By Tim Williams

By Tim Williams

Some of the biggest stars take the biggest risks when it comes to compensation by taking a percent of the box office. A good film makes more than a bad film, and the leading actors get paid accordingly.

In the world of professional photography, a good photograph earns more than a bad photograph. Because the photographer owns the rights, the more the photo gets used, the more the photographer earns. The iconic Maxell photo showing a man in a chair “blown away” by the sound of Maxell tape is still earning royalties more than 25 years later.

Despite the fact that most of the professionals that advertising agencies draw upon to complete their work — photographers, actors, musicians, etc. — earn more for good work than bad work, most advertising agencies themselves are stuck in a compensation paradigm that doesn’t correlate to value.

It’s time for marketing communications firms to realize that they’re in the intellectual property business instead of the hourly rate business. Here’s how agency principal Mike Reineck describes how his firm, Atlanta-based Kilgannon, captures the value they create:

“For the first 70 years of the twentieth century, agencies were paid based on how much media they bought for clients. This imploded after the growth of television drove the cost of media (and consequently the amount they paid agencies) through the roof. So for the next 30 years, agencies got paid based on how many hours of service they gave their clients. This imploded after client-side consultants and procurement folks practically drove agencies out of business by process-engineering the costs down to nothing.
Problem with all this is that it has nothing to do with the core offering of an agency. What is that – Media? Not anymore. Services? Not really. Most clients hire agencies because they want help persuading prospective customers to buy more of their stuff. That generally requires a bright idea that gets effectively communicated to those prospective customers. So, do clients pay agencies based on how bright the idea is? Or how effectively it reaches the customer? Or if it helps sell more stuff? Nope.
A media transaction is a market-determined price, so it’s easy to value. An hour of time is easily measured by a clock. But, how is the brightness of an idea measured, or the effectiveness of communication? These are really fuzzy, non-touchable things to measure. In the land of lawyers they’re called “intellectual property,” and payments for them are generally determined through royalties and licenses.
Underlying the license and royalty are the basic concepts of “Use” and “Value.” If intellectual property has value, it probably is going to be used a bunch. For example, Microsoft Office creates a lot of value to a personal computer. I am using it now to write and post this blog. Our enterprise decided to use it a bunch by loading a version on every computer in the agency. Even though the disc it came on only cost a few cents, we paid a couple hundred bucks for each license on each computer. The program had value; we used it a bunch. We paid Microsoft accordingly. Our procurement people don’t pay Microsoft based on how many hours their programmers spent developing it, or on how many bytes of media the program occupied on the disc. A similar use and value license is employed in the music, publishing, or art world. Back here in advertising, though, we are a little slow on the uptake.
Despite the difficulty of measurement, agencies and clients need to move to a compensation model tied to “value and use.” It more closely links to what we do and what clients want from us. Most every idea gets embodied into some kind of material (an ad, a banner, content, SWAG, etc.). Most of these materials get used (TV, radio, internet, events). Generally speaking, the better the idea the more it gets used.
The payment system should deliver money to the agency based on the idea’s use and the value it creates, even if the client is still using the material and the Agency is not providing services. Why? Because the idea is still producing value to that client and they are using it. In a Darwinian Adam Smith-type system, this would ultimately lead to good ideas and the agencies that produce them flourishing, while bad ideas and their agencies go the way of the Edsel. Isn’t that the most efficient market mechanism?
At our agency, we have spent a long decade trying to transform our compensation systems to ones based on use and value. In the long run, it’s the only win-win for us and our clients. It involves us identifying ideas, tracking their use, and putting skin in the game based on whether they produce value or not for our clients. Last year 25 percent of our revenue came from intellectual property payments.”

So next time you hear that an IP-based approach can’t be done, consider the fact that it already has been done. It works because it aligns the economic incentives of the agency and the client, the hallmark of effective agency-client relationships.