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1、Decoding Compensation Models&Implementing the Right ModelApril 2024Decoding Compensation Models&Implementing the Right Model|2I.The Genesis of the Task ForceII.Challenges in Transitioning to a New Compensation ModelIII.Mutually Beneficial Compensation MethodologiesIV.Categorizing and Standardizing N

2、aming Conventions of Models A.Output Models1.Fixed Price Proposals2.Pre-Negotiated Price List3.Subscription Pricing4.CommissionB.Input Models1.Hourly Rates2.Cost-Plus ModelC.Outcome Models Performance Compensation1.Incentive CompensationD.Hybrid ModelsV.Evaluating the Right Model for an EngagementVI

3、.Characteristics of a Good Compensation SystemVII.Strategies for a Successful Transition or ImplementationVIII.SummaryIX.Task Force Members3455 661014161818192222272929303132Table of ContentsDecoding Compensation Models&Implementing the Right Model|3Marketing has changed dramatically over the last d

4、ecade,but agency compensation models have predominantly remained static and often fail to align with the growing complexity of the industry or with the objectives of the marketers they serve.While agencies and advertisers are adapting and evolving how they work together,compensation structures have

5、not kept pace with the rapid industry changes.Some agencies and advertisers have fully converted to new models,others now use hybrid models.However,the majority of agencies and advertisers are only starting to consider new approaches,which incorporate input,output,and outcome-based models according

6、to the ANAs Trends in Agency Compensation,Section IV:RESPONDENTS FUTURE PLANS FOR AGENCY COMPENSATION(page 19).In response to this issue,the 4As and the ANA established a collaborative task force to share insights,establish a common nomenclature to describe the existing compensation methods,inform s

7、takeholders and advocate for exploring different approaches.The goal of this paper is to inspire agencies and marketers to venture beyond their current compensation arrangements,help remove obstacles,and employ models that reflect the dynamics of todays industry,ultimately enhancing relationships an

8、d delivering positive impacts on business outcomes for both agencies and advertisers.According to a recent survey by the 4As in Q1 2024,Fixed Fee emerged as the most utilized compensation model among the 149 participants surveyed(72 percent independents/28 percent network-owned)in both project and r

9、etainer based relationships.I.The Genesis of the Task ForceDecoding Compensation Models&Implementing the Right Model|4Navigating the unknown is never a straightforward endeavor.In the initial discussions of the task force,the predominant theme of changing models revolved around the apprehension and

10、uncertainty associated with the lack of established frameworks,standardization,and the lack of historical benchmarks-making it difficult to measure and compare different ways of paying an agency.The concerns expressed by the members included potential financial risk,operationalizing anything new and

11、 the cultural changes needed to try something new.Dismantling an existing structure becomes an onerous task when long established arrangements are firmly in place,making it a significant investment to disentangle the operational intricacies.The alignment of organizations,the time required for implem

12、enting and adopting a new model on both sides,and various other factors demand leadership.These include considerations such as evaluating potential investments,determining(ROI),assessing organizational impact by both sides,measuring the benefit,and the willingness to let go of the familiar frame of

13、reference,which can make it difficult to compare prices when models change.However,the potential benefits of reshaping the relationship into a more strategic partnership and reimagining what is achievable(akin to moving from desktop computers to cloud computing)can outweigh the challenges.Like all s

14、ubstantial transformations,success is entirely dependent on achieving alignment among all of the key parties in this case the agency,marketer,and marketing procurement.II.Challenges in Transitioning to a New Compensation ModelDecoding Compensation Models&Implementing the Right Model|5A compensation

15、methodology should be clearly defined,support the advertisers marketing goals,be easy to manage,and contribute to marketing initiatives that generate overall value for the marketers enterprise.The compensation structure should effectively support the recruitment of the necessary talent required to a

16、ddress the marketers business needs.Above all,it should align with the mutual interests of both the agency and the marketer and be fair to both parties.Fair compensation methodologies promote a healthy and productive working relationship and fosters an environment where both advertisers and agencies

17、 can thrive resulting in a win-win scenario.We strongly encourage agencies and marketers to embrace experimentation.Begin with smaller projects or engagements to test and learn from various structures.Be prepared for setbacks,as they often yield valuable insights that can guide your journey towards

18、more effective practices.Initial task force conversations immediately revealed the need for agreement on the various types of models in use and the naming conventions for the models being reviewed.In every instance,a model or its components could go by multiple names,which can create confusion when

19、exploring new approaches.For the purposes of this paper weve categorized these models into three types:The sections of this paper follow these three categories and each section aims to standardize the model name while referencing the other names commonly used.III.Mutually Beneficial Compensation Met

20、hodologiesIV.Categorizing and Standardizing Naming Conventions of ModelsOutput-basedInput-basedPerformance-basedDecoding Compensation Models&Implementing the Right Model|6Proposed Common Name(s)Names in Use(AKA)Additional CharacteristicsFixed PricingFirm BidGuaranteed PriceProject PricePhase PriceSp

21、rint PriceMay include a reconciliation of actual deliverables.These models are characterized by advertisers paying a set fee,based on an expected set of outputs or deliverables.Several approaches are used for output-based pricing with the primary ones listed below:Description:A negotiated price for

22、a defined set of deliverables.The fixed price for the agreed work remains constant regardless of the time,effort,or resources invested by the agency to fulfill the requirements.Best Application:The fixed price model is useful for projects with clearly defined deliverables,where the scope can be tigh

23、tly controlled,and risks are largely manageable by the agency.It works well when the goal is cost control,timely and effective delivery,and minimizing administrative burden for both parties.This model is highly useful when theres trust between the agency and advertiser for delivering outstanding wor

24、k and results.Additionally,advertisers looking for greater flexibility with multiple agencies find the fixed price model appealing.Strategic Importance to the Brand:Assess how critical the project is to the advertisers overall brand strategy.Determine if the project aligns with the advertisers long-

25、term goals and vision Long Term Value Creation:Consider the potential impact of the project on the advertisers business growth and sustainability.Calculate the projected value the work will bring over an extended period of time.Specialized Expertise Required:Evaluate the unique skills and expertise

