Why Agencies Aren’t Paid on Performance

Agencies love to talk about performance compensation models. They make sense. Agencies should be paid based on the value they add to their clients’ businesses rather than the traditional method of billing based on time and costs, they say, and clients will benefit from their agencies having “skin in the game” since their business interests are more closely aligned. It is, as any number of ad industry conference attendees have said, a win-win.

Nice in theory, not so much in reality. There’s a reason that the ad world hasn’t moved in this direction. Ultimately, clients call the shots, and despite agency claims, they feel the current system gives them the upper hand. The commoditization of agency labor ultimately reduces their marketing overheads which, in their eyes, can only be a good thing.

But there are issues on the agency side, too. The first is that they need to keep the lights on. They have no choice but to pay their staffers, which immediately limits the amount of risk they can take in the interests of protecting their business.

“Taking a risk on getting paid isn’t really feasible, which means performance-based compensation is really just about how much you get paid,” explained Adam Kleinberg, CEO of digital agency Traction.

Perhaps more important, performance-based models also expose agencies to a range of factors outside of their control. If agencies are expected to share some of the risk around their client work, they need to ensure they’re not exposed to bad decisions made by the client.

“I’m extremely confident in most of the work we do, but it still has to be the right situation, and specific parameters need to be laid out. People overlook the client role in advertising when they’re talking about this stuff; how does the agency protect itself from that?” Kleinberg added.

In some instances, however, the readiness to put “skin in the game” can even work against agencies. According to one digital agency CEO, his firm frequently enters into conversations with clients about performance-based structures. When the agency agrees, clients start to backtrack with the fear that they’re going to end up paying more than they would if they just paid the labor-based price tag. “We’d like to do it more often, but when it comes down to it, it’s often hard to get the client to follow through,” he said.

That, in large part, is a result of the continued influence of procurement officers in agency-selection processes and relationships, agencies suggest. Clients aren’t structured in a way that allows them to take risks around their marketing expenditure. They have budgets to stick to, and in some cases, personal bonuses to protect and incentives to chase. For a client, a performance-pay system more often resembles holding back part of a fee and tying it to sales goals. If the agency exceeds those goals, few clients are willing to pay them even more. That’s just not in the budget, they’ll say.

Yet for many, performance-based pricing is the only path for the industry to take. Rosetta chairman and CEO Chris Kuenne is a big proponent of the model, suggesting this type of relationship could help reverse the “commodity-doom loop” agencies currently find themselves in as clients place more and more pressure on their pricing. Agencies are de-incentivized to put their best talent on assignments because they’re getting paid purely for time, he suggests, which ultimately hurts the client.

But for most brands, marketing is seen as an expense, not an opportunity, and that fact continues to dictate their relationships with agencies. Until that perception changes, the type of performance-based agency compensation structures proposed by Kuenne are unlikely to happen at a meaningful level.

“I think there’s a misconception around the degree to which these things can work,” Kleinberg concluded. “It’s not going to be 50 percent tied to performance; it’ll be 5 or 10 percent.”

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