We’ve all heard the discussion about agency compensation issues and how the current model of basing agency charges on costs (hours-based fees) has several problems. For clients, paying fees based on how much effort an agency expends falls short of aligning the interests of the client with those of the agency. For agencies, getting compensated based on hours does not take into account the actual value that it may create for the client.

An article that appeared in the 06/11/07 issue of Advertising Age, authors Tim Williams and Ronald Baker call for a new value-based compensation model, arguing that the current model is not in the best interest of either the agency or the client.

The article, which is available here (heads up: subscription may be required), provides some interesting findings from a research study the authors conducted on behalf of the ANA and the AAAA. One of those is a pair of lists of how each group (agencies and clients) believes the other creates value.

How Marketers Believe Agencies Create Value

1. Working in a collaborative way with the client by creating an environment of mutual respect.
2. Ensuring that agency functions are integrated and agency divisions collaborate on behalf of the client.
3. Developing and producing creative ideas that are fresh and unexpected.
4. Developing ideas and programs that can be integrated into multiple communications channels.
5. Developing solutions that go beyond traditional approaches and reach consumers in new ways.

How Agencies Believe Marketers Create Value

1. Giving the agency the necessary time and resources to do its best work.
2. Working with the agency in a collaborative manner that puts a premium on mutual respect.
3. Identifying and articulating the outcomes the agency’s work is expected to produce.
4. Providing clear, complete direction to the agency.
5. Providing constructive, timely feedback to the agency.

Those categories were chosen from 24 possible areas given by the researchers.

The authors state that clients are looking for “campaign integration, media [channel] neutrality, creative innovation, and ‘holistic communication and marketing plans independent of any agency discipline.’” That’s interesting, sure, but hardly news. Anyone who’s been working with clients for some time can recite those client desires more or less verbatim. That’s why we’re all here (to deliver that for clients), isn’t it?

The article later discusses what agencies are looking for from clients (clear direction in regards to timing, strategy, and objectives, as well as being engaged early as an extension of the client team). Again, nothing new here. But what about agency compensation?

The article, while informative and interesting, failed to address the crux of the matter. We can all complain about the current compensation model we use, but until there is a better way to do it, we’ll have to stick with what we have.

In the area of compensation, the authors discuss the necessary shift from efficiency to effectiveness as the focus of new value-based compensation models. As they put it, “a compulsion to increase efficiency—doing things right—reduces the firm’s effectiveness at doing the right things.”

Still, Williams and Baker fall short of telling us how the new value-based model should be, should work, should be structured. They mention a few general and broad comments that describe such a model, but they don’t materially advance the creation of a new agency compensation paradigm.

Newer agencies (for example, Anomaly) are developing new ways to get paid. Some take a small stake in the client company (the ultimate in aligning your interests with those of your client). Some others get a percentage of business generated from their work (ditto as above). But one usually hears of these when the work being done is far from traditional (designing a new mascot for the brand, for example, that gets turned into a toy that is sold at retail). It’s certainly not happening in the more traditional world of marketing communications, at least not yet. For example, McCann-Erickson did not get any incremental compensation for the millions of dollars in sales that the “easy button” office push button toy generated for client Office Depot.

What is the answer? How do we align our interests with those of our clients? How do we get compensated for the value we create? And do we want to leave the relative safety of hours-based compensation with its ease-of-use and predictability benefits to shoot for the higher-risk and higher-reward of value-based compensation? What do you think?