The modern advertiser-agency relationship has evolved from a customer-supplier model into a strategic partnership. Advertisers increasingly expect their agency partner to improve effectiveness, identify and challenge inefficient investment, harness new technologies and recommend the right solutions for the advertiser’s business outcomes. Identifying opportunities for continuous improvement and always acting in the advertiser’s interests are also part of the remit, even when that puts established ways of working into question.
In many cases, remuneration models haven’t evolved alongside evolving expectations of the agency – they continue to be based on relatively narrow measures such as hours, headcount, scope volume or a percentage of media spend, despite the broader value agencies are often expected to deliver.
The way an agency is remunerated can influence what it prioritizes, even if that wasn’t the intention. For example, an advertiser may want its agency to automate routine work and operate more efficiently, while still paying according to the number of people assigned to the account. It may want the agency to challenge unnecessary investment, but pay a fee that is a percentage of media spend. It may expect objective channel and supplier recommendations, while the agency earns different margins from different vendors and platforms. These arrangements can create tensions between the advertiser’s objectives and the agency’s commercial interests. An effective remuneration structure encourages and incentivizes behaviors that the advertiser values, and link the measures used in the contract to the value it wants the agency to deliver.
The growth of automation and AI is making the question of efficiency and remuneration more urgent than ever. The fact is that agencies can now complete many tasks more quickly and with less manual work – this affects some of the fundamental areas of agency work such as planning, reporting, analysis and campaign optimization. There is a clear discrepancy with a resource-based remuneration model here: if the agency is rewarded according to hours or headcount, increased efficiency will reduce their revenue. The advertiser is asking for a new way of working whilst rewarding the old.
This doesn’t automatically mean that agencies should be paid less if technology reduces the amount of time required on an account; they are investing heavily in tools, systems, training and expertise, to the benefit of their clients. That said, it clearly doesn’t make sense to pay for resource that is no longer needed, simply because it was included in a previous scope. A better approach is to create a more sustainable model that allows both parties to benefit from that efficiency, giving the agency a commercial reason to improve the way work is delivered, and the advertiser a clear benefit for their business.
Cost savings are another common basis for agency incentives as they appear objective and are easy to measure. While buying media at a lower cost can create real value, lower prices shouldn’t be assessed in isolation – in the worst cases, cheaper media can deliver poorer audience quality, weaker attention, unsuitable placements or lower overall effectiveness. If an agency is heavily incentivized to drive savings, they may optimize towards the most visible commercial targets, rather than the best overall outcome for the client. It is therefore wise to be cautious about remuneration models that treat savings as a key indicator of performance. It’s the same for other standalone metrics: delivery against a media plan, achieving efficiency benchmarks and improving a platform KPI may all be useful indicators, but none of them provide a complete view of value. A balanced incentive model is more likely to comprise a combination of cost, quality, effectiveness, service and continuous improvement.
When advertisers muse on alternatives to traditional remuneration structures, they often alight on paying the agency according to the business results it helps to drive. This can sound like a good idea in principle, but it needs to be applied carefully. Media agencies can influence business performance, of course, but they don’t control it. There are many other factors that contribute to business success; it’s unreasonable to reward – or penalize – an agency for outcomes it is not solely responsible for.
The most effective incentive models sit between paying purely for inputs, and holding the agency responsible for commercial performance. They should focus on outcomes and behaviors that are relevant to the client’s business, but within the agency’s control. These metrics include media quality improvement, effective allocation of investment, achievement against campaign objectives, stronger governance or demonstrable progress within a specified time period.
As the media landscape becomes more complex and technology proliferates, agency revenue models are becoming more varied. In addition to fees, agencies may earn income from proprietary technology, data, consulting services, principal media or other solutions. These products can and often do offer real benefits for the advertiser, but they also act as commercial incentives that aren’t always entirely transparent.
Advertisers should ensure they understand how their agency partner drives revenue from the services and products it recommends – and they should consider whether their remuneration model encourages impartial advice or makes some options more commercially attractive to the agency than others. Transparency isn’t about requiring agencies to disclose every detail of their profit engines, but it does mean that advertisers need to understand the commercial relationships that can influence decisions made on their behalf.
With remuneration structures reflecting unique client-agency relationships, there is no one-size-fits-all model that will work across the board. The right structure for an advertiser will depend on many factors, including the scope, objectives, available data, the maturity of the relationship and the agency’s degree of influence over the metrics used. A stable base fee combined with a carefully designed variable element is often successful, but the right solution can vary significantly. The starting point is straightforward – what does the advertiser want the agency to do, and how can the remuneration model incentivize that?
With advertisers increasingly expecting agencies to deliver value rather than just carry out investment activities, it’s important that remuneration and incentive structures reflect those expectations – otherwise, they risk asking their agencies to behave in one way while rewarding them for a totally different, sometimes contradictory behavior.