The Answer to Agency Compensation that Will Save the Industry

If you work in Ad Land then undoubtedly, you’ve seen Fast Company‘s The Future of Advertising article. The article glosses over the myriad of issues confronting the industry ranging from the fragmentation of media, digital proliferation, creative crowdsourcing and failing agency compensation models.

Traditionally, agencies have been paid in one of three ways: fee based (billed per hour), incentive based (pay-per-performance based on objectives) and the commission model (media cost plus 15%). Less than typical, a few agencies have tinkered with their cash flows and have worked with clients to secure Intellectual Property rights on product they develop. Anomaly, BBH and Brooklyn Brothers come to mind. These models are not cutting it. We’ve known it for years.

Today, agencies really have no clue as to how they should be paid. “We still don’t know how to monetize what we do,” admits Peter McGuinness, CEO of Gotham … “we don’t monetize ourselves properly, so we don’t hit our margins.” (11.17.10 Fast Company).

How does an industry that appears more and more to be producing a commodity product reinvigorate itself and become more profitable?

It’s really quite easy. Agencies need to refocus on their core competency: they’re in the business of building brands. Moreover, if an agency’s strategic and creative vision truly does build a brand then they should be justly compensated for it. Just like brand managers who are awarded for increasing the value of their brand, so should agencies. Agencies need to go to the mattresses and negotiate pay based on how their work increases a brand’s economic value.

Companies already regularly undergo brand valuations. They even record the intangible value of their brands on their balance sheets. Now, with the International Organization for Standardization releasing their internationally recognized methodology for monetary brand valuation, the only thing stopping agencies from making this compensation model work is themselves. And, it’s a win-win for all parties. Brands will once again see the value of working with professional agencies as business partners and agencies will generate the compensation they deserve based on developing big, brand building ideas.

“We have to figure out how to get paid for the big idea, and what that idea is worth,” says McGuiness. What’s a big idea? Something as ubiquitous as MasterCard’s “Priceless” campaign that arguably could transform a business. (11.17.10 Fast Company).

Under a brand value compensation model McCann Erickson would be compensated on a sliding scale based on the economic value the “Priceless” campaign adds to the MasterCard brand. This number would be far higher than whatever fee based, incentive based or commission based pay McCann currently receives. A brand value compensation model is simple pay-for-performance. It’s fair.