Wary marketers sour on billable hours and incentives, says ANA

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Fee-based agency compensation remains the most popular method, but brands are trying new approaches in the wake of industry shakeups, according to a new report.

Long the scourge of agency life, billable hours appear to be losing favor among clients, as well.

For the first time in more than 10 years, the number of marketers using labor-based fees to compensate their agencies has declined, according to a triennial report from the Association of National Advertisers. The use of incentives—once considered the vanguard in agency compensation—has also declined for the first time in 50 years.

The report, Trends in Agency Compensation: How Marketers Are Simplifying Agency Management and Seeking Transparency, finds that clients are taking a fresh look at compensation options in the wake of high-profile industry scandals, most notably the ANA’s own 2016 Media Transparency report, which revealed widespread evidence of rebates and other nontransparent practices among media agencies.

Among the 82 member companies surveyed, labor-based fees were still the most popular compensation method, used by 68 percent of respondents (down from 81 percent in 2013). But the method, which agencies have long complained fails to account for the full scope of their contribution, is losing ground to traditional commissions and value-based compensation.

While commissions are on the rise, they are still used by only 12 percent of marketers, up from 3 percent in 2010.

"There are many people, including myself, who thought commissions might be becoming extinct," David Beals, president and CEO of JLB + Partners, wrote in the report. "I think what we’re finding…particularly with the advent of programmatic buying and other more complicated approaches to buying and purchasing media, is that some clients are gravitating back to commission methods because it’s just simpler than trying to work out labor fees in the media space."

Performance incentives are also on the decline, receding back to 2010 levels, with 46 percent of marketers employing them, compared to 61 percent in 2013. Respondents cite three reasons behind the drop: Incentives are not affecting agency performance; it’s too difficult to structure mutually agreed-upon incentives; and it’s too hard to link incentives to metrics.

While incentives haven’t decreased for the largest marketers, they have decreased overall, Beals said. "It’s ironic and almost counterintuitive in a world where more investment is being put into measurable digital and social media. This would seem like the prime territory for setting up a performance incentive or to even moving into something like value-based compensation."

Value-based compensation, the method in which the agency’s fee is established based on the value—not the cost—of the services and work, is only used by a small percentage of brands (7 percent). Agency staff time, costs and profits are not factored into the fee negotiation, and its use is so new it didn’t even register among marketers in the ANA’s past two surveys.

The ANA conducted the survey online from December 2016 to January 2017 and conducted complementary in-person interviews. The study was purposefully commissioned six months after the ANA’s Transparency Report to gauge how the compensation landscape had been affected by the issue.

Of those surveyed, 75 percent admitted to reviewing and discussing the ANA/K2 Media Transparency Report with senior management, and 45 percent of marketers said they’d changed their practice of addressing agency rebates and bonuses because of it. In fact, 40 percent of respondents now said they negotiate their agency compensation plans "when required" compared to just 26 percent three years earlier, which means there’s a corresponding drop in the amount of contracts that are reviewed annually—53 percent in 2016 compared to 72 percent in 2013.

The executives reviewing these contracts have changed dramatically since the ANA Transparency Report, too. Involvement of senior management more than doubled, from 33 percent to 73 percent, and the finance department’s involvement nearly tripled, to 45 percent.

"The ANA has been urging marketers to become increasingly involved and engaged in agency contract and digital media supply chain management," said ANA CEO Bob Liodice in a statement. "A key way to accomplish that goal is to be keenly aware of how media transparency issues are minimized within the framework of the client/agency contract."

"Now, our latest compensation research indicates that marketers are taking up that challenge by aggressively addressing transparency concerns and streamlining and simplifying agency compensation practices," he said.

The 17th edition of the ANA’s study will be released on Tuesday at the 2017 ANA Advertising Financial Management Conference.