FE Columns: Ad agencies fear of subtraction

Written by Alokananda Chakraborty | Updated: Jul 23 2009, 02:52am hrs
Plans to link advertising agency compensation to results achieved by the client are almost a reality, and the agencies are apprehensive. They reckon that such a linkage will shift a bigger risk on them as it means lower compensation if the advertisers goals are not achieved. Advertising agencies are typically compensated by commissions or fees charged for services rendered on advertisers behalf. Based on media expenditure, the standard agency commission is calculated as 15% of media billings. But then, in an increasingly RoI-driven world, the traditional model of advertising agency compensation is bound to be questioned. The increased pressure on marketing budgets and a competitive environment has meant advertisers are demanding greater agency accountability.

The issue that may rankle, however, is how to design the most efficient contract to govern the relationship. And that is a tricky job. First, in any marketing campaign, other promotional, marketing and environmental variables in addition to advertising influence final sales. In that sense, environmental uncertaintiesmarketers refer to extraneous factorsplays a key role in influencing the outcome of a campaign and this may be beyond the agencys control. Second, it is difficult, if not absolutely impossible, to ascertain the actual impact of advertising on sales. That is because some of these influences are stochastic, that is, a campaigns subsequent outcome is determined both by the predictable elements as well as the random.

Globally, agencies have been dabbling with the outcome-based compensation model for some time now. Way back in 1990, DDB Needham Worldwide announced a guaranteed results incentive-compensation plan under which it offered rebates to clients if performance goals were not met, but expected bonuses over and above its base compensation if goals were exceeded.

Agreed you cant six-sigma the creative process, but remember, a good compensation contract can balance cost control with creative excellence.