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Taking bias out of agency compensation

Taking bias out of agency compensation Tom Hespos

"You can never really blame anybody for wanting to make money," my grandfather once told me. That was right after I angrily hung up on a telemarketer.

For some reason, that stuck with me. It's fine to feel however you like about telemarketing, but I think the more important part of what he said had to do with realizing what motivates people.

Perhaps that shaped how I think about compensation. To get people to do the best job they can, their compensation needs to be aligned as closely as possible with motivating them to do exactly that. It seems so simple, but when we look around the digital marketing industry, we see plenty of examples of people and companies who are asked to do one thing, but are compensated for another.

A great example is agency compensation. If your digital agency buys media, some clients want to compensate the agency based on a percentage of media spend. More often than not, this compensation method isn't aligned with what the client really wants to do, which is to figure out how to apply digital marketing solutions to business problems. What it leads to is an agency predisposition toward recommending a media campaign as a solution to every problem. After all, when you're holding a hammer, every problem begins to look like a nail.

Even if your agency buys media, though, you have to admit that spending more on advertising can't solve every problem. Sometimes the solution to a problem involves no media spend whatsoever. In those cases, how can a client expect an agency that is compensated on a percentage of media spending to come up with the right solution?

Given all of this, you might think I'm a fan of performance-based agency compensation. If there was a realistic way to directly tie together performance and compensation, I would be. But more often than not, what many clients call "performance-based compensation" forces agencies to take responsibility for things over which they have little or no control. Usually, a client will compensate an agency based on the number of incremental sales or leads they receive as a direct result of the agency's work. 

There are two problems here. The first is that many clients have a fairly narrow interpretation of "incremental." Often, credit isn't given for latent conversions or for any conversions that don't come as the result of an immediate click on a banner ad.

The second problem is much bigger. In many cases, clients who compensate in this way don't like to make adjustments to how leads or sales are processed. An agency might feel strongly that making an adjustment to a landing page or a form might increase conversion rates, but this is entirely outside the agency's realm of control.

There are two other popular models for agency compensation: project fees and retainer fees. To me, these seem more aligned with the notion of getting digital agencies to apply digital technology to solve business problems. However, if you're the type of client that likes to have an agency think about your business on a nearly constant basis, smaller project fees might keep the agency focused on a smaller piece of the business without thinking about the bigger picture.

This leaves us with retainer fees. Not surprisingly, this isn't always the most popular model for clients, as it conjures up images of overpaid executives padding timesheets. However, if you want to encourage an agency to have its A-team spend a lot of time thinking about how to solve business problems, this is the way to ensure that happens.

Of course, many have experimented with hybrid compensation models, blending some or all of the models I've discussed here. I do like the idea of this, as a retainer with a performance-based kicker can help make sure that an agency puts the right people on the business and covers the labor costs of the team it has invested in -- and it can help keep that team motivated and moving initiatives forward.

Tom Hespos is the president of Underscore Marketing and blogs at Hespos.com.

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Tom Hespos is President of New York agency Underscore Marketing. He is a frequent contributor to industry trade publications and has been writing a regular column about online marketing and advertising since March of 1998. His clients include Wyeth...

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