TrinityP3

Agency Remuneration

TrinityP3 Pty Ltd

October 2010
Commercial in Confidence

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Compensation or Remuneration?
Compensation: noun
1. the act or state of compensating.
2. the state of being compensated.
3. something given or received as an equivalent for services, debt, loss,
injury, suffering, lack, etc.
Remuneration: noun
1. the act of remunerating.
2. something that remunerates; reward; pay.

Philosophically we prefer to call it Remuneration to reward the agencies

and suppliers rather than making good for loss, injury and suffering.

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Moving from Input/Costs to Outcome/Value

Most of the existing models are input / cost based that reward volume of
work and not effectiveness.

The current best practice is to move to an output based / pricing model

that fixes the value based on output.

The leading trend is for a value based remuneration model where the
reward is based on the value created or contributed.

Therefore the global remuneration trend is summarised by:

Input / Cost

Output /
Price

Outcome /
Value
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Inputs vs Outputs vs Outcomes

Inputs /
Costs

Model

Positives

Negatives

Resource / Head hour

based

Simple to implement

Rewards increased
volume rather than
effectiveness

No direct link to volume

or scope of work

Outputs /
Price

Based on scope of
work / outputs /
deliverables
Price agreed and set
on historical basis

Outcomes /
Value

Based on the value

created by the activity
Either all or the bulk of
remuneration / profit
More like profit sharing
than bonus

Multiple points of
negotiation including
salary cost, overhead
and profit
Values the output
rather than the cost
Makes budgeting
easier

Based on head hours /

timesheets which are
unreliable
Rewards increased
volume rather than
effectiveness

Adjusting
remuneration easier

Issues arise when work

commissioned then
cancelled

Links agency
remuneration to
outcomes / value

Requires measurement
of marketing
effectiveness

Brings alignment
between suppliers
and marketers if
correctly
implemented

Difficult to get many

agencies to agree on
measures
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Principles of Remuneration

It is generally accepted by the ANA and the AAAA in the US, the ISBA and
the IPA in the UK and the AANA and the Communications Council in
Australia, that agency remuneration agreements should be:

1.
2.
3.
4.
5.
6.
7.

Simple to understand and easy to administer.

Fair to both advertiser and agency.
Aligning advertiser and agency interests and priorities.
Finalised before agency resources are committed.
Recorded in a ratified advertiser / agency contract.
Flexible enough to accommodate changes in the future.
Involving senior management stewardship, with principles clearly
communicated to the teams on both sides.
8. Capable of standing the test of time and being understood by any future
Marketing Director.
9. Based on agreed and understood terms and definitions.
10. Inclusive of specified tracking and review dates.
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Remuneration Models

Most common remuneration models:

Commission & Service Fees
Resource Package Fees (Retainer)
Variable fees based on actual hours
Project Fees
Hybrids

Less common remuneration models:

Scale Fee & Win Bonus
Concept Fee
Licensing Fees

Other remuneration considerations:

Production mark ups
Payment by Results (PBR)
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Commission & Service Fee

Based on the traditional media commission paid by the media proprietor (10% or
11.1% mark up) and a service fee (7.5%) compounded to over 19% paid on all
external costs including production to cover the full service offering of Creative
concept, Media planning and buying.
Continued to be used primarily in Media buying and to a less extent Media
planning remuneration.
When used, is used in combination with other models such as project fees or
head hours.

Advantages
Simple in the case of mainstream
advertising.
Easy to calculate and administer.
Parties focused on quality not
cost.
A crude form of PBR with a higher
Media spend leading to greater
agency earning.

Disadvantages
Based on volume of Media spend,
not scope of work.
Inappropriate were Media is not a
major component of the output such
as DM or Digital.
Does not encourage Media neutral
solutions.
Cancellations of spend has a severe
effect on agency income.

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Resource Package Fees (Retainers)

Based on an agreed detailed scope of work and a resource plan for a defined
period, reflecting the workload requirement of the agency.
Based on salary costs of the required number of people at a % of their annual
billable hours by an overhead factor and the agreed profit margin.
Usually this base formula is agreed in the contract and only the scope of work
and the associated resource requirements are calculated and adjusted annually.
Calculated annually and paid monthly.
Most common remuneration model in the market.

