2013 ANA. Trends in Agency Compensation, 16th Edition Survey Results. Value. Fees. ANA Survey Research. Commission Rates %

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1 ANA Survey Research 2013 ANA Trends in Agency Compensation, 16th Edition Survey Results $ Fees Commission Rates Value ANA surveys are based on topics identified by the ANA and its membership as critical issues and emerging trends that nearly all marketers face today. To access survey reports, please visit

2 Table of Contents Executive Summary... 3 Introduction and Methodology... 4 Definitions... 5 About the Respondents... 6 Section I: Method of Compensation... 7 Fee-Based Compensation Methods Continue to Dominate... 7 Labor-Based Fees Are on the Upswing... 8 Value-Based Compensation Models Have Not Taken Off as Predicted... 9 Fees Predominate with Larger Advertisers...10 Traditional Commissions More Likely to Be Used by Smaller Advertisers...11 Fee Methods of Compensation Dominate Across All Agency Types and Services Section II: Performance Incentives Use of Performance Incentives Has Increased Significantly in Larger Advertisers Use Performance Incentives Significantly More...14 Performance Incentives Have Increased Among All Agency Services...15 Two-Thirds Establish Performance Criteria on Company and Agency Measures...16 Agency Performance Is Measured by a Number of Different Metrics...17 An Increasing Number of Respondents Are Using a Risk-Reward Incentive Structure Almost Half Use Agency Profitability to Determine Agency Bonuses Almost Two-Thirds Indicate That Agency Performance Has Improved Section III: Agency Compensation Management and Change Significantly More Companies Use Procurement Team in Agency Compensation Review Almost Three-Quarters of Respondents Negotiate Agency Compensation Annually Agency Profitability Is a Strong Concern for Three-Quarters of Respondents Agency Profitability Is Acceptable to 61 Percent of Marketers There is a Three Percent Gap Between Marketer and Agency Definition of Acceptable Profits Over Three-Quarters of Respondents Are Satisfied with Their Current Compensation Method While Most Are Satisfied With Compensation, a Considerable Number Are Considering Change Cutting Costs Has Declined Significantly as a Reason for Change in Compensation Conclusion About the ANA Additional ANA Resources About the Author...31 Appendix A: Additional Data Charts Appendix B: Survey Firmographics Appendix C: Survey Questionnaire ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

3 Executive Summary Fees, particularly labor-based fees, are the most dominant method of compensation used today, according to the results of the ANA s Trends in Agency Compensation survey, which is now in its 16th edition. Fees are becoming so prevalent (used by 81 percent of respondents) that they are, in fact, increasing in popularity at the perceived expense of newer methods of compensation, such as value-based compensation and salescommission-based methodologies. This is somewhat surprising, as past editions of this survey have indicated that newer methodologies might start to take root among the marketing community. However, instead, it appears that performance incentives as a complement to fees are being increasingly employed. ANA members use of performance incentives with at least one of their agencies jumped to 61 percent in 2013 (from 46 percent in 2010). Three other key trends uncovered by the survey include: Cost-cutting as a driver of compensation change is abating somewhat since Roughly a third of respondents anticipate making some kind of change with regard to their agency compensation structure in the coming three years. However, this type of change is now primarily driven by a desire to tie agency compensation to performance, and secondarily by cost reduction considerations. Marketing procurement (or strategic sourcing) continues to be involved in reviewing and negotiating agency compensation. The involvement of a procurement/sourcing/purchasing team has increased significantly since the 2010 survey, from 56 percent to 82 percent. According to Terri Burns, strategic sourcing consultant at AFLAC, involving marketing procurement allows an organization to link agency deliverables to compensation more effectively. The goal is not to arbitrarily reduce costs; it is to ensure the maximum return for the marketing investments being made. Of those marketers using performance incentives, the survey showed an increase (up 15 percent since 2010) in the use of a risk-reward financial component. In this arrangement, the agency s basic fee (without incentives) is reduced for underperformance in exchange for a higher upside fee for meeting or exceeding the performance goals. 3 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