26、needed to execute the project effectively.Consider if the agency possesses specialized knowledge that sets them apart.Core Components:A well-structured fixed priced compensation plan should consider both value to the advertiser,complexity,and resource needs of the agency to ensure fair pricing.By ca

27、refully assessing the value the agency brings to the advertiser and the pricing variables associated with execution,both parties can establish a mutually agreed price that aligns with the projects goals.Considerations an agency should use when determining a Fixed Price Proposal:A.Category 1:Output-b

28、ased Models1.Fixed Price:Value Factors*:Decoding Compensation Models&Implementing the Right Model|7 Talent Level/Expertise:Determine the skill level and expertise required from the team members.Assess the cost of hiring or retaining such specialized talent.Scope Complexity:Break down the project sco

29、pe into various tasks and complexities.Estimate the resources and effort needed for each aspect of the project.Resource Requirements:Calculate the number of team members,tools,and technology requirements needed for successful execution.Factor in both direct and indirect costs.Client Responsiveness:C

30、onsider the responsiveness of the advertiser in providing necessary information and approvals as delays can affect project timelines and costs.Size and Duration of Assignment:Evaluate the scale of the project in terms of deliverables and reach.Estimate the projects timeline and duration.Lengthy or l

31、arger projects might require more resources and effort.Longer projects may require ongoing resource allocation and management.Decision-Making Process:Consider the complexity of decision-making within the advertisers organization.Unknowns and Variables:Account for uncertainties and potential risks th

32、at might arise during the project.Allocate a contingency budget to handle unexpected challenges.Qualifications of the Relationship/Partnership:Consider the history and experience with the advertiser.Consider the agencys track record in delivering successful projects.Ensure the deliverables are clear

33、ly defined and agreed upon by both parties.Scoring System:Use a rating and weighting system to assign scores that can be used to categorize projects into different pricing tiers.Value-Adjusted Pricing:Add or deduct from the base pricing using the value factors identified.Pricing Tiers:Create pricing

34、 tiers based on the type of project and expected value to the advertiser.Negotiation and Flexibility:While the pricing may be fixed,allow some flexibility for requirement changes while ensuring that the overall value considerations are maintainedPrice Factors*:How to Calculate:*Price and Value Facto

35、rs created by Tim Williams of the Ignition Consulting GroupDecoding Compensation Models&Implementing the Right Model|8ExampleOnce a fee for the project is calculated,offering multiple pricing options,helps the advertiser understand the context of the proposal and choose what works best.Decoding Comp

36、ensation Models&Implementing the Right Model|9Pros and ConsProsConsThe pricing is based on the complexity of the advertisers needs rather than the time it takes to solve them,thus encouraging the agency to focus on finding effective and efficient solutions.A lot of time is spent on scope definition,

37、constant scope management and potentially frequent change ordersThe Fixed Price model encourages a clear definition of the scope of work and deliverables,reducing misunderstandings and scope creep during the project.The absence of standardized benchmark data poses challenges for advertisers seeking

38、to benchmark fixed-price deliverables against industry standards.By providing a fixed price,discussions about agency overhead and margins are minimized,streamlining the negotiation and agreement processes.Shifting from traditional hourly rates to a fixed price model requires training and a change in

39、 mindset for both agency staff and advertisers.It may take time to educate all parties involved and adjust to the new approach.The model emphasizes achieving business objectives and outcomes,aligning the agencys efforts with the advertisers goals.Unlike some other models it is not tied to specific a

40、dvertising channels,giving both the agency and the advertiser the flexibility to choose the best channels to achieve the desired outcomes.If the project requirements evolve significantly over time,adjusting the fixed price accordingly may pose challenges,potentially affecting the projects financial

41、viability.The pricing structure shifts the focus from who is performing the work to what needs to be done to achieve the desired results,promoting a results-oriented approach.In a fixed-price agency compensation model,balancing deliverables,time,and unanticipated changes becomes particularly critica

42、l.Ensuring that the scope is well-defined,timelines are managed effectively,and changes are incorporated promptly,while maintaining the agreed-upon compensation structure are keys to success.To help navigate this model:Develop a comprehensive and detailed SOW with phasesBuild a scope tracker to trac

43、k progress against the deliverables.Track deliverables and activities,not hours Decoding Compensation Models&Implementing the Right Model|10Proposed Common Name(s)Names in Use(AKA)Additional CharacteristicsPre-Negotiated Price ListAsset PriceDeliverable PriceMenu PriceOutput PriceProduct PriceA menu

44、 of assets/outputs and may be characterized by complexity.Description:A negotiated price for a defined set of deliverables.The fixed price for the agreed work remains constant regardless of the time,effort,or resources invested by the agency to fulfill the requirements.Agency and Advertiser define l

45、ist of outputs required.A list of outputs by channel or other way to categorize the work that is required to service the business.If available,start with historical deliverables and the amount paid to the agency in the past.Agency and Marketer define descriptions and assumptions of the work.After th

46、e deliverables are agreed upon,both parties should collaborate on defining descriptions of the outputs and any assumptions(e.g.,number of rounds,reviews,and versions;fidelity of the output;level of finish of the produced work;2D renders,3D renders)Align on output pricing.Agency creates prices for ea

47、ch deliverable which will consider a variety of factors including resource costs and value factors.Other factors may include volume and frequency,likely time savings,increased efficiency,quality,convenience or impact on sales.Typically,pricing will correlate to the level of complexity(e.g.,easy,mode

48、rate,or complex).These classifications can be quite subjective so its important to align on principles that allow for a constructive dialogue about the complexity of a project.Other considerations may include premium pricing options for accelerated timelines and quick-turn delivery.2.Pre-negotiated

49、Price List:Best ApplicationHigh Demand or Consistent Demand:Used for high volume and repeatable products and/or services that are configured and priced to scale easily.Core Components Catalog or Menu of Outputs The asset specifications and prices will be negotiated,published,and made available for a

