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Industry Consultants Weigh-In on Media Rebates/Incentives

August 21, 2012

By Bill Duggan, Group EVP, ANA

Media Rebates/Incentives Require Full Transparency” is a recently released white paper from ANA and Reed Smith. The industry practice of media companies providing rebates/incentives to agencies for referring or influencing client spending towards that media company, and then the agencies not reimbursing those funds to the client, has long been acknowledged as a common practice outside the United States. However, our recent work confirms that this practice also exists in the U.S.  

The white paper has sparked conversation among the advertising community.  Some leading industry consultants have weighed-in on our LinkedIn group and highlights of those comments follow.

Stephen Broderick, partner at Firm Decisions: The U.S. market is unique in that advertisers “have had sufficient warning” that media rebates “might be an issue” at some point in the future. U.S. advertisers really need to ensure there is transparency in how these rebates are being accounted for, as well as ensuring that they financially benefit from them. My extensive experience in this area tells me that most U.S. advertisers are NOT sufficiently covered contractually. Many advertisers often think they have it all covered, but contracts with omitted clauses or incomplete definitions or what may seem to be relatively unimportant “wording” or “phrasing” can often allow the agency to justify the retention of rebates or commissions that have been earned as a consequence of client billings.

Allan Linderman, president at The Linderman Media Group: Clearly, the two main issues are (1) potential lack of objectivity in media decisions and (2) hidden agency income. Since the foundation of most agency/client relationships is the agency's ability to bring value to the client by developing strategic plans and executing efficient buys, any potential compromise to this fundamental element is problematic and a clear conflict of interest. Accepting revenue from a vendor based upon recommendations for client spend borders on the unethical.

Morten Pedersen, chairman at glue2020: Surprisingly, few clients are covered contractually, enabling them to rightfully reclaim rebates. It hurts to see that so many client-agency contracts are outdated, based on agency templates (excluding key clauses, obviously), and simply not protecting the client well enough. As a result, it is a mistake to make advertisers believe that agencies owe them anything (this has been tried in various court rooms already), let alone think that agencies “need” to give full disclosure to clients if this is not specific in the contract.  Also, it is wrong to assume that rebates exist because of decreasing agency fees/FTE$. Even I remember some good times in the 80’s and 90’s where fees were not an issue (and the rebate system were very much working nicely alongside). Also, rebates are primarily managed independently of client-specific commercial arrangements (incl. fees), so it is a mistake to assume that they are directly linked (again, the specific client-agency contract may go deeper and set out specific T&Cs).

Michael Lay, chief executive officer at Advertising Audit International: For effectively assessing the media rebate issue, we recommend that the marketer start with an in-depth assessment of its agency agreement terms for ensuring contract clarity.  We believe it commences with the agreement terms between the marketer and agency, especially the contract language governing Discounts/Rebates, Compensation and Right to Audit.  Most “best-in-class” contracts include a Discounts/Rebates section in which all discounts and rebates are refunded to the marketer. For example: “All third party discounts, whether taken by Agency or not, will be credited in writing to the account of Marketer, within thirty days of the discount being offered, provided that Marketer pays Agency for such charges in a manner that allows, or would allow Agency, acting diligently, to receive the discount.”

Elliot DeBear, senior vice president at Active International: An agency, in the case of media procurement, is an agent dealing on behalf of one principal with another. Any rebate and/or cost reduction realized based on a client's spend should benefit the client. If the rebate, in and of itself, is cause to shift spending it must be done with full disclosure to the client. Period!

Steve Fajen, partner at  Drexler/Fajen & Partners LLC: When agencies were first birthed in the late 1800s they placed newspaper space. There were few (if any) rate cards then, so agencies made up a high rate, gave the newspapers less and then pocketed the difference. A blind commission, long since thought to be disreputable. When media buying services were first birthed in 1969 they assured clients they could buy time for little or no commission. They gave the client a high rate, paid the stations less and pocketed the difference. A blind commission, again thought to be a worst practice. By these standards pocketing rebates today is just another worst practice. When the major holding companies birthed the modern media agency in the 1980s the industry applauded the abandonment of these blind payments. No one should stand for putting the blinders on again.

Thanks Stephen, Allan, Morten, Michael, Elliot, Steve for sharing your thoughts and expertise!

 




Comments   1 comment(s)

Patricia Jordan May 28, 2014 8:51am ET

Your article above “Media Rebates/Incentives Require Full Transparency" states that "media companies providing rebates/incentives to agencies for referring or influencing client spending towards that media company and then the agencies not reimbursing those funds to the client, has long been acknowledged as a common practice outside the United States. However, our recent work confirms that this practice also exists in the U.S." My questions are "are media agency "credits" the same as rebates/incentives and if not what differentiates them"? Also, how is "Full Transparency" attained?

Much thanks to you for taking your time to address my comment!
Pat

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