Negotiating agency compensation in a “pay for performance” environment!

092Agency compensation, or perceived lack thereof, is a hot topic with most if not all agency executives. Add to this the growing momentum towards “pay for performance’ compensation and the increased involvement of purchasing departments, and the result is a flurry of activity ranging from panic to total frustration.

The agency compensation issue has for years now been a source of friction within the client – agency relationship. Each side being just as guilty as the other in compounding it. In my experience ,most of this can be attributed to a lack of alignment on the subject between the two parties, which in turn has created a noticeable lack of trust.

Agency compensation is currently based on a cost per hour system that rewards the agency for man hours expended against the account. It does not reward:

  • Great work  versus average
  • Breakthrough ideas and concepts
  • Completing the work in less time than expected
  • Increased efficiency in negotiating and buying media etc
  • Increased customer traffic and sales
  • Increased customer value

In essence, it is budgeted by the client and treated as an expense, as opposed to an investment. The client sees the agency being paid no matter whether they succeed or not, hence they cannot help but begrudge it. I was recently talking to Lisa Colantuono from AAR Partners, and she told me that one of the key reasons for a client putting their business up for review was a feeling on their part, that the agency did not care whether they succeeded of not. I have no doubt that our compensation basis helps fuel this perception.

Now in this post I am not going to go into all the types of compensation and their pro’s and con’s as that on its own deserves another posting. What I am going to suggest is that you consider these issues when you look to negotiate next time.

  • How can you better align your compensation to reflect the same measures that your client’s is being rewarded on?
  • Can you consider a mix between fee and performance based compensation?
  • Are you assigning resources to areas that are valued by the client or are you doing it based on your perceptions of value?
  • Is all your work on behalf of the client based on sound business objectives and have you done your part to prove that out? If it was your money would you risk it?

A close long term client – agency relationship is based upon trust and the knowledge that you win and lose together.  Are there some clients who believe in a win/lose approach? Sure there are. The only question in this case is do you want them as a client badly enough to accept that type of relationship?

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One Response to Negotiating agency compensation in a “pay for performance” environment!

  1. Janell says:

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