50、dvertisers.Well-Articulated Descriptions and Assumptions Inherent in the model are thorough descriptions of the products and services included in the pricing and any assumptions made to ensure both parties are clear on what is being delivered.See example below:How to CalculateDecoding Compensation M

51、odels&Implementing the Right Model|11Define Ways of Working.Once both parties have aligned to a menu of outputs and descriptions,documenting the ways of working between both parties is critical for success.A way of working document or service level agreement(SLA)provides clarity and guardrails aroun

52、d the governance of the model.Topics that may be covered:1.Briefing process2.Project cancellation process3.How to manage incremental rounds of review4.Change management process5.Stakeholder review and approval process 6.Process for agreeing on prices for new deliverables7.Approvals and legal clearan

53、ce process8.Third-party coordination9.Define how ad hoc work(outside price list)will be handledTest Pricing Against Baseline.A testing period should be agreed upon for select products and markets.A comparison between old and new pricing should be reviewed with the results analyzed to identify any si

54、gnificant variances.Both parties will explore various options,with the goal of getting closer to their respective target pricing.Adjustments may be needed to the ways of working or pricing to achieve acceptable pricing.Decoding Compensation Models&Implementing the Right Model|12AssetDescription/Comp

55、onentsTelevision ad from conception through post production=$XPlanning:Basic TV campaign planning session to discuss creative and strategic approach.Output as a document of five to 10 pages with treatment examples.Research:Field research into multiple customer/user sets in multiple markets.Output as

56、 a document of 10 to 20 pages.Creative Concept:Creative concepting sprints involving,strategy,creative team,and design to develop a unique look and feel for TVC campaign.Output as series of concept boards/creative territories(up to three).Assumes up to three rounds of creative revisions once a maste

57、r is chosen.Script Development:Script produced for a short form TV spot,based on a mix of new and existing creative direction/established campaign footage.Three scripts;client chooses one.Assumes up to three rounds of creative revisions to a chosen script.Storyboarding:Production of a single storybo

58、ard for a 30 second film/animation with copy and art direction annotation.Assumes three rounds of edits/revisions to storyboard layout.Pre-Production:Pre-production exercise for a TV shoot suitable for a single market campaign.Includes three or four creative production options(a mix of known and unk

59、nown suppliers/3rd parties/stakeholders).Assume a 30-second TVC with cutdowns with five second CG sequence.Production:Two-day filming session with full agency team.Includes hire of venue/third-party suppliers and talent management.Assume one location,covering four set-ups and four talent for a 30-se

60、cond TVC.Post-Production:Detailed post production phase.Can include very complex/bespoke graphics treatments(including CG builds),full grade online work.Assume for a 30-second TVC with five-second CG sequence.Assumes up to three rounds of creative edits.ExampleA recommended approach from moving from

61、 an old model to an output model is to classify prior years deliverables into discrete categories and defined deliverables.The advertiser can easily choose the needed assets using this method.This model provides the marketer more flexibility to tailor the scope to the changing needs of the business

62、with clarity about how much the agency will be paid.Below is an example of a commercial production asset:Decoding Compensation Models&Implementing the Right Model|13ProsConsPrice visibility:Pre-negotiated list provides visibility on the cost of each deliverable(directly ties agency compensation to t

63、he deliverables and output).Time and training are needed.Requires defined responsibilities to ensure detailed scopes are managed appropriately.After the price has been agreed upon,project pricing provides visibility for budgeting purposes.Menu pricing needs to have strict assumptions that clearly de

64、fine all roles in the process,including response times and approval levels to provide guardrails for the model.Specificity is required if the advertiser wants more focus on individual project statements of work versus annual staff plans.Difficult to establish prices.Mutual alignment for codifying de

65、scriptions,levels of complexity,and corresponding level of effort to deliver can be challenging.Pricing is immediately available as scope changes to meet evolving business needs once the model is mature.May help accelerate market readiness.Requires advance planning with an estimated annual scope to

66、secure the appropriate resources and to ensure continuity of staff.Can work across multiple channels with mutual alignment on definitions and parameters.Longer lead time upfront to establish prices and to train both advertiser and agency staff,but much faster to market once the model is mature.Bette

67、r for standard offering from the agency.Can run the risk of creating a more transactional versus strategic relationship if not administered correctly.Focuses on deliverables,not inputs.No direct link between compensation and effectiveness.Can work across channels provided there is mutual alignment o

68、n definitions and parameters.Rarely covers all the outputs since the discipline of marketing requires innovation.Exceptions to the pre-negotiated list can become onerous.No confusion about overhead definitions,margins,or resource plans and hourly rates.Challenging to implement when new bespoke deliv

69、erables are requested by advertisers.Pros and ConsDecoding Compensation Models&Implementing the Right Model|14Proposed Common Name(s)Names in Use(AKA)Additional CharacteristicsSubscription PricingLicenseUsageIP UsagePrice per user,per company,per output,per use or any other trackable mechanism.Descr

70、iption:The model requires a set monthly payment for a certain number of services or deliverables provided.This works for regular or repeatable monthly services or deliverables.It is a fixed price(“use it or lose it”)and can also be used for access to agency developed IP or third-party tools that aid

71、 in data tracking,research,creative,or workflow or other tools designed around the delivery of marketing services(“SaaS”).Best Application:Best used for longer,recurring/repeatable work.Access to a Software as a Service(SaaS)platform designed by the agency,offering widespread services.Access should

72、require minimal ongoing involvement from the provider.Consistent regular consulting services or deliverables,such as reports or maintenance.This requires distinguishing which deliverables would be included in a subscription price versus in an existing scope of work for general services or ad hoc pro

73、jects.Core Components:Clearly defined timing and deliverables.It is essential that the type and quantity of services and deliverables remain largely consistent each period.Throughout the term,there should be a monthly requirement for these services and deliverables.In the context of SaaS models,buye

74、rs should verify that the model is accompanied by a robust SLA.This agreement should clearly outline each partys responsibilities and cover aspects like response to downtimes,ensuring a comprehensive understanding of responsibilities and commitments from both sides.3.Subscription Pricing:How to Calc

