Methods of Agency Compensation

May 1, 2004

Description of Compensation Methods

Survey respondents were asked to identify their primary method of agency compensation. The different methods were defined as follows:

  • Commission at fixed rate: The agency is paid a fixed percentage of media billings and markup on production costs.
  • Commission at sliding scale rate: The agency is paid a level of commission that varies with the level of client media spending.
  • Fixed fee: An agency fee is 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: Agency fee determined by amount of agency time multiplied against negotiated hourly labor rate, or a percentage of time methodology (estimates of agency time and personnel). All media, production, and any other costs are billed at net, with no markup.
  • Combination of fees and commission: As the name implies, a combination of compensation methods. An example might be a company that pays for its agency's planning and creative services using a fee, but uses a commission to pay for media buying services.
  • Other: Any other method of compensation not described by one of the above.

Compensation Method by Size of Advertiser

Fees are the predominant method of compensation for all sizes of advertisers (here defined as the size of their annual advertising spending). The use of labor-based fees is far more predominant than fixed fees amongst larger advertisers.

  Total Survey <$15MM $15-100MM >$100MM
  % % % %
Commission: Fixed 8 9 8 6
Commissions: Sliding Scale 2 1 5 2
Commission: Total 10 10 13 8
 
Fixed Fee 27 50 31 20
Fee: Hourly Labor Rate 47 21 48 54
Fee: Total 74 71 79 74
 
Combinations: Commission/Fee 8 18 8 6
Other 8 1 0 12
Other: Total 16 19 8 18
 
Base # Agencies 575 83 104 382

Method of Agency Compensation by Size of Annual Advertising Budget

Compensation Method by Type of Advertiser

As with size of advertiser, the use of fees dominates across all types of industries. The data is relatively consistent with the exception of "other" industries, which show a relatively greater share of "combination" or "other" methods of agency compensation. "Combination" or "Other" methods are used more than commissions alone, except by the services industry.

  Total Survey Packaged Goods Consumer Durables B-to-B Services Corporate Advertising Other
  % % % % % % %
 
Commission: Fixed 8 5 7 7 8 0 11
Commissions:
Sliding Scale
2 4 0 3 2 0 0
Commission: Total 10 9 7 10 10 0 11
 
Fixed Fee 27 20 33 33 37 60 7
Fee: Hourly Labor Rate 47 56 48 37 41 10 45
Fee: Total 74 76 81 70 78 70 52
 
Combinations:
Commission/Fee
8 7 12 8 6 30 19
Other 8 8 0 12 6 0 18
Other: Total 16 15 12 20 12 30 37
 
Base # Agencies 575 201 54 61 192 10 71

In looking at individual industries over time, the general trend of moving from commissions to fees is consistent. Some of the survey sample sizes for specific industries are relatively small, therefore showing greater variance. The small increases in commissions seen in 2003 for consumer durables and business-to-business marketers is more likely a function of smaller sample (in both this and previous surveys) than any suggestion of a return to this method of compensation. Finally, the "other" category in these trend lines primarily represents marketers who are using a combination of fees and commissions.

Source

"Trends in Agency Compensation." David Beals. New York:ANA, 2004.