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.
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