It's true. Clients really have changed the way they compensate their agencies. Following are some guidelines you should review during your next compensation negotiation. Many clients are not comfortable with:
- Commissions
- Markups
- Anything we call a retainer
- Projects that have no price
- Agency of record status
Incidentally, these methods were once used 90 percent of the time to compensate agencies. Today, many clients want:
- Net media
- Net outside purchases with invoice proof
- Good estimates on projects
- A discount for volume
- No agency of record
However, many clients are willing to consider:
Giving the agency a bonus for performance. Few clients are really willing to put the agency on an open-ended, risk-based compensation plan. We think they feel the agency could make too much money.
Following is our take on a very client-friendly, but agency-fair, system.
- Charge net for media.
- Charge hours for planning, placement, and analysis each month. One note: clients are increasingly pushing back on hourly rates, arguing that AI-assisted work takes less time. Be prepared to defend your hours with documented scope. The value you bring to planning and analysis hasn't changed. The burden of proof has.
- Charge net on outside buys (invoices available). By negotiating a volume purchase discount agreement with selected vendors to obtain a 5-10 percent rebate for volume, your agency uses its purchasing power to deal with the vendor. This power spreads over a number of clients, so no single client can suggest that you are marking up their work.
- Provide an estimate on every project. Give the client a one-line, rather than a multi-line, estimate. This way the client buys the "whole car," not just the "steel."
- Establish a monthly service arrangement. This covers account service, education, trade show attendance, and other important industry and knowledge-based activity. Consider offering the client a volume-based discount on your blended agency hourly rate.
- Establish a monthly public relations service arrangement. This is separate from the account service arrangement. It covers your public relations work each month for the client. Since you cannot guarantee placement in any one month, and since PR industry standards discourage results-based compensation for public relations, the monthly stipend is the fairest way to go.
- Base the agency bonus on agency performance and client performance. We suggest agencies place themselves in the hands of their clients on this one. Most clients really don't want to share their financial information with your agency, and they really don't want a partner. The gesture of allowing some up-front discounts with the ability to earn a bonus at year-end is something most clients are willing to accept. Client-as-true-partner remains rare. This is a sound way to work toward it.
By the way, the bonus or "play for pay" arrangement enables the agency to ask for agency of record status. This gives the agency, and the client, a more equitable operating platform. One thing has changed: clients today are more likely to grant AOR status for a specific discipline — creative, media, or PR — than across the board. Take what they'll give. Discipline-specific AOR still gets you the legal and tax protections below.
Awarding Agency of Record status allows:
- Clients to own all the work. The work-for-hire arrangement is in effect for agencies of record and their clients. This saves a lot of grief down the road.
- Agencies to escape charging sales tax to clients. In agency of record agreements, agencies take ownership of nothing, so clients assume the burden of paying sales tax or using tax as they deem necessary.
- Over 130 years of published American case law exists regarding agency of record situations, therefore both client and agency are more protected through precedent.
There are so many valid types of agency/client compensation plans. "Whatever seems to work for both sides" has always been our operating philosophy, but the plan above seems to bring a smile to most clients' faces, and we sincerely believe it is fair for agencies.
One more point: After negotiating the deal, please make sure you have a formal buy-in meeting with the client to review the terms, sign the contract and explain to them how you will bill, when you will bill, why you may need occasional up-front payments, why there are sign-offs, what your estimates look like, etc. Take it from us, this up-front, semi-formal meeting at the beginning of the relationship is worth its weight in gold.