4 Introduction and Methodology The survey was conducted online during the first quarter of 2013 among a sample of 98 client-side marketers. Those 98 marketers represented 1,011 client-agency compensation agreements. Respondents were drawn from the membership of the ANA. Survey respondents have an average of 18 years of experience in the marketing/advertising industry. Triennially, for nearly 50 years, the ANA has fielded this unique and comprehensive agency compensation trend survey among client-side marketers. This is the 16th edition of this study, which offers agency compensation trend insight not found in any other report. David Beals, president and CEO of R3:JLB, worked with the ANA to analyze the findings of the research and presented the survey results at the ANA s Advertising Financial Management Conference in May The three key objectives of this study were as follows: To provide general industry background on broader agency compensation trends and practices not found in any other report a single source for the most current compensation trends information. To provide marketers a meaningful resource for comparing and assessing their individual compensation agreements and practices, and for all types of agency services. To serve as a baseline for predicting future industry arrangements and anticipating the direction of future change. Please note that some of the base sizes in this report are very small and, as such, should be considered directional in nature only. They are noted on the appropriate charts. 4 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

5 Definitions Survey respondents were asked to identify their primary method of agency compensation. The different methods were defined as follows: Commission fixed rate refers to when the agency is paid a fixed percentage of media billings and markup on production costs. Commission sliding scale refers to when the agency is paid a level of commission that varies with the level of client media spending. Fixed or Output-Based Fees are negotiated for a specific project or time period, and cannot vary. All media, production, and any other costs are billed at net, with no markup. Labor-Based Fee Compensation is when the agency fee is determined by the amount of labor time multiplied against a negotiated hourly labor rate (or a percentage of time methodology), i.e., the cost estimate of agency time/personnel to service the account. All media, production, and any other costs are billed at net, with no markup. Value-Based Fee is when the agency s fee is established based on the value, not the cost, of the services and work provided by the agency. Agency staff time, costs, and profits are not requested or reviewed as part of the fee negotiation. Sales Commission is when the agency is compensated a percentage of the sales for the brand(s) it is managing (e.g., the Procter & Gamble model). 5 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

6 About the Respondents Recreate PMS 6 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

7 Section I: Method of Agency Compensation Fee-Based Compensation Methods Continue to Dominate Fee-based methods of compensation continue to dominate, with 81 percent of the survey respondents employing some type of fee compensation. Other methods of compensation, which include the newer methods of value-based and sales commission, declined from 22 percent in 2010 to 14 percent in Traditional media commissions continue to be used by only a small number of respondents (five percent in 2013). Compensation Agreements by Form of Agreement Base: Sum of All Agency Agreements Among Total Sample Total Commission Total Fee Total Other Methods / Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. 7 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

8 Section I: Method of Agency Compensation Labor-Based Fees Are on the Upswing In looking more specifically at the types of compensation methods, it is the use of labor-based fees that is on the upswing, increasing significantly from 49 percent in 2010 to 65 percent in Output-based fees (fees that are negotiated for a specific project or time period, and cannot vary) declined slightly, from 20 percent to 15 percent. Fee-Based Compensation: 2000 to 2013 Base Sizes Vary by Agency Type Fixed or Output-Based Fee Labor-Based Fee Compensation Combination of Fixed and Labor-Based Fees CHAPTER ONE: ABOUT THE RESPONDENTS NA / Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. 8 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

9 Section I: Method of Agency Compensation Value-Based Compensation Models Have Not Taken Off as Predicted Of the other methods of compensation, use of sales commissions declined from 15 percent in 2010 to five percent in Value-based compensation received no responses in this survey. Our assessment is that value-based agency comp models take a significant amount of internal resources and time to handle and manage. The diversity of our brands, combined with the unique variations of need across those brands, makes placing a value on each piece of advertising delivered extremely time-consuming and labor- intensive. We believe that there are other, easier-to-manage ways Recreate PMS for a company with multiple brands to achieve high-quality, high-value advertising. Christine Eaton Senior Manager of Digital Marketing Strategic Sourcing General Mills Other Compensation: 2000 to 2013 Base Sizes Vary by Agency Type 25 Value-Based Fee Sales Commission Combination of Fees and Commissions Miscellaneous Other CHAPTER ONE: ABOUT THE RESPONDENTS / Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. 9 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

10 Section I: Method of Agency Compensation Fees Predominate with Larger Advertisers While fees are the predominant form of agency compensation regardless of the size of the advertiser, larger advertisers are much more likely to employ fee-based compensation. The larger the advertiser s spending, the more likely fees are to be employed, with 94 percent of those spending $500 million or more on advertising using fees as a compensation method. In addition, labor-based fees are far more likely to be employed by these larger spenders (86 percent versus only 34 percent of smaller advertisers). Compensation Method by Type of Advertiser Base Sizes Vary by Agency Type Commission Fee Other Methods Total Sample Under $30 MM CHAPTER ONE: ABOUT THE RESPONDENTS $30 MM < 100 MM $100 MM < 500 MM $500 MM or More Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. Compensation by Size of Advertiser: Fees Base Sizes Vary by Agency Type Fixed or Output-Based Fee Labor-Based Fee Compensation Combination of Fixed and Labor-Based Fees Total Sample Under $30 MM CHAPTER ONE: ABOUT THE RESPONDENTS $30 MM < 100 MM $100 MM < 500 MM 6 75 $500 MM or More Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. 10 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

