Don't Pay Too Much for Agency Compensation

By Thought Leaders Archives
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Agency review consultants should always be responsible for routinely assessing client/agency compensation bids.  This is a critical part of a review practice and must be implemented on a continuous basis as agency work load changes and full transparency is at the heart of the relationship in agency remuneration.  "How much should agencies pay their agencies?  What do others pay?  What are we getting for our money?  What is fair?  What is being hidden from us?"  These questions persist for every conceivable kind of client/agency relationship -- creative, media, digital, direct, full service, project work.

What Can You Do on Your Own?

For every $10 million in media spend, a client is likely to be paying their agency from $0.5 million to $2.0 million in fees, depending upon the type of agency and the type and scope of work.  So if you're a client, especially in procurement or marketing, where it is your responsibility to manage costs, how do you answer the questions posed above?

You can refer to what you have paid for services in the past.  You can call friends in the business and seek their advice.  You can go with the lowest bid, without a firm grasp of value.  Or you can bring in an expert with the knowledge and information to help you answer the questions and negotiate a favorable and fair contract.

How Do Agencies Determine Their Bid?

There are many kinds of agency compensation arrangements, including but not limited to commissions, fees, a mixture of both, sliding scales, pay for performance incentives and rebates.  Regardless of the arrangement one thing is certain: The agency knows how much it will cost them to manage a client's business.  The more you know about that, the more you are in a better position to negotiate.  So how do you do that?

The way agencies calculate the cost of doing business is to look at scope of work and determine the numbers and types of people with appropriate skills to put against a client's business.  When the salaries of these individuals are aggregated on a full time equivalent  (FTE) basis, that figure reflects total salaries.  Agencies have already determined their overhead ratio or what the relationship between salaries and overhead is, so they add that to the total salary figure.  Now that they have established total costs, all that is left is the profit margin.   Regardless of the type of agency you are dealing with, the process is the same within the agency.   However, without the industry norms and ranges for staffing, salary, overhead and profit you cannot peek behind the curtain and are in a less favorable position to assess the fairness and value of a compensation bid.

There are many traps to be avoided when a client does this without help.  For example, hourly rates have been known to exaggerate the financial value of a staffer by as much as 25% on average.  That can amount to a lot of money and represents only one path to overpaying.  Conversely, while a good compensation consultant will make sure you as a client are protected, they will also make sure the agency is fairly compensated so you have all the resources you need.

What Can an Expert Do for You?

Many clients rightly or wrongly feel they are now in a position to run their own agency reviews.  None have a large database of industry norms developed over a series of years.  That financial data and expertise is what makes consultants so valuable.  They can assess the agency staffing against your scope of work.  They can benchmark and analyze staff salaries against norms for every conceivable job.  They can assess the overhead and profit margins requested by agencies.  They can establish fair margins of error to allow for idiosyncrasies.  Put another way, consultants can derive a benchmark agency compensation bid, with ranges, for your agency relationship and further assess the value of resources to be placed against your business. 

At a time when transparency in agency compensation is a burning issue, maybe it's time to rethink how and what you pay your agency.

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