A Contrast of Agency Remuneration Structures: The Performance-based System and the Commission-based System

There are several compensation systems existing which clients use to pay their agencies. However, it generally depends on the perspective of the client which structure they choose to utilise; whether they want to pay the agency for the work they produce, the success of the work they produce, or a flat rate fee or commission.

The Commission-based system is the traditional, yet now less frequently used (Belch et al, 2012), form of compensation. As agencies were saving the media time, money and effort on sales and collections, “the media allowed the agencies to retain a 15% media commission on the space or time they purchased on behalf of their clients” (Arens et al, 2009). This means, for instance, if a magazine space cost $200,000, an agency would bill the client $200,000, retain 15% ($30,000) and pay the media $170,000 for the space.

The Performance or Outcome-based system, in contrast, is much less ‘standard’, but is becoming increasingly popular (Belch et al, 2012). This method sees the agency being compensated depending on how well they meet predetermined goals. These goals can include “objective measures such as sales or market share, as well as more subjective measures such as evaluations of the quality of the agency’s creative work” (Belch et al, 2012).

The two structures are very different, and they are so because the Performance-based system grew from the Commission-based system as the latter was increasingly being criticised (Shimp, 2010). Where the Performance-based system relies on the agency’s accountability, Belch et al (2012) states that the Commission-based system encouraged agencies to recommend creative solutions that would require higher priced media spend in order to obtain a larger commission. In this way, agencies were seen as valuing higher commissions over providing the best solution (Arens et al, 2009; Spake et al, 1999), and it is generally through the use of a number of different IMC programs (not just commission based tools) which helps produce better results (Shimp, 2010). Another key contrast between the two structures is that the Commission-based method provides more ‘security’ in terms of payment for the agency, whereby some Performance-based systems can entail negative payment results if the campaign does not meet objectives. For instance, DDB Needham takes the “risk” (Spake et al, 1999) of offering its clients a “guaranteed results” program, where if the campaign is successful, the agency earns more, but if it fails, the agency earns less (Arens et al, 2009). This is an issue for some agencies, because while this system acts as a value for money method for the client, campaign success can be subject to factors external to the agency’s control (Linton, n.d.). While the two structures are quite obviously and intentionally different, Linton (n.d.) and Belch et al (2012) indicate that they are slightly similar in that the Performance-based system includes media commission, as well as fees and payments by results.

In essence, the Performance-based compensation system seemly encourages agencies to create work not because it is business, but because a better execution that meets the client’s objectives will be far more rewarded monetarily than that of agencies adopting the traditional Commission-based system.

References

Arens, W. F., Schaefer, D. H., & Weigold, M. (2009). Essentials of Contemporary Advertising (2nd ed.). New York: McGraw-Hill/Irwin.

Belch, G. E., Belch, M. A., Kerr, G., & Powell, I. (2012). Advertising: An Integrated Marketing Communication Perspective (2nd ed.). North Ryde, NSW: McGraw-Hill Australia.

Linton, I. (n.d.). Advertising Agency Fee Structures. Retrieved May 10, 2015, from Small Business: Chron: http://smallbusiness.chron.com/advertising-agency-fee-structures-57126.html

Shimp, T. A. (2010). Advertising, Promotion, and other aspects of Integrated Marketing Communications (8th ed.). Mason, Ohio: South-Western Cengage Learning.

Spake, D. F., D’souza, D., Crutchfield, T. N., & Morgan, R. M. (1999). Advertising Agency Compensation: An Agency Theory Explanation. Journal of Advertising, 28 (3), 53-72. doi:10.1080/00913367.1999.10673589

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Comparison of TBWA’s Disruption Philosophy and Y&R’s Brand Asset Valuator

Proprietary tools, processes and philosophies are often implemented into brands through advertising agencies in order to reach a particular outcome, whether it be a clearer brand model, direction, position, growth, and so on.

‘Disruption’ is a philosophy that is key to TBWA’s business. Disruption entails looking at the pre-existing conventions of a category, and then “finding a way for the brand to behave differently to accelerate its growth” (Shepherd-Smith, 2009) by challenging the norms, and creating a disruption that allows the brand to reach their vision. This philosophy is not simply a tool for developing marketing and advertising solutions for brands; it is a process that can uproot a brand and change “how [they] think, behave, do business, learn and go about [their] day-to-day” (Howard, 2013).

The ‘Brand Asset Valuator’ (BAV) used by Y&R is a very different process. While TBWA’s Disruption philosophy looks at conventions and ways which brands can disrupt these conventions, the BAV looks at measuring the value of a brand in terms of it’s strength and stature (Y&R, 2010). The BAV measures brand value by evaluating a brand’s level of differentiation, relevance, esteem and knowledge (Value Based Management, 2014). Mizik & Jacobson (2008) claim this model is a specific approach, as it assesses universal brand characteristics, rather than category specific characteristics. In contrast, Shepherd-Smith (2009) tells how the Disruption process looks more broadly at the brand category for commonalities. However, both processes have strong focuses on differentiation, as one of the assessible pillars of the BAV is ‘differentiation’ as it exists currently in the brand, and Disruption seeks to establish differentiation through its process.

Another distinct difference between Y&R’s BAV and TBWA’s Disruption is their point of perspective. Mizik & Jacobson (2008) state that the BAV model is “based on the premise that brand is a multidimensional construct that can be assessed through customer perception measurements.” While the BAV measures value from a customer point of view, Disruption again focuses on views in terms of the market and category (Shepherd-Smith, 2009). But while the BAV focuses on the brand’s output, in terms of products or services, perceived value, awareness and so on, Disruption looks more closely at the operations within the brand. Brands who implement the Disruption process can often see changes in corporate behaviour, which in turn flows into shifts in marketing and advertising communications, and brand perceptions (Shepherd-Smith, 2009). Pedigree is a prime example, who changed from a product-based packaged goods strategy (“we sell dog food”) to a brand-based strategy (“we love dogs”).

In essence, both the Disruption philosophy and the BAV focus strongly on the brand’s position and their level of differentiation. Disruption looks at identifying conventions of the brand’s category, and challenging these conventions in order to establish differentiation. The BAV, however, does not go so far as this. The BAV merely measures the value of the brand as it currently is, which could provide insights into where the brand could go, but doesn’t go so far as planning this process. In summary, Disruption is a proactive process, while the BAV is seemingly a more reactive measurement tool that produces insights.

References:

Howard, C. (2013, March 27). Disruption Vs. Innovation: What’s The Difference? Retrieved April 24, 2015, from Forbes: http://www.forbes.com/sites/carolinehoward/2013/03/27/you-say-innovator-i-say-disruptor-whats-the-difference/

Mizik, N., & Jacobson, R. (2008). The Financial Value Impact of Perceptual Brand Attributes. Journal Of Marketing Research (JMR) , 45 (1), 15-32.

Shepherd-Smith, M. (2009, December 9). Philosophy of Disruption. Retrieved April 24, 2015, from Chief Executive Officer: http://www.the-chiefexecutive.com/features/feature71671/

Value Based Management. (2014). Brand Asset Valuator. Retrieved April 24, 2015, from Value Based Management: http://www.valuebasedmanagement.net/methods_brand_asset_valuator.html

Y&R. (2010). Tools & Knowledge. Retrieved April 24, 2015, from Y&R: http://young-rubicam.de/tools-wissen/tools/brandasset-valuator/?lang=en