others and the Coca Cola remuneration model is called value-based remuneration. A base fee remains part of its model but, as the author of the scheme put it, “timesheets are as obsolete a currency to us as Italian lira is to post euro Italy”. Equally there are agencies which simply don’t run timesheet systems and pitch on a value-added basis.
For the majority, though, there are a range of more common remuneration models and these are usefully set out in the recent version of the joint industry best practice guide to Agency Remuneration available from the IPA, ISBA, PRCA and MAA.