Value-based compensation doesn’t always mean outcome-based
June 8, 2010 | Author: Tim Williams
It's important to understand that there are many different forms of value-based compensation. Today I read a piece by Rance Crain in Advertising Age, "Why Agencies — and the Media — Are Reluctant to Bet It All on Value-Compensation Systems," which perpetuates the mistaken notion that value-based compensation equals outcome-based or performance-based compensation. That's just one way to think about it.
The foundation of a value-based approach is to accept the premise that advertising agencies don't sell hours, they sell the "utility" that the hours produce. Economists going back to Adam Smith have taught that nobody buys a product or service; they buy the utility the product or service creates. This is as true for agencies as for anyone else.
Adam Smith had it right.
There are innumerable ways for agencies to be compensated in ways that have nothing to do with hours or time. A fee doesn't have to be tied to a complex set of metrics to be "value-based" — it just has to be based on something other than time sheets. Some digital firms, instead of charging for the time they invest in developing branded widgets, simply charge per download. We've seen direct marketing firms get paid per qualified lead. One Major League Baseball team pays its agency 50 cents for every non-season ticket sold. We know of an agency who was a finalist in a luxury car brand review whose compensation proposal took hours completely out of the equation and instead proposed to earn $50 for every car sold.
Of course, next comes the complaint from agencies that they don't have complete control over any of these things and would therefore never agree to tie their compensation to them. But they're looking through the wrong end of the telescope. If agencies want more control, this is precisely how to get it. As Dave Beals of the agency search consultancy Jones Lundin Beals points out in the above-referenced Advertising Age article, it fundamentally changes the dynamics of the agency-client relationship when the agency has some skin in the game. Because the economic incentives of the client and agency are aligned, there is a much higher degree of trust and mutual respect than in the standard pay-by-the-hour-regardless-of-results mentality.
Value-based compensation can also mean that the client pays the agency to use its IP. This isn't a far-fetched idea; it's being done by some progressive agencies every day. Firms like Sarkissian Mason have IP ownership at the center of their approach to compensation.
Finally, value-based compensation can also mean just quoting a simple, fixed price that is based on the value to the client rather than the costs of the agency. This is how pricing works in virtually every other industry, and it will become the standard in professional services as well. There's a pricing revolution underway, and it's up to the agencies (the sellers), not the clients (the buyers) to make it happen.