75、ulate:Agency and advertiser define which regular or standardized services are required each period(e.g.,number of briefs,meetings,reports,presentations)Marketer assesses the value for these regular services,which will either be in the form of efficiencies(more efficient/time savings than doing it in

76、ternally)or effectiveness(for specialist skills that are required regularly but do not justify hiring staff in-house).Agency to assess the effort or resources to deliver.For SaaS-based models,assess the set-up costs and maintenance requirements of the platform.Decoding Compensation Models&Implementi

77、ng the Right Model|15ExampleIn a normal AOR model,a number of work streams would be combined into one model,typically FTE-based.However,if priorities change significantly,scope and time tracking can become difficult.If the workstreams are broken out into those that relate to projects and those that

78、fit under a subscription model,it becomes easier to identify how the work streams are performing.ProsConsMarketers know what deliverables they will receive monthly for a pre-agreed price.Can lead to multiple SOWs for AOR engagements;necessary to consider the ability to manage volume of agreements.Al

79、ternative model for agencies to recover capital investments.Not appropriate if technical work requires frequent modifications.Provides ability to separate work streams that have different parameters and allows easier tracking of services and deliverables.Not appropriate for work where there are freq

80、uent scope changes or where the workflow fluctuates from month to month.Easy to budget and allocate resources.Not appropriate for periods of six months or less or for one-off projects.Can be expanded based on needs.May be burdensome to set-up.Pros and ConsDecoding Compensation Models&Implementing th

81、e Right Model|16As with all scope definitions,it is important to agree the outputs expected(the quantity and quality required)as well as the parameters and conditions that affect their delivery.Some key points to consider for a successful model:Set-up:Determine how much effort is required.Relationsh

82、ip management:Subscription models are useful for relationship management(regular meeting attendance and general access for consulting),normally from a small number of agency individuals.Meetings:Determine the level of regular interactions required(e.g.,monthly basis)and separate from output-based sc

83、opes of work(status meetings,reporting,points of contact).Term:Most benefit is gained when the regular services are delivered each month over an annual period.It should be easy for either agency or advertiser to start or stop at short notice.Personnel involved:Ideally,this should use the same consis

84、tent personnel who are the decision-makers on both sides.This will lead to better alignment and agreement.Regular assessment:The service-based model is flexible and allows for deliverables to be added or removedProposed Common Name(s)Names in Use(AKA)Additional CharacteristicsCommissionPercentage Ma

85、rkup Media CommissionMay include a declining percentage rate as advertisers spend increases.Commission amount paid may be calculated on the actual media spend-or planned media spend.Description:Compensation is based on a percentage of the media spend.Multiple percentage levels may be established for

86、 different media types to recognize the complexity or effort required of each media type such as network or spot TV,radio,social,out of home and digital.Definitions:Gross Cost is the price traditionally listed by the media owner.In cases of TV and radio,gross costs are quoted to buyers,and it includ

87、es a default amount of 15 percent as historically reserved for agency commission.Net Cost is the cost that the agency will pay the media vendor on behalf of the advertiser.The amount excludes any agency commission.Net Cost is the most common metric used in todays media environment.Industry Variation

88、s:Media commission models may vary by sector.Some advertisers have shifted toward alternative compensation models like hourly rates or hybrid models that augment the commission.A hybrid of commissions plus a fixed fee,hourly,or performance-based arrangements are often used together.4.Commission:Deco

89、ding Compensation Models&Implementing the Right Model|17Best Application:When the services are limited to media planning and buying.Short-term or seasonal engagements between advertiser and their agency.Flexibility is needed when an advertisers spend changes frequently.The model has the ability to p

90、ivot quickly with market variations without renegotiating staffing plans and fee amounts.Core Components of Model:Media dollars,percentage agreed by media type.The fee is calculated as a percentage of the media spend.For example,if an agency commission is agreed at 15 percent and the advertiser spen

91、ds$100,000 on media placements,the agency would receive$15,000 commission.Commissions can be calculated as a percentage of the gross media cost or an equivalent percentage calculated as a markup on the net media cost.Using historical commissions,a 15 percent commission on Gross Costs is the same as

92、a 17.65 percent markup on the Net Cost.Key Factors for Consideration:Understanding the complexity and effort of each media type is important to negotiate commission rates.It is common to have a tiered commission structure,with different commission rates for each type of media.This accounts for diffe

93、rences in complexity and the workload required for the agency to manage the media investment.Media commission levels should be reviewed periodically and when there is a shift in spend from one media type to another.How to Calculate:ProsConsSimple to understand.Media agency compensation is tied to th

94、e cost of media.In times of rising inflation,the agency could be disproportionately rewarded;however,the reverse is true in times of media deflation.Ease of implementation and administration.The agency could be perceived to be motivated to recommend increasing media spend levels.Flexible and variabl

95、e for when budgets are uncertain and spending levels change frequently.Spend more,pay more;spend less,pay less.When media is canceled by the advertiser,agencies may have to fund staffing resources that are not covered by commission revenue.One inclusive fee provides greater flexibility,as agencies w

96、ill execute all agreed-upon media-related services within the commission structure.Agency compensation and resourcing may be difficult to predict when media budgets are not established annually or need to change frequently.Commission fee rarely covers all services required by most advertisers,which

97、then requires additional compensation models.Pros and ConsDecoding Compensation Models&Implementing the Right Model|18The most common models involve advertisers paying agencies based on the time the agency estimates will be spent by its staff for a specific scope of work.The fee is determined throug

98、h hourly billing rates,categorized by role or level,or using a cost-plus method by person or role.These methods result in a price per hour,price per day,or the annual or monthly equivalent for each full-time staff equivalent.For long-term engagements,time-based input models are often structured as r

99、etained teams,with compensation paid in installments throughout the scopes duration.The fee agreement is typically fixed,aligned with an agreed statement of work.In other cases,the fee is reconciled based on the time spent or the total resources utilized.The retained team is alternatively referred t

