Fees replace media commissions

When media commissions were the prevailing method of agency compensation, it almost always resulted in either over or under payment for advertising services. In theory this methodology rewarded the agency for risking some of their profits for the prospects of future growth in their client's businesses,

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based on the premise that advertisers would maintain a constant Advertising/ Sales (A/S) ratio. In practice the large advertisers usually overpaid their agencies, since the costs to service their accounts were seldom proportionate to the agencies' income; and the small advertisers usually underpaid, and were subsidized by the agencies' large clients.
Every three years the A.N.A. surveys their members' agency compensation practices. In 2003, 74% of the 112 advertisers responding, utilized some sort of labor-based fee arrangement to compensate their agencies.

The table at the right based on the A.N.A. data shows how the proportion of commissions and fees have reversed within the past ten years.
It wasn't until the hyper-inflation in media costs that began in the late eighties, that large advertisers began to seriously question the magnitude of their agencies' commissions. These questions lead first to reductions in media commissions from the old 15% standard to 10% or less. But since most national agencies had become parts of publicly traded holding companies, having a steady and predictable earnings stream became the paramount issue to them. Thus fees became the solution of choice for both parties.

However this decision has had unintended consequences for many advertisers and agencies.

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Suddenly agency compensation became a line item in marketing and/or advertising budgets.The money was always there but it was "invisible" as media commissions. But now it was out in the open, subject to question and scrutiny from all quarters.

Agencies and advertisers adapted in different ways. Some welcomed the opportunity to establish a clear value-added context to their relationships based on the agency's contributions and their financial candor. But many agencies, clung to their old ways, acting as though they still had something at risk in their new fee arrangements, and taking the position that their costs and profits were "none of anybody's business".
Although labor-based fee arrangements have always been recognized as potentially the most equitable for both parties, they depend on the good will and candor of both parties. Plus, depending how they are structured, they can add a considerable amount of administrative complexity.

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Over the last twenty years, we have structured and managed numerous different types of fee arrangements which is why many advertisers have enlisted our firm to audit the financial health of their agency relationships and to help them set up equitable fee agreements with their agencies.
Related Subjects Incentive Compensation

Agency Profits

 Media Buying Options

Media, Message & Brand
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McBride & Associates