The Future of Agency Compensation

As you can see there is no one method of agency compensation to which everyone subscribes. The recent ANA survey found that nearly half of advertisers made significant changes in their compensation plans in the past three years, while 21 percent plan more changes soon. One of the most significant findings from the recent ANA survey is the rapid rise in incentive-based compensation agreements, as 35 percent of advertisers are using some type of performance-based system versus only 13 percent 10 years ago.

As more companies adopt IMC approaches, they are reducing their reliance on traditional media advertising, and this is leading to changes in the way they compensate their agencies. For example, Procter & Gamble, which has traditionally been a heavy user of television advertising, was one of the largest major advertisers to move away from the standard 15 percent commission system. In 2000 P&G implemented a major change in its compensation structure from one based entirely on media commissions to one based entirely on sales-based incentives. One of the reasons for the change in P&G's compensation system is to encourage agencies to focus less on expensive com-missionable media such as television and magazines and make use of other IMC tools such as direct mail, event marketing, public relations, and the Internet.22 P&G joins a list of other major consumer products advertisers, such as Colgate-Palmolive, Unilever, and Campbell Soup, that have changed their systems to more closely link agency compensation to a product's performance in the market. Many automobile advertisers, including Nissan, Ford, BMW, and General Motors, are also using incentive-based systems.23 GM made the change to encourage its agencies to look beyond traditional mass-media advertising and develop other ways of reaching consumers.24

Many companies are changing their compensation systems as they move away from traditional mass media and turn to a wider array of marketing communication tools. They are also trying to make their agencies more accountable and reduce agency compensation costs. However, advertisers must recognize that their compensation policies should provide agencies with a reasonable profit if they want quality work and the best results from their agencies.

Evaluating Agencies

Given the substantial amounts of money being spent on advertising and promotion, demand for accountability of the expenditures has increased.

Regular reviews of the agency's performance are necessary. The agency evaluation process usually involves two types of assessments, one financial and operational and the other more qualitative. The financial audit focuses on how the agency conducts its business. It is designed to verify costs and expenses, the number of personnel hours charged to an account, and payments to media and outside suppliers. The qualitative audit focuses on the agency's efforts in planning, developing, and implementing the client's advertising programs and considers the results achieved.

The agency evaluation is often done on a subjective, informal basis, particularly in smaller companies where ad budgets are low or advertising is not seen as the most critical factor in the firm's marketing performance. However some companies have developed formal, systematic evaluation systems, particularly when budgets are large and the advertising function receives much emphasis. The top management of these companies wants to be sure money is being spent efficiently and effectively. As the costs of advertising and other forms of promotion rises, more companies are adopting formal procedures for evaluating the performance of their agencies.

One example of a formal agency evaluation system is that used by Whirlpool, which markets a variety of consumer products. Whirlpool management meets once a year with the company's agencies to review their performance. Whirlpool managers complete an advertising agency performance evaluation, part of which is shown in Exhibit 3-7. These reports are compiled and reviewed with the agency at each annual meeting. Whirlpool's evaluation process covers six areas of performance. The company and the agency develop an action plan to correct areas of deficiency.

Companies develop evaluation procedures that emphasize different areas. For example, R. J. Reynolds emphasizes creative development and execution, marketing counsel and ideas, promotion support, and cost controls, without any mention of sales figures. Sears focuses on the performance of the agency as a whole in an effort to establish a partnership between the agency and the client. These and other evaluation methods are being used more regularly by advertisers. As fiscal controls tighten, clients will require more accountability from their providers and adopt formal evaluation procedures.

Exhibit 3-7 Whirlpool's ad agency performance evaluation

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Responses

  • ornella
    Why p&g moving away from the use of traditional massmedia advertising?
    7 years ago

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