100、o as a retainer,core team,allocation model,or project team.The most common methods in use:Description:Fee is based on the unit rate times the hours or,alternatively,the days worked.Hourly or day rates can be either by title,level,a single blended rate or a blended rate by level or department.Best Ap

101、plication:Hourly rates can be a suitable pricing model when theres uncertainty or potential changes in a projects scope.Hourly rates offer flexibility and simplicity in calculating a fee.For highly customized or specialized advertising services,agencies can use hourly rates to reflect the time and e

102、xpertise required.Consulting services,such as projects involving testing and experimentation for campaign effectiveness,or ad hoc work streams with variable workloads are also well-suited for hourly rates.Hourly rates provide an adaptable compensation structure that doesnt fit neatly into other pred

103、efined models.Core Components:Staff positions,hours per position and hourly rates by position.B.Category 2:Input-based Models1.Hourly Rates:Proposed Common Name(s)Names in Use(AKA)Additional CharacteristicsHourly RatesRatecardHourlyFTE ModelStaff PlanThe fee agreement may be fixed,aligned with an ag

104、reed statement of work,or reconciled and adjusted based on the resources utilized.Rates can be established using a cost-plus(see Cost-Plus section)calculation or by referencing competitive market rate data.Comprehensive data on competitive rates is accessible through the 4As survey report,fielded ev

105、ery two years.You can find more information and purchase the 4As 2023 Billing Rate Benchmark Survey HERE.How to Calculate:Decoding Compensation Models&Implementing the Right Model|19ProsConsIts comfortable and familiar and easy to understand.The focus is on the agency costs rather than value created

106、.Helps agencies predict what resources will be needed to forecast revenue and costs.Discourages process efficiencies to reduce time spent.Resources are easily adjusted when the scope is not defined upfront and can flex with changes of work.Too much focus on individual rates can create friction durin

107、g a negotiation.Well-known in the industry and easy to set up.Doesnt align to technological advances or promote meeting the requirements of the advertisers business.The calculation of the fee is easier to validate by advertisers with available benchmarks.4As 2023 Billing Rate Benchmark Survey HERE.T

108、heres an expectation that an agency should fit into specific ranges versus accounting for differences in talent and technologies.Pros and ConsDescription:Cost-plus pricing is a model where the price is determined by adding a mark-up on the staff costs to cover agency operations and profit.The calcul

109、ation is complex and relies on the agency calculating its forecasted direct labor costs and then applying a percentage to recover its operation expenses,typically referred to as overhead costs.Then a further markup is added to allow for a reasonable profit margin.The result of the calculation can be

110、 expressed as a multiplier.Note:overhead costs and profits are not fixed amounts.Overhead varies as a function of direct labor costs.The more time and costs required,the larger the amount of overhead applied.2.Cost-Plus:Proposed Common Name(s)Names in Use(AKA)Additional CharacteristicsCost-PlusMulti

111、plierN/ADecoding Compensation Models&Implementing the Right Model|20Best Application:The advertiser prefers to pay for a defined group of people representing the talent and time expected to be deployed on their business.The advertiser prefers a predictable cost stream.This model sets the amount to b

112、e paid each month through the year.The advertiser and the agency agree that a fee,calculated by role or by title is the best way to hire agency resources for the account(Hourly Rate model also works here).The agency and the advertiser agree the fees will adjust,up or down to reflect changes in the s

113、ize or level of the team.(Hourly Rate model also works here).The deliverables are difficult to define in advance and are shifting often.Core Components:To prepare a fee proposal using this model,the agency will estimate the resources and time required to deliver the scope of work.The price to the ad

114、vertiser includes employee compensation costs and a markup for overhead and an agreed profit margin.Position and Seniority of Talent:Positions and seniority(junior/mid/senior)are identified and agreed upon with the advertiser.This agreement drives the costs that the agency will apply in the fee calc

115、ulation.Direct Labor Costs:Includes employee salary,benefits and taxes for the time each staff member is required to work on the Advertisers projects.Overhead Costs:Defined as the Agency expenses that are to support the running of the Agencys business and not included in the direct labor costs(above

116、).Overhead is calculated as a percentage of Agency operating expenses divided by direct labor costs.The main components of overhead costs are indirect payroll and related expenses,such as management,human resources,and finance,technology expenses,general office expenses;professional fees,and space a

117、nd facilities expenses.Direct Client Expenses:Non-reimbursable,out-of-pocket expenses that are directly attributable to an advertisers account.These may include travel costs,entertainment,research,presentation costs,and storage,legal or courier fees.How to Calculate:ExampleIf the agency determines t

118、hat the labor costs of the team required to deliver the SOW is$350,000,and applies an overhead rate of 100 percent and a profit margin of 20 percent,the fee paid by the advertiser would be$875,000.Decoding Compensation Models&Implementing the Right Model|21Direct Labor x(1+Overhead%)/(1-Profit Margi

119、n%)The math of the model is fairly easy to understand and communicate,which facilitates reaching an agreement easier.However,the specifics of what costs are in direct labor versus overhead requires detailed discussions between the advertiser and the agency as there is no standard definition in the i

120、ndustry.The following definitions and principles need to be discussed and agreed upon upfront:1.overhead and profit rates2.reconcilable or fixed fees3.annual billable hours4.what to include in Direct Labor versus Overhead(payroll taxes,benefits,bonus,pension etc.)5.reporting frequencyIf an agreement

121、 cant be reached easily,benchmarks may help resolve this issue.ProsConsIt is familiar and has been in use since the 1990s.Discourages agency investment in tools and initiatives to lower required resources to deliver SOWs.Predictable cost stream and easy for advertiser to budget each month.It ignores

122、 the concept of competitive market pricing,relying instead on a formula.Helps agencies predict resources,revenue,and cost.Similar to Hourly Rates,the model focuses on costs rather than the value of the services.Has built in flexibility where components are easily adjusted to reflect changes in the w

