Articles on the advertising industry usually cover new account wins, news on creative awards, people or account movements and interviews with advertising personalities. When it comes to larger industry issues, it is usually about consumer behaviour future trends, talent issue in the advertising business and so on. But one topic which in my opinion does not get talked about often enough, is the issue of agency compensation. Globally too, that maybe the case. In an article in The Economist, the boss of BBH says ‘her industry has been “approaching and avoiding” a change in how it is paid for many years‘. Traditionally, it was the commission system and when that got eroded it has moved to a mix of commission, time based fee or simply a negotiated amount based on work load and resources allocated to execute that work load. Pay-for-performance another model that is being mooted.
This post is not about suggesting the right agency compensation model but the consequences it. Many agencies believe that they are not adequately compensated but agree to the terms because of competitive pressures (of course, all clients believe that they are over paying their agencies!) and fear of the client. One consequence of poor agency compensation and the resultant squeezed margins is the propensity of agencies to find ‘other ways’ of making money or at least saving money. The ability to afford top quality talent becomes an issue. This triggers a vicious cycle: sub optimal service to the client, leading to client’s unhappiness, leading to a pitch. Another manifestation is the ‘other income’ which some agencies resort to – film production being a source of back door money making.
If the advertising industry was united and spoke up for a just compensation in one voice, maybe this topic would be discussed more often in the higher echelons of the industry. But when survival is an issue, undercutting becomes the norm, leading to a vicious cycle. Sadly, every stakeholder ends up on the losing side.