What’s the deal with fee compensation?


  • Business
  • Saturday, 01 Feb 2003

By EE SIM MACHADO - JM CREATIVE

ACCORDING to the president of the Association of Accredited Advertising Agents (4As), Khoo Boo Boon, some 130 agency folk – some with clients in tow – attended the half-day seminar about 10 days ago on the subject of implementing a fee-based system for agencies.  

As a follow-up on the first round held a year prior organised by the 4As, the turnout was encouraging, until Khoo said that 50 others were no-shows despite confirming their attendance. So much for taking an interest in trends that can affect your livelihood.  

If you did not attend the seminar but only read the news report carried in this newspaper in which one of the speakers, Greg Paull of R3 Asia Pacific, is reported to have said that “a fee-based remuneration could possibly be fully adopted within two years” in the Malaysian context, you probably deserve to be shell-shocked.  

However, the “within two years” switch-over timing is a tad over optimistic as even David Beals (chief executive officer of Jones Linden Beals Inc who was the other speaker) indicated that it took 15 years (1985-2000) in the US for the shift from the standard 15 per cent commission to fees.  

In fact, the last survey showed 68 per cent of agreements between clients and agencies in the US moved to fees with some form of performance component included in over 36 per cent of the agreements.  

While the fee system of compensation is becoming more commonplace in Asia (22 per cent), it is the international agencies and their multinational clients that have no hesitation in embracing it. Or, could it be, thrust upon them through globalisation.  

Despite the gung-ho spirit towards this change, it is evident that some key issues still rankle when the two parties decide on the basis of compensation.  

For example, “equitable” according to a client relates to getting “fair value” from his agency for awarding his business while in the view of the agency, it is receiving “fair profit”. How you arrive at a mutually acceptable percentage requires the patience of Job as well as a large dose of transparency on both sides.  

If you doubt that this is a sticking point, consider the times you’ve had to justify ad nauseam those production costs because your client puts a lower value on the work to be produced. And this is exacerbated during a downturn when getting the lowest cost possible is the flavour of the day.  

It was emphasised at the seminar that the fee system cannot work if a client is on a cost-cutting drive – wonderfully demonstrated when a participant found the indicative figure of 20-25 per cent as “fair profit” to an agency unjustifiable since it would be a good 5-10 per cent above the traditional media commission payment.  

So, how do we, as agencies, rationalise this increase to our clients? It comes back to negotiation on what is fair and reasonable, despite arguments by the speakers that the system – once expectations of tasks have been defined – would make both parties more efficient.  

The sad truth, surely, is that there are only so many Nestles, Unilevers, Coca-Colas, Daimlers, and P&Gs who believe the fee system is more efficient. What about those on the other side of the Great Divide – home grown agencies and their similarly home grown clients? 

Predicated as the fee system is upon transparency, mutual trust and respect, plus the fact that discounting practices have cut the ground from under our feet, local agencies and their clients will be slower to jump on the bandwagon.  

To help speed things along, we need clients to recognise – as Lowe & Partners Malaysia managing director Khairudin Rahim said in his opening remarks at the seminar – that “an ad agency, just like an advertiser, has similar business needs ... it must pay taxes. It needs to grow, if only to keep pace with inflation. It needs to attract talented people and provide a stimulating environment in which to work as well as to retain and reward these people.  

“All of these are management goals that can be attained only by recovering costs and earning an adequate profit.”  

He went on to re-define the difference between an agency and other types of business: “Our skill set is primarily imagination, creativity and originality ? Ideas can’t be made on machines and we have only one asset, people. We are not a logical, linear process. Imagination, creativity and originality don’t happen that way.”  

At the close of the session, there was this final word from David Beals covering reconciliation – how long does it take to come up with an idea? A crucial question since that’s what clients pay an agency for.  

Under the fee system, this admittedly imprecise, difficult task to measure would require a year’s work to establish, tracked through a rigid log book of hours spent on the account. Given an industry average of 18 to 24 months that clients stay with an agency, you can imagine the administrative work.  

While the switch to a fee system is probably as inevitable as the US attack on Iraq, as long as some clients continue to haggle over the cost of a campaign as they do over a kilo of fruit in Petaling Street, the commission system will still be around. 

As you dig into that dish of “lo-hei” in the days ahead of the Chinese New Year season, the fee system and how you may/may not introduce it will probably give you much food for thought. Gong Xi Fa Cai to all friends and readers. 

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