123、orkload which helps manage resourcing talent.Very difficult to benchmark the relative costs of overhead and direct labor costs.There is no standard benchmarking that evaluates important factors such as the size of an agency,the type of services it offers,or the economics of the market where it is ba

124、sed.As with hourly rates,the scope isnt easily defined upfront,the level of effort is easily adjustable.Can create friction during a negotiation when definitions are not agreed upon upfront.Pros and ConsDecoding Compensation Models&Implementing the Right Model|22When set up correctly it can flex wit

125、h salary inflation pressures to retain agency talent.Burdensome to set-up and maintain.Requires education and significant time for agency and advertiser to agree and document their understanding.Overhead is not universal.The overhead is different across countries and types of service,This complicate

126、s the negotiation.Staff salaries can not be disclosed,making the largest cost element of the fee difficult to evaluate.This is an advanced approach to compensate agencies for the services provided,which is associated with performance.There are two primary models.One is Outcome Compensation which is

127、based solely on achieving the advertisers primary business goals.This eliminates the use of hourly rates,cost-plus or asset-pricing.More common is Incentive Compensation which is incremental compensation to a base fee.It rewards the agency for its service and for helping the advertiser achieve certa

128、in business results.C.Category 3:Performance Compensation1.Incentive CompensationProposed Common Name(s)Names in Use(AKA)DescriptionAdditional CharacteristicsIncentive CompensationAgency PerformanceAt Risk CompensationOutcome-BasedBonus/MalusRisk/RewardPay for PerformancePerformance-based remunerati

129、onIn addition to a base fee agreement,a portion of the total agency compensation may be generated through advertisers business results and/or agency performance.Advertisers business metrics are tied to the advertisers financial performance,volume performance or other metrics tracked by the advertise

130、r.In some cases,the agency agrees to accept a risk to its base compensation for achieving the agreed metrics.Agreed up-front and tied to well defined and tracked KPIs.Reviews and results should be shared monthly or quarterly.Metrics should be within agencys control,in return for the opportunity to e

131、arn more compensationDeals with downside risk will provide for greater upside when results are achieved.Evaluations may include customer satisfaction surveys and agency agreed upon metrics.Decoding Compensation Models&Implementing the Right Model|23Description:The model involves incremental compensa

132、tion(or risk)paid by the advertiser or refunded by the agency.Metrics are aligned with the business goals of the advertiser that can be affected by the services by the agency.This compensation structure is typically incremental to a base fee determined by another compensation model.Best Application:

133、When there are clear shared objectives that can be translated into metrics that are tracked and both parties are aligned on how to achieve the objectives.The most critical elements of a successful incentive compensation plan include a clear definition of what success looks like and alignment on eval

134、uation metrics prior to implementation.These include:The metrics are aligned with the day-to-day mission of the marketer.The targets are achievable.The targets are within the agencys control or influence.Advertisers share metrics on a regular and agreed upon frequency.All stakeholders at the adverti

135、ser are aligned with paying a bonus to the agency.Core Components:Targets are based on metrics the agency can control or at the very least significantly influence.If not,agencies will have little appetite to pursue the plan.There is mutual agreement on:Specific metrics.Performance targets.Evaluation

136、/measurement methodology.Performance against targets is reviewed regularly,at minimum quarterly.Targets have incremental award levels,avoiding all-or-nothing cliffs.Advertisers are transparent in sharing past,current and projected performance against metrics in use.Bonus for the full incentive payou

137、t is accrued within the advertisers budgets.Program is implemented only once the agency and advertiser have worked together for a sufficient period(often at least one year).Example Sample Evaluation ProfileMetric Type WeightingMetricAdvertisersBusiness 10%Sales growthMarketing Program50%1.Total Bran

138、d Recognition and Total Brand Regard2.Lead generation/Lead deliveryAgency Performance20%360 degree delivery/relationship assessment via Aprais or similar toolAgency Performance20%Media savings and optimization deliveryDecoding Compensation Models&Implementing the Right Model|24Sample Payout Based on

139、 EvaluationScore(out of 5)ImplicationImpact on Agency Revenue0 to 1.9Agency fails to meet all objectivesAgency rebates revenue to advertiser up to 5%2.0Agency meets minimum objectivesAgency rebate is 0%2.1-2.5Agency meets minimum objectivesAgency revenue increases up to 2.5%2.6-3.5Partially exceeds

140、objectivesAgency revenue increases up to 5%3.6-4.5Exceeds objectivesAgency revenue increases up to 7.5%4.6-5.0Outstanding performanceAgency revenue increases up to 10%ProsConsBetter performance=higher payThe ability to establish and agree on baselines against which to measure performance can be chal

141、lenging and requires transparency on the part of the client.Drives desired behavior.The agencys work must be in the market to generate results.Shared accountability/in it together.When things change it can call into question the KPIs originally established.Demonstrates mutual trust.Takes time and ef

142、fort to administer and maintain.Can drive efficiencies clear on upfront/not reworking.Potential for struggles with budgeting on the advertiser side holding budget for something that might not happen and cant invest elsewhere.Shows whats working and whats not working.Can be too many elements out of t

143、he agencys control.Typically no single attribution that links to agency performance;usually multiple driving forces.Provides agencies with a better view into the advertisers businesses.The emotion of“paying agency too much”if it over-delivers.Forces advertisers to prioritize where they want agencies

144、 to direct their focus.Pros and ConsDecoding Compensation Models&Implementing the Right Model|25Consideration of risk-reward compensation involves evaluating the potential outcomes and consequences associated with a particular compensation structure.Its important to review the inherent risks to dete

145、rmine the most suitable arrangement for motivating and aligning the interests of individuals or teams.It is essential to ensure that the agency has control or influence over the agreed metrics,fostering accountability and fairness.Additionally,the risk element of an incentive program and chance of a

146、 downside should be carefully weighed,as an improperly designed compensation program can backfire with the agency reducing levels of service when a downside is inevitable.Regular communication of the metrics on a monthly basis,using the same metrics that marketers are incentivized by,is crucial for