11 Section I: Method of Agency Compensation Traditional Commissions More Likely to Be Used by Smaller Advertisers Traditional commissions are more likely to be employed by smaller advertisers, although it is still a far less popular method than fees. Smaller advertisers are significantly more likely to use a combination of fees and commissions (20 percent versus only two percent of large advertisers). In addition, the use of sliding scale commissions is only reported by smaller spenders (five percent of those spending under $30 million). Compensation by Size of Advertiser: Other Base Sizes Vary by Agency Type Value-Based Sales Commission Combination of Fees and Commissions Miscellaneous Other Total Sample 5 9 Under $30 MM 3 CHAPTER ONE: ABOUT THE RESPONDENTS $30 MM < 100 MM $100 MM < 500 MM $500 MM or More Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. Compensation by Size of Advertiser: Commissions Base Sizes Vary by Agency Type Commission Fixed Rates Commission Sliding Scale Total Sample 4 1 Under $30 MM CHAPTER ONE: ABOUT THE RESPONDENTS $30 MM < 100 MM $100 MM < 500 MM 7 $500 MM or More NA Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. 11 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

12 Section I: Method of Agency Compensation Fee Methods of Compensation Dominate Across All Agency Types and Services While the use of fee-based compensation dominates across all types of agencies, traditional commissions, either on their own or in combination with fees (as reported in the other category), are somewhat more likely to be employed for media agency services or full-service agency assignments (which typically include media services). Because media buyers at most agencies are buying on behalf of multiple clients, some marketers and their agencies find it easier to compensate the media buying function with a commission versus trying to accurately plan, track, and compensate for labor time with a fee. Compensation Method by Agency Service Total Commission Total Fees All Other Methods Base Sizes Vary by Agency Type Total for All Agreements Full-Service Advertising Creative Advertising 5 84 CHAPTER ONE: ABOUT THE RESPONDENTS Media Planning and/or Media Buying Direct Marketing Promotion/Event Marketing Interactive/Internet/Digital Multicultural Market Advertising Public Relations Strategic/Branding Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. 12 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

13 Section II: Performance Incentives Use of Performance Incentives Has Increased Significantly in 2013 The use of performance incentives flattened out in 2010, with just under half of the respondents indicating they employed incentives with at least one of their agencies. However, this number jumped up markedly, to 61 percent, in It is possible that marketers are gravitating to performance incentives versus the newer methods of compensation as a simpler and more precise way to tie at least some of their agency compensation to performance accountability. Incentives can be easily tailored to different types of agencies, especially as the capabilities and tools for measuring marketing communications performance have grown and become more sophisticated. Use of Performance Incentives Base: Total Sample / Q8. Regardless of the agency compensation method(s) you use, if you currently utilize performance-based incentives for any agency(ies) for a specific discipline, please check the box corresponding to that discipline. Select all that apply. 13 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

14 Section II: Performance Incentives Larger Advertisers Use Performance Incentives Significantly More Consistent with previous surveys, the use of performance incentives is far more common among the larger advertisers (from 80 percent to 100 percent). Smaller spenders are significantly less likely to use incentives (20 percent). This might be related to several factors. For example: A small marketing and agency compensation spend might not warrant the time to plan and manage incentives. Smaller marketers might be less able to afford marketing communications measurement tools. The budgets are too small to allow for the potential upside bonus payment to the agency. In addition, these types of incentives are most likely to be used by companies in the durables (100 percent) and packaged goods (89 percent) categories. Use of Performance Incentives by Size of Advertising Spend Base: Total Sample Total Sample Under $30 MM $30 MM < $100 MM $100 MM < $500 MM $500 MM or More Q8. Regardless of the agency compensation method(s) you use, if you currently utilize performance-based incentives for any agency(ies) for a specific discipline, please check the box corresponding to that discipline. Select all that apply. Use of Performance Incentives by Industry Base: Total Sample Total Sample Packaged Goods Consumer Durables B-to-B Services Other Q8. Regardless of the agency compensation method(s) you use, if you currently utilize performance-based incentives for any agency(ies) for a specific discipline, please check the box corresponding to that discipline. Select all that apply. 14 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

