Contemporary Advertising 14th Edition by William Arens ,Michael Weigold ,Christian Arens

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The payment structure that defined the client-agency relationship for over a century has come under fire by both sides. Ad agency compensation was once a simple formula, but now it has become one of the foremost concerns for both advertisers and agencies in a world of high media costs, low budgets, and rising awareness of corporate fraud and scandal.
Founded in 1875, N.W. Ayer Sons was the first ad agency to plan, create, and execute complete advertising campaigns in exchange for media-paid commissions-typically 15 percent of the client's media expenditures. Back then, 15 percent may have seemed a small amount as the venues for advertising were limited to the low-cost advertising space of newspapers, magazines, posters, and other forms of print. However, by the late twentieth century, advances in technology had created many new avenues for reaching consumers. Today, advertisers can send their messages through awide variety of print, electronic, and digital interactive media, all far more expensive-and profitable-than the newspapers and magazines of the nineteenth or early twentieth century. Take, for example, a 30-second TV spot on American Idol that averages $750,000. Under the commission structure, the agency that placed this commercial would receive almost $113,000, considerable revenue considering the time directly spent placing that commercial. And that's for just one spot! When the client runs a schedule of ads, the ad agency's profits really balloon.
As a result of this high profitability, the standard 15 percent commission is under siege. Some observers regard an agency's so-called expert and impartial advice to the advertiser about commissionable media spending as suspect, if not outright biased. Commissions, they believe, negatively affect the ethics of the business by potentially causing the agency to be motivated by income rather than the client's best interests.
Consequently, advertising industry leaders sought change. In the early 1990s, clients began taking control of the process, establishing their own compensation systems. By 1995, only 14 percent of advertisers were still paying 15 percent commissions, as labor-based fees and incentive programs increased. Tying compensation directly to the time spent creating a campaign, as well as to the actual sales performance the campaign achieved, allowed advertisers to feel that their goals and needs were once again the primary focus.
However, by the turn of the twenty-first century, compensation concerns returned to the forefront of advertisers' agendas, as fraud and scandal created a need for greater agency accountability. SEC investigations have found that, by using complex billing statements and convoluted accounting methods, some agencies had once again started putting personal profit ahead of their clients' interests. Government probes found that some had even padded suppliers' bills in exchange for costly perks. These investigations have led to guilty pleas from 32 people and nine companies.
Fortunately, leaders on both the client and agency sides have been quick to find a proactive solution that would benefit both sides. In 2002, the Association of Advertising Agencies and the Association of National Advertisers, Inc., came together to create the first-ever set of guidelines covering compensation agreements between agencies and advertisers. In an effort to create the most effective compensation agreements possible, the joint document established dozens of guidelines. Among others, the guidelines state that the best compensation programs
Align advertiser and agency interests and priorities.
Match compensation with the resources required to do the work.
Establish agreement on key compensation definitions and terms up front.
Do not favor one solution or service over another.
Finalize compensation before agency resources are committed.
While these guidelines do help provide a benchmark of best practices for compensation agreements, they are far from an end-all solution. In fact, some people within the ad agency community feel that the very search for an ultimate solution is aggravating the problem. Specifically, these members believe that there will always be certain aspects of the client-agency dynamic that cannot be standardized or measured. One example is the creative talent that differentiates one agency from the next. Surely a premium for creativity must be paid, but how do you standardize a price for such talents Another question is how to tie compensation directly to results. Compensation should be tied to results, but how are results measured in such an inexact and intangible science?
The one thing both sides can agree on is that the debate on "fair" compensation is sure to last for many years to come.
Compare the advantages and disadvantages of the commission system with those of the fee or incentive system.