Advantages
Agency knows its income and can
resource appropriately.
Advertiser knows cost and can
budget appropriately.
Encourages more Media neutral
solutions.

Disadvantages
Requires the scope of work to be
accurately defined.
Does not allow for major changes in
scope of work with falls costing
advertiser and rises costing agency.
Input based and therefore less
accountable.
Often time consuming to negotiate
and administer.

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Variable Fees based on Actual Hours

Fees are based on actual time spent using an hourly charge out rate for
individual staff.
Charge out rates calculated to cover staff salary, plus overhead factor and
agreed profit margin.
Fee is paid after work is undertaken based on actual recorded hours.
More common in marketing services contracts such as Sales Promotion, DM
and PR, rather than Creative agencies.

Advantages
Relatively easy to administer,
provided agencies maintain
accurate timesheets.
Reflects advertiser needs and
agency activity.
Allows flexibility should scope of
work changes.
Allows agency return based on
clearly defined process and actual
deliverables.

Disadvantages
Difficult for advertiser to budget.
Difficult for agency to resource.
Requires accurate time sheet
process and requires audit in
disputes.
Lack of accountability with no
incentive for efficiency.

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Project Fees

Project fees is an alternative to fixed annual fees, determined and paid on an

individual project basis.
Often used for simply ad hoc projects, pre-agreed project fees can be paid either
on completion of the individual project or for projects completed in the month,
quarter or year.
Used extensively for specialist services such as Direct Marketing, PR and Sales
Promotion.

Advantages
Easy to control expenditure.
Often used to top up retainers for
work outside the agreed scope.
Reflects specific advertiser needs.
Suits integrated or niche services.

Disadvantages
Inclined to encourage a short term
focus rather than longer term
relationships.
Agency does not have the same
level of confidence in remuneration
unless scope of work defined up
front.
Tends to come at a higher cost
compared to the retainer.
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Hybrids

Very few advertisers use any one of these remuneration models exclusively.

There are a number of components in the services required including:

Account management
Strategy development
Creative concept development
Creative production supervision
Production management
Production
Channel planning
Media planning
Media buying

The application of the remuneration model needs to be defined across the

services included and excluded. Eg. Account Management and Strategy may
be retained, the Creative concept may be paid as a project fee, while the
Production may be paid based on hours.

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Less Common Models

Scale Fee & Win Bonus
Advertiser pays the agency a salary based on a fixed percentage of
either sales or annual marketing budget. Win Bonus is built into the
sales model with increases in sales leading to increased agency fees
and must be added as a more traditional PBR for the marketing budget
model.
Concept Fee
One-off fee to cover the development of the Creative concept. Fee
based on the estimated value to the advertisers business and its
anticipated use in an agreed context over an agreed period of time.
Used where the work falls outside the current advertiser - agency
agreement or in ad hoc projects.
Licensing Fees
The advertiser pays the agency a reduced concept development fee
and then agrees to pay a license fee for use of the concept once it has
been approved. Rather than the advertiser owning the rights, the
agency retains the rights.

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Production Cost Considerations

Mark up versus At net

Traditionally external Production costs were marked up under the
commission and service fee model. The majority of remuneration
agreements today have the external production costs at net.
The increasing diversity of agency networks means that often agencies
have affiliate or subsidiary relationships with companies that may
superficially appear as external suppliers.

Variable versus Fixed

The market is split between the use of fixed cost rate cards and variable
head hour rate cards.
Agencies typically prefer and encourage variable rate cards, but these
rely on proper and robust recording of head hours and reconciliation to
actual from the approved estimate.
Increasingly the market is moving to fixed fee rate cards, especially in
situations of high volume, as they make it easier to budget, reduce
estimating time and do not require reconciliation of internal agency
resources.
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Performance Based Remuneration

Payment By Results describes a service relationship in which some part of

any associated remuneration is contingent on results or other performance
assessment measured against pre-determined criteria.

Benefits:
Improved agency performance.
Improved advertiser performance.
Goal alignment and congruence.