15 Section II: Performance Incentives Performance Incentives Have Increased Among All Agency Services The use of performance incentives has also become a more common practice for most types of agency services. Consistent with the 2010 survey, incentives are most likely to be used with creative agencies. But the use with all other types of agencies, except media, increased since the last survey. The reason for the decline in use with media agencies is unclear, as media performance is clearly measureable. Performance-Based Incentives Used for Each Agency Type Base: Those Who Use Respective Agency Type Use Incentives for Any Agency (Net) 61 Full-Service Advertising Creative Advertising Media Planning and/or Media Buying 24 Direct Marketing Promotion/Event Marketing Interactive/Internet/Digital Multicultural Market Advertising Public Relations Strategic/Branding 7 8 Q8. Regardless of the agency compensation method(s) you use, if you currently utilize performance-based incentives for any agency(ies) for a specific discipline, please check the box corresponding to that discipline. Select all that apply. 15 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

16 Section II: Performance Incentives Two-Thirds Establish Performance Criteria on Company and Agency Measures Among those companies who use performance criteria, 69 percent establish their performance criteria on both company and agency measures. This is relatively consistent with the 66 percent seen in Basis for Performance Incentives Agency Performance Only Company Performance Only Both Agency and Company Performance Base: (2013) 9* CHAPTER ONE: ABOUT THE RESPONDENTS 2006/ Q11. What is the main basis for your agency incentive compensation program? *Caution: Extremely Small Base Size 16 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

17 Section II: Performance Incentives Agency Performance Is Measured by a Number of Different Metrics Advertisers use a number of different metrics to measure their agencies performance. Agency performance reviews continue to be a key incentive criterion for most advertisers (75 percent). Brand awareness and sales goals are the next most commonly used metrics (54 percent and 48 percent respectively). The use of specific marketing communications metrics (brand awareness, brand perceptions, media performance goals, digital performance goals, etc.) increased relative to client sales and market share goals. It is possible that as marketers and agencies continue to gain experience with performance incentives, there has been increased emphasis put on criteria more directly affected by the agency s contributions. Performance Incentive Criteria Base: (2013) 9* Agency Performance Reviews Sales Goals Market Share Goals Brand/Ad Awareness 31 CHAPTER ONE: ABOUT THE RESPONDENTS 54 Brand Perceptions Profit Goals Media Performance Goals Copy Test Results Digital/Online Communications Goals Other Criteria Q12. Which of the criteria listed in the column(s) below do you use to evaluate agency performance for your agency incentive program? *Caution: Extremely Small Base Size 17 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

18 Section II: Performance Incentives An Increasing Number of Respondents Are Using a Risk-Reward Incentive Structure Over half of respondents (56 percent) continue to structure their agency incentive as a pure upside bonus on top of the negotiated base compensation. However, an increasing number are structuring in risk-reward fashion (up 15 percent since 2010), where some of the agency compensation is at risk if performance goals are not met in exchange for upside revenue reward if the agency meets or exceeds the goals. A small number of respondents reduce their agency s base compensation, with the bonus allowing the agency to earn back the negotiated base for meeting or exceeding goals. Financial Structure of Bonus Base: Bonus is all earn back ; agency base revenue lowered and can be earned back through performance CHAPTER ONE: ABOUT THE RESPONDENTS 6 8 Risk-reward structure; some agency revenue at risk in exchange for upside reward Bonus is all upside, above and beyond the agency s base revenue Q9. You indicated that your firm utilizes performance-based incentives. Taking all your agency relationships as a whole, which of the following best characterizes your most prevalent practice in structuring the incentives? 18 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

19 Section II: Performance Incentives Almost Half Use Agency Profitability to Determine Agency Bonuses Of those respondents who employ performance incentives, nearly half (47 percent) link the agency bonus to an agency profitability target on the assignment, consistent with the last two Trends in Agency Compensation surveys (2010 and 2006/07). And for those respondents who do structure incentives in a risk-reward fashion, the targeted agency profitability averages nine percent at the low end (where the agency has underperformed versus goals), ranging to 19 percent at the high end (where the agency has met or exceeded the performance goals). This is also relatively consistent with previous survey results. Performance-Based Incentive Directly Linked to Profitablility Base: Utilize Performance-Based Incentives / Q13. In general, for all agencies for which you utilize performance-based incentives, are the incentive compensation programs directly linked to agency profitability on your account? Profit Margins When Incentives Are Linked to Profitability Base: Sample of Agency Agreements Where Incentives Linked to Profitability 25 Minimum Compensation Typical Compensation Maximum Compensation / Q15. Please indicate the profit margin earned for each of the following scenarios, for each agency type where performance incentives are linked to profitability. 19 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

