There are three basic methods by which clients compensate agencies for services rendered: (1) receiving commissions from media, (2) being compensated based on a fee system, and (3) earning compensation based on outcomes.
- Commissions from media for advertisements aired or printed on behalf of the agency’s clients provided the primary form of ad agency compensation in the past. Historically, U.S. advertising agencies charged a standard commission of 15 percent of the gross amount of billings.
- The most common compensation method today is a labor-based fee system, by which advertising agencies are compensated much like lawyers, tax advisors, and management consultants. That is, agencies carefully monitor their time and bill clients an hourly fee based on time commitment. This system involves price negotiations between advertisers and agencies such that the actual rate of compensation is based on mutual agreement concerning the worth of the services rendered by the advertising agency.
- Outcome- or performance-based programs represent the newest approach to agency compensation. Ford Motor Company, for example, uses a compensation system whereby it negotiates a base fee with its agencies to cover the cost of services provided and additionally offers incentive payments that are tied to brand performance goals such as targeted revenue levels.