Types:
Bonus - additional to the agreed profit margin.
Cost recovery - represents all profit.
Shared risk and reward - agency puts % of margin at risk and advertiser
meets that % in pool.
Earn back - agency puts % of margin at risk to be paid in results.
Combination - usually a mix of earn back and bonus.
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Performance Criteria
Business Performance (Hard)
Examples include: sales, traffic, profit, market share, volume growth, etc.
These can be measured by the same criteria that the advertiser uses for
their internal bonus systems.
Agency often claims that business results may not be within their span of
control as many factors besides advertising can affect business outcomes.
Advertising Performance (Medium)
Examples include: product awareness, ad awareness measures, consumer
measures, attitude ratings, persuasion, purchase intent, awards, brand
equity, image, effectiveness awards, etc.
This kind of performance assessment is vulnerable to research technique,
statistical anomalies and discussions of creative philosophy.
Agency Performance (Soft)
Relates to the evaluation of agency functional areas: account services,
creative and media in terms of: performance, service, relationship, cost
efficiencies, etc.
This is highly subjective and may be affected by entertainment on the
upside and personality problems on the downside.
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Performance Criteria
Business Performance

Sales Volume
Volume Growth
Relative Brand
Performance
Composite
Performance
Market/brand share
Customer loyalty
Brand equity
Brand profitability

Advertising Performance

Advertising Awareness
Brand Image Shifts
Attitude Ratings
Ad enjoyment
Brand personality
Predisposition to buy
Ad scores
Persuasion index

Agency Performance

Agency Service
delivery*
Relationship
Management*
Functional
competencies*
Contribution to
branding
Project management*

Administration*
Cost Efficiency*
Pro-activity*
Collaboration*

* Can be measured, managed and maximised using Evalu8ing. Find out more at www.evalu8ing.com

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Critical Success Factors

PBR is not suitable for all client/agency relationships. Implementation

may not be possible or suitable for a number of reasons; however the
process of examination and discussion can still be very beneficial.

There must be TRUST and mutual respect.

There must be a fundamental acceptance of fairness and equity. PBR

is not a means to reduce agency revenue and margins. The agency needs
to be fairly remunerated and make a fair margin before PBR is considered.

Consider the current client/agency relationship. PBR is not a

prescription for improving advertiser / agency relations (even though
relationships are said to improve under PBR).

Be very clear on the objectives, measurement criteria and performance

standards that will determine the PBR bonus.

Recognize that there may be some difficulties involved, particularly in

the early stages of implementation, the negotiation process can be
protracted and there can be disagreements on the risk/reward, measures,
objectives, methodology, size of the PBR pool, weighting, etc.
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Critical Success Factors

Incorporate a mutual performance review to improve fundamentals for

both parties. Conduct the performance reviews frequently (every 3 - 6
months), particularly during the early adoption of PBR.

Clearly establish roles and responsibilities for both partners, through

development, implementation and monitoring.

Keep it simple - develop greater complexity as you move forward together

and increase learning.

Start out with a lower level of PBR remuneration, then grow the
percentage over time.

Establish hard, quantifiable measurement criteria to the extent

possible and control soft qualitative measures.

Give serious consideration to drawing down the PBR pool as

frequently as possible.

Continually refine and enhance the process, criteria, measurement,

weightings, etc.

You will need greater communication, openness and transparency.

Training of the participants can be an important element in success.

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Critical Success Factors

Provide protection against plan changes. The agencys commitment to

deliver results is based on the expectation that the advertiser will execute
its plan in terms of media spending, product introductions, distribution
initiatives etc. If the advertiser wants to make unilateral changes to the
resources supporting the business, and if those resources are likely to have
a material effect on the agencys ability to deliver results, then the PBR
scheme must be re-visited and modified.

Incorporate the PBR agreement, criteria and measurement into the

agency contract and ensure that advertisers senior management are
aware and involved.

Ensure there is top management sign-off at the advertiser and that the
accumulation of upside bonus monies and their payment are in the budget.
In schemes with downside risk, payment schedules should allow more
frequent payment as milestones are reached through the year protecting
the agencys cash flow consistent with performance.

Consider using an independent, objective mediator to facilitate and

manage the process.
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For further information please contact

TrinityP3 Pty Ltd
Sydney
+612 8399 0922
Melbourne
+613 9682 6800
London
+44 7880 910 064
Wellington
+64 21 515 650
Hong Kong
+852 3589 3095
Singapore
+65 6884 9149
people@trinityp3.com
www.trinityp3.com

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