Was Agency Commission Such a Bad Thing?

I promised to share some more of my conversations with Mark Earls when he was over recently. Inevitably we got to chatting about Ad Agencies, especially the ‘Big Ones’. Are they evolving fast enough, can they? How come some of the best ideas come out of independent agencies?

A surprising conclusion – at least to me – was the idea that Ad Agencies lost something when they moved away from the old commission system. Ad Agencies began life as agents for media owners (hence the epithet ‘agency’). They were paid a commission on media sales and used to throw in the creative for free. This method of remuneration persisted long after they evolved to be, first and foremost, creative ad agencies, well into the 90’s in fact. Why, the argument went, should an agency get paid according to the whims of the client regarding their media budget, a budget that was notoriously vulnerable if the clients were under profit pressure? So after a brief flirtation with market success related payments (P&G tried this) Ad Agencies moved to the now familiar agency fee structure– essentially a retainer based on the predicted workload and the level of resource the agency puts on the account. (True, some clients operate a hybrid system with fees plus a kicker if the media spend is increased significantly but remuneration is still effectively fee based not commission based.)

Fees sound fairer and more professional but do they deliver creativity that works? Jeremy Bullmore tells the story of Archimedes to illustrate, among other things, the benefit of a tight timeline and a very strong incentive (tell me if the crown is made of gold, you have one week and you’ll be executed if you don’t come up with an answer). Knowing that with a really well executed, great idea that drives brand sales the client will spend heavily and remuneration will rise accordingly is a very clear incentive.

Yes, we can all see the flaws in this. It steers agencies towards big budget media ideas where the job could perhaps have been accomplished better with cheaper forms of promotion like events or social media. Are short term sales the right measure – many of the effects of advertising are longer term? Agencies cannot predict their income if it depends on a budget set by someone else. If they can’t predict their income it makes it harder to run the business, attract and retain talent etc.

My favourite quote at the moment comes from Gareth Kay (Goodby, Silverstein & Partners) – “not advertising ideas but ideas worth advertising”. This nails it. The job of the Ad Agency – any creative agency – is to come up with ideas so good clients want to invest behind them. Perhaps media spend is a crude indicator of this but if you want “ideas worth advertising” there has to be an incentive based on how enthusiastic the client is to get behind the idea. Market place success as an incentive is too complex with too many stakeholders and variables.

Media spend is very crude, total execution budget would be better but is still flawed as noted above. Perhaps, however, it is like democracy – a crap system but better than the alternatives?

Because, as Mark pointed out, if an agency team knows they are getting pretty well paid and that this remuneration is linked more to inputs (size of the team, time invested) rather than outputs (how good the ideas and execution are) you drive the kind of ‘big agency’ behaviour that people complain about. And when I say people I include those in the big agencies not just the clients. I spoke recently to a former head of a big agency who is about to launch his own independent shop. He was very cynical about the ability of big Ad Agencies to do anything effective or creative these days.

It’s not black or white. Big agencies do some brilliant work and fee systems can be made to work. But losing the link to ‘ideas worth advertising’ that the old commission system, with all its faults, gave must be a bad thing for creativity. Why do independents have a stronger reputation? Because they are brave and hungry in equal measure, they have to be to survive.

Leave a Reply