20 Section II: Performance Incentives Almost Two-Thirds Indicate That Agency Performance Has Improved A majority of respondents (62 percent) who use performance incentives indicate that they have improved agency performance. This has declined slightly from the 2010 survey (66 percent), with a corresponding small increase in respondents who claim they have resulted in poorer agency performance. The great majority of respondents (80 percent) who use performance incentives plan to continue doing so, declining slightly from 2010 (85 percent). Although small, the number of respondents who plan on discontinuing incentives increased to eight percent in Time will tell whether this is an early sign of growing dissatisfaction with incentive plans, or simply anomalous to the 2013 survey period. Impact of Incentives on Performance Base: 15* Improved agency performance Poorer agency performance No change in agency performance Don't know/not sure CHAPTER 29 ONE: ABOUT THE 31 RESPONDENTS / Q16. For the agency(ies) for which you use incentive compensation, which statement do you believe has been the overall result of that form of compensation? Select one for each agency(ies) identified. *Caution: Very Small Base Size Future Use of Incentives Base: 25 Will continue to use Will not continue to use Don't know/not sure CHAPTER ONE: ABOUT THE RESPONDENTS / Q17. For the following question, think in terms of your company s predominant practice across all of your relevant agency relationships. Do you plan to continue utilizing agency incentive compensation in the future? 20 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

21 Section III: Agency Compensation and Management Change Significantly More Companies Use Procurement Team in Agency Compensation Reviews While a number of different corporate groups are involved in the review and negotiation of agency costs and compensation, the involvement of a procurement/sourcing/purchasing department has increased significantly since the last survey (from 56 percent to 82 percent), as has the involvement of brand management (from 47 percent to 67 percent). It allows an organization to link agency deliverables to compensation more effectively. The goal is not to arbitrarily reduce costs; it is to ensure the maximum return for the marketing investments being made. Agencies should be rewarded for outstanding work. However, they are not entitled to fees that were genuinely not earned through a positive impact on business objectives. Procurement can be extremely helpful in navigating the potential subjectivity surrounding agency performance by more clearly connecting it to desired outcomes. Terri Burns Strategic Sourcing Consultant AFLAC Review of Agency Costs: Team Involvement Base: Brand Management Advertising Department CHAPTER ONE: ABOUT THE RESPONDENTS 51 Corporate Senior Management 52 Procurement/Sourcing/Purchasing CFO/Finance Department Other 7 15 PQ1. Who in your organization is involved in each of the following areas? 21 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

22 Section III: Agency Compensation and Management Change Almost Three-Quarters of Respondents Negotiate Agency Compensation Annually Most advertisers (72 percent) negotiate their agency compensation on an annual basis, and this has become the dominant practice over the last decade. This is up from the previous two surveys at above 60 percent. The next largest group is those who negotiate when required at 26 percent. Frequency of Compensation Negotiation Base: Total Sample / When required Annually, for the following year Other Never NA NA 6 1 NA NA Don't know/not sure NA NA NA NA 5 NA Q22. How often does agency compensation negotiation typically occur? 22 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

23 Section III: Agency Compensation and Management Change Agency Profitability Is a Strong Concern for Three-Quarters of Respondents A number of trends not the least of which are the growth of labor-based fees, the growing role of marketing procurement, and the increasing demand for marketing/advertising performance and cost accountability have led to increasing scrutiny of agency costs and profits. Consistent with previous surveys, there is a belief held by about three-quarters of survey respondents that advertisers should be concerned about ensuring that their agencies are profitably working on their behalf. Advertiser Attitude Toward Agency Profitability Base: (2013) Agency profitability on our account is not our concern; it is a problem for agency management. 60 We believe our account must be profitable to our agencies and we will work with them to make sure it is / Q26. Which of the following statements describes your general attitudes about agency account profitability? 23 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

24 Section III: Agency Compensation and Management Change Level of Agency Profitability Is Acceptable to 61 Percent of Marketers Over time, it is clear that survey respondents have become more accepting of the level of agency profitability on their account. Whether agency profit goals are clearly understood by the marketer or not, well over half the survey respondents believe their agency profitability is acceptable (61 percent). General Attitude Toward Agency Profit Goals Base: Total Sample / Our agencies define their profit goals clearly, and they are generally acceptable. Our agencies do not define their profit goals clearly, but we believe they are generally acceptable. We and our agencies do not discuss their profit goals on our account. It's not clear what our agencies believe a fair profit to be. Our agencies do not define their profit goals clearly, but we believe they are generally excessive. Our agencies define their profit goals clearly, and they are generally excessive NA NA NA NA NA NA NA NA NA NA Don't know/no answer 3 7 NA NA NA NA Q27. Which of the following statements best describes your general understanding and attitude about your agency profit goals? 24 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

