Child, please! Agency compensation and the suspension of disbelief

Any explanation is better than none. - Nietzsche

The 4A's (Amer Assoc of Ad Agencies) have a salary survey out ($350 for members) that, according to Advertising Age, shows top creative 'talent' billing out at $978 per hour [here] with lesser talent averaging $400 and up. I put the word 'talent' in parentheses because it takes quite a bit of talent to convince someone to pay you $978 per hour...for anything.

If you were working 2000 hours per year, that would value your labor at $1.95 million. Of course, it would also mean that 4A's members only have to work for 21 minutes at that rate to pay for a copy of the 4A's confirming survey.

But what is it that makes America's top creative talent worth that much? In the spirit of Nietsche, here's an explanation:

These talented men and women are creating campaigns that, as a directly measurable result of their efforts, sell at least $1.95 million worth of something.

How else to explain these rates? Some people might use terms like 'great' or 'impactful' to describe the work product that warrants this type of agency compensation. Others might throw in 'award-winning' to modify the noun 'work'. But those are not business terms.

One other explanation does come to mind, but that would require something less noble. Maybe these rates aren't justifiable? Maybe they don't actually exist at all except in a world where reality is suspended in favor of imagination? Maybe they are reported, like capitalized billings once were, as a way of creating the impression of importance...of shoring up an industry pricing structure under duress.

Whatever the explanation for the incredi-rates being reported in the 4A's study, the buyers of creative talent can always ask for a measurable explanation of the return on the investment.

There are quite a few highly competent creative talents and agencies who are compensated at a fraction of the 4A's-reported levels...here's a few ways to recognize them:

1. they embrace discussions about campaign measurement + can show you how they've worked with their clients to create measurement at every level of campaign (not just using awareness studies!).
2. they are able to work with value-based or milestone-driven, fixed fee billing approaches that minimize the financial risk inherent to the client in spending on any campaign.
3. they can define 'the work' with specificity around deliverables, costs + support for business objectives.
4. they use the word 'strategy' in the proper context of accomplishing objectives rather than as a separate creative exercise and thus expect client involvement in the creative process.

HT to Chad Ochocinco for inspiring the headline...and for delivering measurable results in the Dog Pound!

Value-based billing: Agencies at the table?

Bloomberg posted a story on P+G's decision to move Grey Advertising's work on Pringle's to a value-based compensation setup last month (here). All I can say is, it's about time!

I've worked at two companies whose billings were tied, in part, to performance-based incentives derived from the client's overall success. And while the P+G move (along with several other consumer companies) comes later in the game, it's also a bit more comprehensive.

Some in the advertising business are worried that it is merely a ruse to reduce fees. Others seem to embrace the concept. Here's four reasons I think it's a good thing:

1. Results: In my experiences with value-based billing, the discipline of evaluation creates discipline in the thinking. I'm not talking about stifling creativity. On the contary, agencies get passionate about the work...the risk is that they get wedded to an idea even when it can't deliver results. Value-based approaches that rely on meaningful measurement ensure that outcomes are considered throughout the ideation and execution.

2. Trust: When an agency's financial success is tied--directly--to the business success of the client, it makes the partnership more meaningful and easier to understand for both parties. Both parties can trust that they are working together for the same thing. And of course, trust is a key element of any long term relationship.

3. Strategy: Much talk is made of being strategic in the agency business. However, much work ends up being quite tactical in the context of larger business go-to-market strategies. When agencies are seen as partners, sharing the risk based on business strategies, they may find themselves earning a seat at a much larger table.

4. Inevitability: It isn't going to go back to the way it was. For decades, marketers half jokingly used the quote that "half their advertising worked, they just didn't know which half." But now the precise measurability that comes standard with all things digital is seeping into the expectation of all marketing and advertising.

Of course there are risks to the agency...that's the shared part of shared risk...some clients may use it as a means of giving agency billings a beat down. Others may pursue ill-conceived or simplistic measurement schemes. And the biggest risk is that the agency's work is held directly accountable for things it can't impact directly.

But while these risks are real to agencies, it may be wise to remember that clients has always taken a very real risk with their agencies when payng upfront or for hours worked. It may just be that, like their customers, companies have decided they'd like a little less risk in their worlds. Agencies that embrace value-based approaches may benefit by getting a more enduring seat at the table...instead of a place on it.