Last summer, the Institute of Practitioners in Advertising (IPA) warned that the advertising industry was approaching a “tipping point” over agency pricing structures, arguing that traditional time-and-resource (FTE-based) pricing models fail to capture the value of services provided by modern agencies. The IPA found that only 27 percent of agencies felt they receive a “fair” price for their work.
Now these remuneration models appear to be changing. A new report from the World Federation of Advertisers (WFA) and Agency Mania Solutions suggests that global brands have “effectively ditched” the traditional labour model, as multinationals shift towards a mix of output-based payment methodologies.
Time isn’t money
The report, ‘How Brands Define, Scope and Reward Agency Work’, is based on responses from 69 different multinational companies, representing six different industry sectors and a collective global marketing spend of $147 billion. Most (71 percent) respondents were in a global marketing procurement role.
The responses suggest that labour-based payments, the dominant approach in 2011, now represent the main agency compensation model for just 19 percent of global brands. Meanwhile fixed-fee/output models have risen from 20 percent to 33 percent over the 15-year period, and ‘Labour + Performance’ models have more than doubled, from 9 percent to 21 percent.
That said, outcome-linked models currently represent a relatively small share of agency fees, according to the research. Between 67 percent and 80 percent of respondents say that performance-based remuneration accounts for less than 20 percent of total agency compensation. The study adds that adoption of these models is highest in media-related disciplines, where outcomes are “typically easier to track and measure than in creative and production work.”
A hybrid future
Looking ahead, performance-based fees show the strongest momentum in terms of adoption of different models, according to the research, with 63 percent of multinationals expecting to increase their use. Value-based (46 percent) and fixed-fee or output-based (36 percent) payment approaches are also expected to see higher adoption. In contrast, 42 percent anticipate further reductions in their Labour + Performance arrangements, while commission models also face more contraction than growth.
Much of this shift is driven by AI, due to the compression of labour hours brought on by the technology, which is expected to place higher value on outputs and performance than time and resources. But the report notes that brands are still catching up with this effect; just 20 percent have already evolved their commercial models in response to AI, although 61 percent intend to do so.
“Clients ultimately care about the quality, impact and performance of the work – not how many people or hours were required to produce it,” said Laura Forcetti, Director of Global Marketing, Sourcing and Director Marketing Services, Asia Pacific at WFA. “AI is accelerating this transition by enabling agencies to complete many activities faster, making time an increasingly weak proxy for value. The growth of hybrid approaches also shows that no single model suits every discipline or assignment. The future of agency compensation is not paying for effort, it is rewarding valuable work, delivered effectively.”
Beyond the formula
The study also looks beyond remuneration models to get a wider picture of agency-client relationships, including the factors that brands consider essential to producing performing work. The research suggests that financial incentives are considered a “less important” factor, scoring 3.9 out of 6 (where 6 represents essential), with clients placing higher value on great briefing (5.6), respect and trust (5.2), and high-quality feedback (5.1).
Long-term relationships also rank among the less important factors, with a score of 3.8. But according to the research, agency relationships are now lasting longer than they did in 2018, with average tenure increasing across paid social, creative, production and media. Paid social has seen particularly high growth in average tenure over the past eight years, rising from two years in 2018, to 4.3 years in the latest survey.
“Becoming better partners isn’t a mindset shift, it’s an operational one,” said Bruno Gralpois, Co-Founder & Principal at Agency Mania Solutions. “As AI reshapes how work gets done and priced, the brands and agencies who get ahead will be the ones building the clarity, shared definitions, and ongoing conversations that let trust and commercial models reinforce each other, instead of compensating for each other. That’s the harder, more durable work than any single remuneration formula.”
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