25 Section III: Agency Compensation and Management Change There Is a Three Percent Gap Between Marketer and Agency Definition of Acceptable Profits The average reported pre-tax profit margin held at 14 percent, exactly the same as the last two surveys. The profit level considered acceptable to the advertiser increased from 12 percent to 14 percent. The 12 percent acceptable margin reported in 2010 might well have been a function of the poor economic climate at the time. What the respondents claimed their agencies were asking for in terms of an acceptable profit increased to an average of 17 percent, which demonstrates a three percent gap between what clients deem acceptable profit margin for agencies and what the agencies themselves see as acceptable. Please note, however, that the sample sizes are small and, as such, the findings are directional in nature only. Agency Pre-Tax Profits: Reported Versus Client and Agency Expectation Base: (2013) 46 Profit Margin Reported by Agency (Among Those Whose Agencies Report Profit) 2006/ Profit Margin Considered Acceptable by Client (Among All Respondents) 2006/ Agency Request for Acceptable Profit Margin (Among All Respondents) 2006/07 Under NA 2 3 NA 1 1 NA NA NA NA NA NA NA NA or more NA NA NA NA NA NA NA NA NA Don't know/not sure Average Profit () Q31. If an agency reports its profitability on your account, what is its reported percent pre-tax margin (for the most recent year)? Q32. What do you, as an end client, consider a reasonable and acceptable profit margin for your agency? Q33. What do your agencies request as a reasonable and acceptable profit margin for their handling of your account? 25 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

26 Section III: Agency Compensation and Management Change Over Three-Quarters of Respondents Are Satisfied with Their Current Compensation Method Respondents were generally satisfied with their current compensation method, a finding which mirrors the past two editions of the Trends in Agency Compensation survey. Specifically: One-quarter of the survey respondents indicated that they were very satisfied with their current agency compensation method, while about 60 percent were somewhat satisfied. Satisfaction with the compensation for promotion/event and interactive/internet/digital agencies is somewhat lower than for the other agency types, but still remains at relatively high levels. Overall Satisfaction with Current Compensation Method Base: 36 Very Satisfied Somewhat Satisfied Not Very Satisfied Not at All Satisfied CHAPTER ONE: ABOUT THE RESPONDENTS / Q37. How satisfied would you say you are with your current agency compensation agreements? Satisfaction with Current Compensation Base Sizes Vary 100 Very Satisfied Somewhat Satisfied Total CHAPTER ONE: 50 ABOUT THE RESPONDENTS Full-Service Advertising 14 Creative Advertising 25 Media Planning and/ or Media Buying Direct Marketing Promotion/ Event Marketing Interactive/ Multicultural Internet/Digital Market Advertising Public Relations Strategic/ Branding Q37. How satisfied would you say you are with your current agency compensation agreements? 26 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

27 Section III: Agency Compensation and Management Change While Most Are Satisfied With Compensation, a Considerable Number Are Considering Change Despite the fact that most respondents claim to be satisfied with their current compensation approaches, anywhere from one-third to one-half are considering a change to the compensation for their different agency types. This trend is most apparent in creative, media planning and buying, promotions/event marketing, and interactive/internet/digital agencies. Likelihood of Changing Current Compensation Approach in Next 12 Months Base Sizes Vary Very Likely Somewhat Likely Total CHAPTER 28 ONE: ABOUT THE RESPONDENTS Full-Service Advertising Creative Advertising 19 Media Planning and/or Media Buying 10 Direct Marketing 7 6 Promotion/ Interactive/ Event Marketing Internet/Ddigital Multicultural Market Advertising 3 Public Relations 14 Strategic/ Branding Q38. How likely do you believe you are to change the current compensation approach with your agencies in the next 12 months? 27 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

28 Section III: Agency Compensation and Management Change Cutting Costs Has Declined Significantly as a Reason for Change in Compensation Almost 40 percent of those surveyed indicate that a change to the compensation method is driven by a desire to improve agency performance, a small increase versus the previous survey. Cost cutting was mentioned second most often at 27 percent, but this is a significant decline from the previous survey, where it was over 40 percent. One should take into account that the previous survey was conducted during a much more difficult economic environment (2010). Other reasons are given by a significant percentage (27 percent) of respondents; those reasons represent a diverse group of factors, with many related to agency changes or consolidation. Reason for Changing Compensation Approach Base: Cut Costs CHAPTER ONE: ABOUT THE RESPONDENTS Improve Agency Performance Simplify Administration 10 6 Other Reason Q39. You indicated that you are very or somewhat likely to change the compensation method for at least one of your agency types in the next 12 months. What would you say is your predominant reason/motivation for changing your compensation approach? 28 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

