The use of labor-based fees and performance incentives by marketers is decreasing as advertisers look to simplify their agency compensation practices, according to a new report by the ANA (Association of National Advertisers).
The latest ANA agency compensation research revealed that as a result of the ANA's 2016 Media Transparency initiative, brands are more aware of their own agency compensation practices and are reviewing them at the highest level of their organizations.
The report, Trends in Agency Compensation: How Marketers Are Simplifying Agency Management and Seeking Transparency, is the 17th edition of the triennial study; it will be released tomorrow at the 2017 ANA Advertising Financial Management Conference.
The study found that the drop in labor-based fees was the first such decline since 2006. Although it remains the most-used method, it is losing momentum in favor of a small but increasing use of traditional commissions and value-based compensation.
In addition, the use of incentives has significantly declined for the first time in 50 years of the survey. Respondents indicated incentives do not improve agency performance. Structuring and managing effective incentive plans is complicated, time-consuming, and often ineffective.
IMPACT OF TRANSPARENCY REPORT
Referencing the ANA's media transparency study, respondents said the effort has had an impact on their approach to agency compensation. They are examining and restructuring their contract agreements as part of their overall agency compensation practices.
The study showed that senior management involvement in agency negotiations more than doubled (from 33 percent to 73 percent) in 2016 from the last survey three years ago, while involvement of finance nearly tripled (from 15 percent to 45 percent). At the same time, corporate senior management involvement in agency cost reviews increased from 52 percent in 2013 to 79 percent last year. Also, half of respondents who were aware of the report have changed their rebate and bonus practices.
"The ANA has been urging marketers to become increasingly involved and engaged in agency contract and digital media supply chain management. A key way to accomplish that goal is to be keenly aware of how media transparency issues are minimized within the framework of the client/agency contract," said ANA CEO Bob Liodice. "Now, our latest compensation research indicates that marketers are taking up that challenge by aggressively addressing transparency concerns and streamlining and simplifying agency compensation practices."
- Commission-Based Payment: Driven by marketers' push for simpler compensation methods, the use of traditional media commissions — near "extinction" at only 3 percent of respondents in 2010 — has climbed back to 12 percent. Commissions are being used primarily for media services, and notably for programmatic media, which involves both human labor and technology costs.
- Value-Based Compensation: This newer method reappeared after no reports of its use in the previous two surveys. Although only a small percentage (7 percent) employ this method, it is a further indication that marketers continue to explore alternative approaches to traditional fees or media commissions.
- Negotiation: Most advertisers (53 percent) still negotiate agency compensation annually; however, this practice is down 19 percent from the previous survey. Those who negotiate "when required" is at 40 percent, up substantially from 2013 (26 percent).
- Multiple Agencies: Marketers are compensating a wide number of agency types (an average of 1.85 agencies each), indicating clients are choosing an agency mix to get the expertise and results they need even when it means managing multiple relationships.