147、transparency and alignment.The programs design should be a collaborative effort involving the teams responsible for owning and delivering the work.Metrics that are too distant from the goals of the marketing team or unrelated to the actual work being completed may undermine the effectiveness of the

148、compensation structure.Striking the right balance can lead to a compensation model that not only motivates but also contributes to overall organizational success oft both the agency and the advertiser.Business Assessment Review historical trends.Review existing metrics and models.Review in-market da

149、ta.Data Mapping Map data sources to selected KPI possibilities.Identify marketing investment KPIs and external factors.Establish technical requirements for tracking.Establish roles and responsibilities for tracking.KPI Exploration Identify possible KPIs.Map the above possible KPIs on Performance/Att

150、ribution grid.Compensation Principles Full versus partial performance.Single KPI versus weighted average.Performance caps(top and bottom).Performance bands/slope.Sample ApproachDiscover(4 weeks)Decoding Compensation Models&Implementing the Right Model|26KPI Selection Select KPIs.Refine KPIs based on

151、 technical feasibility.Contractual Language Agree on timing of PBR contract.Agree on measurement timing(e.g.,quarterly).Write up an agreed and calibrated compensation model in contractual language.Sign off.KPI Tracking Ongoing tracking of KPIs.Exploratory trend analysis.Calibration Stage Design Fina

152、lize tracking.Design analysis methodology.Define timing of calibration stage(depending on data volume and variability).Compensation Model Simulations Enter test data into compensation model.Run compensation simulations.Assess stability/sensitivity of financial outcomes.Compensation Model Design Join

153、tly design incentive model based on Performance-based remuneration principles agreed upon during Discovery.Management Regular reviews of performance against KPI targets.Ongoing assessment of KPI metrics and target levels.Optimization or recalibration as required.Causal Analysis Build test models bas

154、ed on real data.Intermediate Compensation Model Agree on intermediate compensation model to be put in place during calibration period.Sign off on intermediate compensation model.Compensation Model Calibration Recalibrate compensation model if necessary.Design(4 weeks)Implementation(4 weeks)Calibrati

155、on(3-12 months)Decoding Compensation Models&Implementing the Right Model|27Description:Hybrid models use multiple compensation methods within a single relationship and possibly within a single scope of work.If one model doesnt fit the situation,then using multiple models may be the best solution.Und

156、er hybrid model scenarios,there is usually a base model,e.g.,Fixed Price,Commission,Hourly Rate or Pre-Negotiated Price List and then other models can be added on to the base model when a different method would be more optimal for the other service types.Many of the models listed in this paper compl

157、ement each other to create hybrid”models.Best Application:When you need flexibility or the type of work varies greatly.They are particularly well-suited for large complex relationships and become essential when a single compensation model cannot adequately address the complexities of the work.In suc

158、h instances,employing model A for one service and model B for another service can optimize outcomes.For example,in an agency relationship some of the work is highly predictable,while other services will be variabile or unknown at the time of scoping.In this instance,a Subscription model or retainer

159、could be used to include resources for managing account service,strategy,and ideation,and a Fixed Price or Pre-negotiated Price List model would be more advantageous for execution of specific deliverables or project-work.Hybrid scenarios are also useful for risk tolerances.Risk scenarios include att

160、empting innovative solutions or entering new markets.In such cases,implementing a Fixed Price model for a segment of the relationship can mitigate marketers risk,while Incentive Compensation may offer incentives for the agency for delivering outstanding work.Most common combinations:1.Media Commissi

161、on(planning/buying)+Fixed fee for strategy,creative(may include certain reporting)2.Core Retained team+Pre-negotiated Price List3.Hourly Rates+Subscription+Incentive Compensation4.Core Retained team+Fixed Price projects5.Cost-Plus+reconciled deliverables+Incentive Compensation(quantitative and quali

162、tative)How to Calculate:See specific models above.Example D.Hybrid ModelsDecoding Compensation Models&Implementing the Right Model|28ProsConsNot boxed into one way of doing things.Requires a lot of effort up-front to determine which models work best for different types of work.Provides more flexibil

163、ity to both the advertiser and agency.Can look for efficiencies together.Harder to reconcile and manage the work because there are multiple approaches in use.May be able to provide more cost savings:tactical work is more cost-effective and strategy more high-level.Teams can forget which model is in

164、place for various types of work.Caters to the needs/requirements of the business to be able to mix and match.Must consider how many models is too many to manage.Works well for media agencies.Multiple models creates more negotiation across more items.Works better for integrated models.Pros and ConsAl

165、though the hybrid model brings the best of multiple models together,it can have some downsides.On the positive side,using multiple models provides flexibility.In most situations,a combination of multiple models creates an overall compensation model that fits the business needs more effectively compa

166、red to one single model.But one risk in the hybrid model is that confusion can be created if the teams dont know which model is in place for a given project or solution.The advertiser and agency teams must align on compensation strategies and how to manage each project/workstream before,during,and a

167、fter the project to avoid any misalignment.Decoding Compensation Models&Implementing the Right Model|29This section introduces an approach for determining what model might be right for an advertiser-agency relationship.The scoring will vary by advertiser based on the needs and preferences of that ad

168、vertiser.The evaluation framework is a simple Pugh matrix designed to help rank multiple options based on the need of the scope of work or the engagement.There is no“one size fits all”solution,and this tool helps align specific needs.This section introduces an approach for determining what model mig

169、ht be right for an advertiser-agency relationship.The scoring will vary by advertiser based on the needs and preferences of that advertiser.The evaluation framework is a simple Pugh matrix designed to help rank multiple options based on the need of the scope of work or the engagement.There is no“one

170、 size fits all”solution,and this tool helps align specific needs.Use this example worksheet to evaluate the compensation system you are considering.V.Evaluating the Right Model for an EngagementVI.Characteristics of a Good Compensation SystemCharacteristicExplanationSimplicityEasy to understandAdmin

171、istrationEasy to administerFairnessFair to both advertiser and agencyAppropriatenessIs designed for the work at handAgilityAbility to evolve over time,working across multiple types of engagementsCost-AppropriateNeither over-pays or under-paysFocusedAligned to the advertisers goalsDrives Best Behavio

