75% of advertisers plan to revamp agency compensation models by 2027: Report

New Delhi: An overwhelming 75% of advertisers are looking to make changes to their agency compensation model in the next 3 years, according to WFA and MediaSense's recent report on the future of agency remuneration. 

The report states that most advertisers adopt a hybrid approach to their remuneration models, commonly comprising commission, labour/people and outcome/performance-based fees. 

Advertisers are putting a greater focus on more accountable agency compensation, with 74% of respondents seeking to better align agency compensation to business performance.

Measurement methodologies and agency risk appetite will be tested as advertisers demand remuneration models be increasingly made up of outcome/performance-based fees (58% anticipate outcome/performance-based models will increase).

Logistical barriers are impacting the implementation of more accountable remuneration models, with 84% of respondents believing there is a lack of data and measurement between the advertiser and agency to facilitate outcome/performance-based models.

61% of respondents are expecting to pay their agencies more over the next three years, showing the ambition to invest more in their agency relationships. Talent is at the heart of this desire, with strategy and planning, data and measurement, and generative AI at the top of their wish list.

However, AI represents a threat to agency remuneration in the long term, with wider deployment expected to trigger a reduction in fees (58% see a direct relationship between AI deployment and fee reduction). 

Commercial transparency is a major source of frustration for advertisers, with a disparity between advertiser expectations and reality over what constitutes appropriate transparency. 75% care how their agencies make money, but currently only 28% believe they have transparency in how they do. Non-disclosed revenue streams (e.g., pooled AVBs, opaque programmatic supply chains and inventory media) continue to prove challenging. 

87% of advertisers believe agencies are resistant to adopting models that require greater transparency in how they make money. This is a clear tension to overcome given the overwhelming desire to evolve remuneration models. 

While it’s evident why advertisers want to shift the tide to more accountable remuneration models, there are significant barriers to overcome such as measurement, transparency and internal/external alignment.

As technology becomes a more prominent part of the agency service model, alternative remuneration models like deliverable/output-based and SaaS-based will grow into favour. While currently fledgling, for some advertisers these models will see a greater share as the barriers to outcome/performance-based models prove difficult to overcome. Agencies will also seek to complement their technology offering with the growth of strategic and technical talent, with the advertisers seeing value in the multiplicative effect of technology + strategy.

The very fact that there is no perfect model suggests increased customisation of remuneration models so they can be uniquely designed to the requirements of the advertiser.

Recommendations:

Improve two-way transparency

Consider establishing greater openness within the commercial relationship. For advertisers, this may mean providing agencies with greater visibility on expectations, goals, and budgets, as well as access to data that will improve how they are able to operate to those objectives. For agencies, this may mean being more transparent and proactive in communicating all revenue streams (including the non-disclosed elements) and the macro and micro challenges faced. Advertisers are willing to pay more to their agencies, but they want to understand what they’re paying for.

Alignment of incentives

Conducting an evaluation of current contracts and remuneration models is a first step in understanding how agencies are currently compensated and whether there are opportunities to better align agency incentives towards desired outcomes. 

Negotiate fair and flexible contracts 

Advertisers should consider ensuring that commercial agreements allow for fair compensation for their agency partners depending on the level and type of work required. Central to this is flexibility to account for frequent strategic changes and ensuring remuneration models do not get in the way of accessing the right talent and innovation.

Leverage technology and data

The only way that more accountable remuneration models can be realized likely resides in the use of technology to create a system of data provision, measurement and reporting to enable both advertisers and agencies to access the necessary information. This responsibility is on the advertiser as much as the agency, with outcome/performance-based models often relying on outcomes that will come from the advertiser’s owned data pools and internal systems. 

Experiment

As different remuneration models evolve and the role of technology and automation becomes more pervasive, start to experiment with different approaches to test the impact on business performance alongside access, retention and quality of talent. Start small (by capability or division, or market), and then look to scale.