TRENDSETTERS: Darren Woolley Outlines the Difference in Agency Remuneration v. Compensation and Considers Future Models

"The biggest obstacle to remunerating agencies is getting marketers, procurement and even agencies themselves to stop thinking about the cost of the services they provide and look at the value or the contribution to the value they create," says Darren Woolley, Founder of TrinityP3, an independent marketing and strategic management consulting company headquartered in Australia and working in key countries throughout the world. He is co-founder of the Marketing First Forum, a global ecosystem of marketers, procurement, agencies and consultants developing Next Practice in Marketing Management.

He believes the heart of the issue rests with a belief that marketing is still largely seen as a "cost of business" rather than as an "investment." This drives the attitude of compensation as simply payment for the cost of business. Whereas, a remuneration attitude means a focus on reward for effort and the results produced. "Thinking that the two are interchangeable misses the subtle but important power of these words", says Woolley.

He continues: "Consider the difference between account service and account management. Do you want people that "service" the client or manage the process? It is similar with compensation and remuneration. Is the process simply to compensate for the agency's cost or is there a more effective approach which moves the focus from the cost of service to the value of that service to the company or organization?"

Given today’s increasing emphasis on "return on investment," "transparency" and "effectiveness," Darren Woolley sees Value-Based Remuneration as key to the success of an agency's future.

However, it is still just an initial step. (He defines Value Based Remuneration as setting a price and rewarding the agencies against a set of performance criteria.) "Rewarding agencies for how well they perform the tasks they are contracted to do, or for developing good relationships is simply a table stake, a minimum requirement. The future is in developing true partnership agreements between marketers and their agencies based on return, effectiveness and transparency where the agency shares in the rewards of the value created. Agencies often use the term partnership, but it is rarely backed up in any financial sense. Most agency agreements cover the agencies cost and profit no-matter if the client is financially up or down. But the complaint from the agency is usually that there is so much they cannot control in relation to financial performance.

But my question to them is 'Who can?' Can the CFO of the client company control the economy? Can the marketer control competitive activity? Can the CEO control acts of God such as fires, floods and cyclones that can wipe out manufacturing of distribution? The fact is that no one can control any of this, but we can all make a contribution to success and share the failures. Our most successful remuneration models have the agency sharing the KPIs with the Marketing Team. It delivers true alignment of focus and effort."

Here is Darren Woolley’s checklist of considerations for choosing or implementing an agency remuneration model:

• It is easy to understand and simple to manage – now media commission is easy to understand and simple to manage (just set and forget). But then again many of the retainer and resources cost based models are incredibly complex, as are many of the performance based calculations.
• Is it fair and equitable to all parties – this is often the sticking point with many of the traditional compensation models as if the agency resource is not directly proportional to the media spend then the commission is not fair or equitable. But likewise if the agency resource is not linked to the scope of work produced the retainer or fee may become inequitable for the agency or the client as the scope of work moves up and down.
• Is it flexible enough to meet future needs – One thing media commissions did was enable agencies to get paid more as the spend increased and vice versa. But many of the retainer models are so inflexible that as the scope of work changes year on year, or even during the year, as the fee stays the same.
• Reward and encourage positive agency behavior and practices – Rather than simply compensating the agency for the resources used, a well-structured value based model can reward or remunerate the agency in a way that encourages positive or desired behaviors, rather than rewarding the agency for encouraging the advertiser to spend more or take more time and resources to deliver the work.
• Align agency efforts and outputs to the advertisers objectives and priorities – Performance models that go beyond the simple sacrifice of the agencies profit for the opportunity to “earn” it back by meeting a mix of performance, relationships and marketing metrics are ineffectual and yet widely popular. But when real profit incentives are linked to the financial performance of the brand and the agency and the marketing team share metrics, then it can very effectively align agencies to the advertisers’ objectives.
• Increase resource efficiency by focusing on the outputs rather than the cost of inputs – by moving the compensation model away from the cost of resources to the value of the outputs, you move the emphasis to measuring and monitoring the strategic quality of the outputs and move it way from measuring the cost of the inputs.

Of course the total amount paid to the agency matters. But to say that it is the most important factor and more important than how it is paid is to reduce the agency compensation to a simple transaction for the cost of services and to ignore the huge opportunity agency compensation can make to adding value to the outputs and outcomes of the client / agency relationship.