172、rEncourages optimal performance by individualsTimelinessDoes not delay getting the work doneChannel NeutralDoes not promote the use of one marketing channel versus anotherDecoding Compensation Models&Implementing the Right Model|30Scoring Recommendations:Resultant Score(Sum of the Following):Grade e

173、ach of the characteristics on importance to the advertiser,or the agency.(5=Most Important;1=Least Important)Score each model against the 10 characteristics.5:maximum score(high correlation to the characteristic)1:minimum score(poor correlation to the characteristic)Characteristic 1:Importance x sco

174、reCharacteristic 2:Importance x scoreCharacteristic 3:Importance x score.Characteristic 10:Importance x score=TOTAL SCORE FOR THE MODELThe evaluation framework allows an advertiser to score each model based on its own ranking of characteristics and how the model scores.Scores will differ by advertis

175、er based on its individual marketing efforts,budgets,and channels.For advertisers seeking to optimize their compensation models or embrace a new approach,here are suggestions for effectively navigating the transition:Identify owners:Identify owners from both agency and advertiser to administer the m

176、odel and ensure compliance.Adequate preparation:Do the legwork.Everyone tends to want to jump to the end and negotiate pricing,but the key is aligning on goals,definitions,and assumptions.Understand and align to goals and requirements:Actively listen to each others needs and concerns and have them g

177、uide the solution.Present the value proposition:Align on the benefits(speed to market,price visibility,flexibility).Negotiate and compromise:Flexibility is important.Find areas where the agency and advertiser can meet in the middle and compromise.Be open to adjusting pricing and the requirements to

178、accommodate constraints.Be open to addressing the specific needs of both parties.Demonstrate value:Align on the benefits.Mutually agree on how the model will address the business challenges and pain points to deliver on each others business goals.VII.Strategies for a Successful Transition or Impleme

179、ntationDecoding Compensation Models&Implementing the Right Model|31 Finalize:Document everything.Once both parties are aligned on the terms,ensure that the agreement is well-documented in a contract.This should include definitions,pricing,scope of work,deliverables,timelines,templates and any other

180、relevant details.Training and rollout:Develop a roadshow to introduce the model,including its usage,process,and workflow.Continue training throughout the engagement for new employees and any updates/adjustments.Ways of Working document or SLA:Create and adhere to a Way of Working document,with a foc

181、us on the change management process.Continuous communication:Maintain open lines of communication and address any concerns or changes as they may arise.Conduct monthly reviews to assess progress and adjust the agreement as needed.Software to assist:Create tools to enable the pricing model within a s

182、oftware platform to facilitate adoption,ensure compliance,and use as reference.Flexibility:Acknowledge the need for flexibility,especially in the first year.Establish a mechanism to modify definitions,prices,and contract terms.Add items,such as new marketing assets,as required.Like any behavioral ch

183、ange,careful oversight is crucial during the initial stages until the model matures.While there are many choices of remuneration models available,the committees recommendation is to prioritize those models that yield the most favorable outcomes for both the engagement and the relationship,with an ai

184、m to drive advancement in remuneration practices within the industry.This paper comprehensively outlines definitions,optimal applications,advantages,and disadvantages of various models,providing valuable insights for successful implementation alongside a practical evaluation tool.We underscore the s

185、ignificance of agencies and marketers embracing experimentation,advocating for a test-and-learn approach through the utilization of smaller projects.In summary,this quote from the WFA Global agency remuneration trends update of 2022 is worth considering.Ultimately the chosen remuneration model will

186、dictate the type of relationships clients want to have with their agencies.A focus on outcomes instead of input enables agencies to become integral partners to a clients growth and performance,thats why its great to see that more clients want to reward not just performance but also quality through s

187、ustainability,diversity,and talent,”said Laura Forcetti,Director of Global Marketing Sourcing Services at the WFA.You can view the full article here.VIII.Summary“Decoding Compensation Models&Implementing the Right Model|32Task Force Chairperson(representing both ANA and 4As members):Rick BrookIX.Tas

188、k Force Members4As Leadership4As MembersNameTitleCompany NameMollie RosenExecutive Vice President,Strategy,Insight and Innovation4AsNicole RizzoSenior Vice President,Business Intelligence and Insight4AsNameTitleCompany NameMichael AsaroSVP,Director,Client OperationsWPPMark BachmannPartner/OwnerMarcu

189、s Thomas LLCScott ChapinChief Operating OfficerMarcus Thomas LLCRaphaela Cristiano-DavisSVP,Finance Managing DirectorEversana Intouch/ChicagoAndrew GraffChief Executive OfficerAllen&GerritsenErwan GuillouChief Financial OfficerTBWAChiatDaySharon NapierExecutive Chair and FounderPartners+NapierElaine

190、 NaumSVP,Managing DirectorPartners+NapierMark PiazzaChief Financial Officer/Chief Operating OfficerOxford RoadRichard TanPartner and Chief Operating Officer/Chief Financial OfficerFIGRick WeberChief Commercial OfficerInterpublic Group of CompaniesDecoding Compensation Models&Implementing the Right M

191、odel|33ANA LeadershipANA MembersNameTitleCompany NameBill DugganGroup Executive Vice PresidentANAGreg WrightSenior Vice President,Brand and MediaANANameTitleCompany NameDenis Budniewski Associate Vice President,Marketing Investment and TransformationVerizonAmol Chopra Assistant Vice President,Strate

192、gic SourcingTravelersPaul HaggertyGlobal Marketing Operations and PartnershipsGeneral MotorsRene LassauzetHead of Brand and Creative ExcellenceNestlMelissa LewisSr.Director Target Creative OperationsTargetKwan YimDirector,Head of Global Agency ManagementCitiHave questions about this paper?Please contact Nicole Rizzo,Senior Vice President,Business Intelligence and Insight,at nrizzo4as.org or Bill Duggan,Group Executive Vice President,at .Contact Us