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Advertisers turn to performance-based remuneration for ad agencies

Agency contracts continue to evolve

Eight in 10 marketers plan to increase the use of performance-based remuneration contracts with their ad agencies over the coming year in the hopes of not only eliciting better value and more transparency but improving the working relationship.

The shift towards output-based payment models, rather than those that are labour or fee-based, is not a new one. Since 2011, marketers have been pushing for agencies to ink alternative contracts; from Airbnb paying former creative shop TBWA on a “per night” basis (meaning, the agency took a cut of every sale) to more experimental models like St Luke’s set up with Uber-rival Gett.

According to The World Federation of Advertisers' (WFA) Global Agency Remuneration report, conducted in partnership with The Observatory, the number of marketers currently using output-based fees as the main remuneration contract has risen to 28%, up from 20% in 2011. A further 15% have combined performance with a labour-based payment (up from 9% in 2011).

However, a further of survey respondents said they expected to see an increase the prevalence of output, performance and value-based remuneration models.

One marketer noted how they had alread moved to ‘100% of payment based on incremental sales generated’.

Laura Forcetti, global marketing sourcing manager at the WFA said brands rewarding partners based on success they help generate was a positive step for agencies.

“The move to performance-based remuneration is a recognition that where agencies and advertisers are aligned in the same way, the outputs are more likely to be better for both,” she said.

However, there is still some way to go. Across all types of agencies, on average less than 20% of the total remuneration is linked to performance for 80% of respondents.

And the pace of change over the past seven years has been different among agency types.

Creative agencies have seen a 20% decrease in the use of FTE-based models and a 14% rise in the use of fixed/output-based models since 2011.

Despite being faced with transparency-crisis, marketers are largely ‘happy’ (77% for media planning and 69% for media buying) with their media remuneration models than any other agency type. 44% of marketers (compared to 16% in 2014) now offer a performance-based fee or bonus to their media agencies on top of labour fee, while 7% have also started to use fixed pr output-based remuneration models.

Improving relationships

Among the benefits of a shake-up to remuneration models is the improvement to the client-agency relationship.

Transparency concerns remain, with more than half (52%) of the respondents not feeling that they are getting full transparency on their agencies’ costing models.

Almost three quarters (71%) of marketers agreed, including 19% who strongly agreed, with the statement that ‘I feel that changing my current agency remuneration models would improve the relationships that I have with my agencies’.

However, perceptions of the value delivered by agencies is positive, with 87% of respondents feeling that they are getting genuine value for money from their agencies (up from 67% in 2011). In addition, nearly 70% agree that their agencies are now accountable for the value that they create.

“While there has been some positive change in approaches over recent years, many have yet to define the most appropriate remuneration model to deliver positively to all stakeholders,” added Stuart Pocock, co-founder of The Observatory International.

“Advertisers need greater insight into the range of models being used, and what each delivers, if they are to develop the most appropriate model, one that can deliver positively against their specific business needs,”

The research was based on responses from global/regional senior marketing procurement experts from 42 different companies with a total communication spend in excess of $84bn.

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