29 Conclusion This study, along with other recent ANA survey compensation work, suggests that a fundamental shift may be taking place, with advertisers focusing more on performance than cost when structuring and negotiating agency compensation. Key trends that emerged in the 2013 Trends in Agency Compensation Survey mirror trends from the ANA s 2012 Global Agency Compensation Survey and 2011 Digital Agency Compensation Survey, 4th edition. Specifically, across all three surveys: While fees remain the dominant form of compensation versus newer methods of compensation (e.g., value-based and sales commission), there has been a strong increase in both interest in and the use of performance incentives as an element of the fee structure. It is also interesting to note that while cost-cutting was a key driver of compensation change during the recent economic downturn (when the digital and global surveys were fielded), it may now be abating based on this latest survey. This year, performance considerations replaced cost considerations as a primary change agent, and it will be interesting to see if that becomes a true trend over the next few years. Based on this data, we anticipate that agency performance and performance incentives will continue to play a large role in compensation conversations leading up to the next survey in Specifically: The use of performance incentives will continue to gain favor, but how these incentives are structured will remain quite different from marketer to marketer. A one size fits all approach to performance incentives is not anticipated, as the performance goals and relationship dynamics vary greatly from marketer to marketer and across agency types. It is expected that there will continue to be a wide variety of performance metrics being employed. There will continue to be a greater compensation focus on agency performance than costs. Cost efficiency will never go away as a consideration. However, as more marketers engage with their agencies on performance incentives, and as the procurement discipline at many companies continues to grow and become more sophisticated about marketing goals (and their agencies contributions to those goals), the growth of brands and businesses will take precedence in the development of agency compensation plans. The increased use of performance incentives will lead to more experimentation and adoption of newer methods of compensation. Based on this year s results, it would be hard to predict any big upsurge in the use of value-based fees and sales commissions, yet we would not be surprised by a modest rebound. The transition from traditional media commissions to fees, and the adoption of performance incentives, also started very slowly before taking off. The more that marketers and their agencies focus their compensation discussions on desired performance, and not just costs, the more this will set the stage for newer methods to be tried and accepted. 29 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

30 About the ANA Founded in 1910, the ANA (Association of National Advertisers) leads the marketing community by providing its members with insights, collaboration, and advocacy. ANA s membership includes more than 500 companies with 10,000 brands that collectively spend over $250 billion in marketing and advertising. The ANA strives to communicate marketing best practices, lead industry initiatives, influence industry practices, manage industry affairs, and advance, promote, and protect all advertisers and marketers. For more information, visit follow us on Twitter, and like us on Facebook. Additional ANA Resources Marketers are encouraged to tap into the various resources of the ANA to learn more about the marketing industry: ANA Marketing Knowledge Center: To find articles and presentations on a range of marketing topics, visit or to submit a customized information request to the Insights Team, visit ANA Survey Research: ANA surveys are based on topics identified by the ANA and its membership as critical issues and emerging trends that nearly all marketers face today. To access survey reports, which allow you to tap into members-only research and perspective, please visit ANA Insight Briefs: ANA Insight Briefs are compilations of the ANA s best resources on a given subject. Filled with charts, quotes, and client-side marketer case studies, they provide today s busy marketer with top-line information on the hottest topics in marketing. For more information, please visit ANA Committees: ANA committees offer members a forum for sharing best practices, the opportunity for peer-to-peer networking and benchmarking, and the ability to learn about new industry developments through the exchange of ideas with guest speakers and fellow committee members. ANA committees also often take leadership roles in shaping industry issues. For more on ANA committees, please go to ANA Conferences: The ANA helps the marketing community stay abreast of cutting-edge trends and best practices via a comprehensive calendar of national conferences. In addition, the ANA goes on the road to offer members a portfolio of peer-to-peer gatherings that afford opportunities to discuss special needs in a convenient, informal setting. Find more information at ANA School of Marketing: The ANA School of Marketing offers marketers on-site training sessions and full-day classes that help marketers grow as brand builders. Find more information at 30 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

