next evolution of agency compensation

2013 has certainly been a landmark year, and we have seen both social and financial gains dance across the headlines of various news publications. We watched as the S&P 500 hit an all-time closing high of 1,682.50 in July, and we watched history be made with the United States Supreme Court’s ruling on DOMA.

While I still do not have access to a crystal ball, the fiscal outlook for 2013 will certainly determine a large portion of the way the growth within the Advertising Industry, among other industries, will play out.

The Way I See It

  • I see the industry continuing to evolve to adapt to changing consumer trends, marketer needs and media evolution.
  • I see the advertising industry continuing to be an important engine of business growth and job creation.
  • I see the advertising industry as the storytellers that allow marketers to better inform the public and help businesses promote their brands and sell their products and services.
  • I see the advertising business working hard to do with less, while attracting and retaining the best and most creative talent.
  • I see the advertising industry needing to be fairly and reasonably compensated to do all that I just said.

The Way The Industry Sees It

I sat down with Neal Grossman, Chief Compensation Officer of TBWA Worldwide and Chief Operating Officer of TBWA\Chiat\Day’s Los Angeles office, to discuss the economic outlook and agency forecast for the industry in the year ahead.

There has been a great deal of press lately surrounding advertisers extending their payment terms.  What are your thoughts on this?

I don’t see this as anything new or as the sign of a new trend.  Larger advertisers in particular have for years been looking for ways to extend payment terms.  Aside from media spend, agency fees and production represent a significant portion of their remaining marketing spend.  Agencies, however, are not able to, nor should they have to, act as banks for their clients.  In terms of agency fees, we don’t have much flexibility in the payment of our own costs.  80% of our costs (such as staff costs, rent, taxes, etc.) are paid within 30 days or less and less than 7% are paid after 60 days.  To accept extended payment terms effectively is accepting a reduction in the agency’s profit margin and for smaller agencies it can create significant cash flow issues.  With smaller agencies, it could even put them out of business.  With regard to production companies, they are similarly situated where a significant portion of their costs are talent related and costs that need to be paid up front.

A lot has been said about value compensation in recent years and most advertisers seem to equate that with implementing some form of pay-for-performance.  Does this address value compensation as agencies see it?

While the adoption of pay-for-performance has become more common place, it’s not been meaningful because there is often not a significant and achievable upside.  The criteria is often subjective and we’ve seen examples where it’s been used as an excuse not to pay the agency, where junior clients are given equal weighting as senior clients in their evaluations of the agency and where procurement criteria related to cost savings and process are weighted more heavily than marketing criteria.  Further, a common way pay-for-performance criteria are scaled uses a minimum threshold of “meets expectations” before any portion of the bonus is earned.  And yet, most people’s expectations are that work be “above average.”  So, the scales are biased to begin with because “meets expectations” (above average) as a beginning threshold for earning a bonus might not yield any bonus for above average work, and 100% of the bonus is often not achieved even when the marketing results are exceptional.  As a result, pay-for-performance is generally not material and won’t be accepted by agencies as a substitute for base compensation they feel is inadequate.


Continue Reading A Candid Conversation on the Economic Outlook & Agency Midyear Forecast with TBWA\Chiat\Day’s Neal Grossman