31 About the Author David Beals is president and CEO of R3:JLB, the North American unit of R3 Worldwide. R3 is a global consultancy whose mission is to help clients improve the effectiveness and efficiency of their marketing agency relationships. Mr. Beals has provided agency review, remuneration, and client-agency relationship evaluation counsel to a number of leading marketers, including Walmart, GM, the U.S. Army, Whirlpool, SC Johnson, Cisco Systems, Kellogg s, Microsoft, Johnson & Johnson, Nissan, and Allstate. Mr. Beals joined Jones Lundin Associates in 1999 after a 19-year career at the DDB agency, where he worked on major accounts such as McDonald s, General Mills, Anheuser-Busch, and Campbell Soup Company. He purchased the company in 2000, renaming it Jones Lundin Beals, and in 2010 merged with long-time alliance partner R3, based in Beijing and Singapore, to form R3:JLB and offer consulting services on a global scale. Mr. Beals has authored the last four ANA Trends in Agency Compensation reports, as well as the ANA Insight Briefs Structuring Effective Agency Performance Evaluations and Compensation Guidelines for Today s Agency World. He is a regular contributor and participant at ANA conferences and committees on the subjects of agency compensation and relationship management. Mr. Beals received a B.A. in International Affairs from the University of Colorado, and a master s degree in International Management from the American Graduate School of International Management. 31 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

32 Appendix A: Additional Data Charts About the Respondents Sample By 2013 Advertising Spend Base: 29 (Total Answering) Under $30 Million 34 $500 Million or More 17 $100 Million Under $500 Million 17 $30 Million Under $100 Million 31 PQ3B. What is your company s planned 2013 advertising budget? Sample By Type of Advertiser Base: 35 (Total Answering) Consumer Durables 8 Other 17 Services 40 Business-to- Business 6 Packaged Goods 29 PQ2B. How would you best classify your business industry vertical? 32 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

33 Sample Composition by Type of Advertiser Base: 68 (Total Sample) / Packaged Goods 41 NA Consumer Durables 10 NA Business-to-Business 9 NA Services 11 NA Other 14 NA PQ2B. How would you best classify your business industry vertical? Method of Compensation Traditional Commission Compensation: 2000 to 2013 Base Sizes Vary by Agency Type 25 Commission Fixed Rates Commission Sliding Scale CHAPTER ONE: ABOUT THE RESPONDENTS / Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. 33 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

34 Compensation Agreements by Form of Agreement: Packaged Goods Firms Base: Sum of All Agency Agreements Among Packaged Goods Firms Total Commission Total Fee Total Other Methods / Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. Compensation Agreements by Form of Agreement: Consumer Durables Base: Sum of All Agency Agreements Among Consumer Durables Firms* Total Commission Total Fee Total Other Methods / Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. *Note: Base size is extremely small (less than 10) 34 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

35 Compensation Agreements by Form of Agreement: B-to-B Firms Base: Sum of All Agency Agreements Among Business-to-Business Firms* 100 Total Commission Total Fee Total Other Methods / Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. *Note: Base size is extremely small (less than 10) Compensation Agreements by Form of Agreement: Service Firms Base: Sum of All Agency Agreements Among Service Firms Total Commission Total Fee Total Other Methods / Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. 35 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

36 Distribution of Compensation Methods by Type of Agency Service: 2013 (Read Percentages Across) Commission- Based Fee-Based All Other Methods Total Number of Agreements Fixed Sliding Scale Fixed or Output- Based Fee Labor-Based Fee Compensation Combo of Fixed and Labor-Based Fees Value-Based Fee Sales Commission Combo of Fees and Commission Misc. Other Base: Total Sample # Total for All Agreements NA NA 5 9 NA Full-Service Advertising NA NA 8 11 NA Creative Advertising NA Media Planning and/or Media Buying NA 7 12 NA Direct Marketing NA 3 9 NA Promotion/Event Marketing NA 7 13 NA Interactive/Internet/Digital NA 5 9 NA Multicultural Market Advertising NA 7 9 NA Public Relations NA 4 8 NA Strategic/Branding NA 7 13 NA Q2. For each discipline/agency you use, please enter the number of each type compensated by each of the available compensation methods. Satisfaction with Current Compensation Method Base: Weighted Average of Total Number of Agency Types Answered For Not at All Satisfied Not Very Satisfied Somewhat Satisfied Very Satisfied / Q37. How satisfied would you say you are with your current agency compensation agreements? 36 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition

37 Agency Compensation Management and Change Negotiation of Agency Compensation: Team Involvement Base: Brand Management Advertising Department CHAPTER ONE: ABOUT THE RESPONDENTS Corporate Senior Management Procurement/Sourcing/Purchasing CFO/Finance Department Other 7 21 PQ1. Who in your organization is involved in each of the following areas? 37 ANA Survey Research: 2013 Trends in Agency Compensation, 16th Edition