CLOSE-UP: LIVE ISSUE/PAYMENT BY ROYALTIES; Should the ad industry adopt a royalties system?

Claire Beale looks into the viability of this alternative method of remuneration

Claire Beale looks into the viability of this alternative method of

remuneration



Three months is a long time, it seems, in the history of agency

remuneration. It’s not so long ago (Campaign, 23 June, to be exact) that

everyone was discussing the resurgence of the commission system of

remunerating agencies for all their hard work.



Mind you, that was before Coca-Cola, one of the world’s biggest

advertisers, decided to ditch commission in favour of fees (Campaign, 6

October) and before the news that the Central Office of Information was

to switch to payment by results to reward (or otherwise) its roster

agencies.



And now there’s a new alternative. At the recent Incorporated Society of

British Advertisers/Institute of Practitioners in Advertising conference

on client/agency relationships (Campaign, 17 November), the ad industry

was encouraged to take a leaf out of the arts world and consider a

method of payment by royalties.



Birger Jensen, a consultant to the advertising industry, proposed the

system. Effectively an extension of the commission system, the royalties

method is based on the number of times a creative idea is aired - in the

same way that musicians receive royalties each time their songs are

performed.



While admitting that it is not perfect - ‘factors other than the quality

of the advertising idea patently influence an advertiser’s spend’ -

Jensen is convinced of the viability of the method, particularly for

advertisers looking for a creative idea that will last.



The words strike a chord with Carol Reay, who came up with the idea of

payment by royalties at the beginning of the year and now uses it with

several Mellors Reay clients. As Reay sees it, payment by results

‘builds in a payment for value rather than for labour. We work in a

creative industry, so there’s a strong case for rewarding creative

thinking.’



Not that it was easy to sell to clients. Around half of those Reay

approached rejected the notion. ‘It’s still a relatively new concept and

some clients take time to see the benefits,’ she explains.



Of those who have taken it up, Reay says they are not paying

substantially different sums for their advertising than they would under

another method. ‘No payment system would work if it priced you out of

the market. This is a kind of success bonus - if our work is good, then

we get rewarded for it.’



But isn’t there a temptation for media buyers to plan and buy campaigns

of excessive length, with more screenings or insertions of the ad than

is necessary, just to get the royalty figure up?



Reay is adamant that if the client/agency relationship works in the

first place, such abuses would not occur. ‘There’s always this terrible

suspicion that people are self-seeking. It’s just not the case - most of

us are interested in doing the best job we can for the client.’ With

much media now being sourced separately from the creative work, Reay

adds, the situation would rarely arise.



And, as Reay points out, other forms of remuneration are equally open to

abuse. ‘Some payment systems reward agencies for work that doesn’t make

the grade, even reward them for failure. If an idea fails, the agency

has to come up with another one, and sometimes that can generate more

revenue. With the royalty system, if the creative work is good, it has a

longer life and you get bonuses on that.’



In an industry bogged down by the fee versus commission debate, Reay

says, ‘I’m starting to see real results. It’s just a more sensible

approach.’



Not so, says Ambrose McGinn, the marketing director of Abbey National.

He thinks that, like commission, royalties just serve to confuse: ‘It’s

just not suitable for clients trying to manage budgets.’ McGinn is a

firm believer in the solid framework offered by fee-based remuneration

‘where we have a transparent formula which everyone can work around’.



Yet Peter Walker, the finance director of Ogilvy and Mather, believes

fees only reward an agency for its effort and, while that is suitable

for smaller businesses or project work, ‘there’s no reason why there

shouldn’t be a way of payment for use of an idea’.



Walker sees the royalty system, which he believes is just a slight

extension of commission, sitting happily alongside other methods of

payment. ‘Royalties can be used to reward an idea, with a fee for client

service and commission for media remuneration.’



Derek Ralston, the managing director of Barker and Ralston, doesn’t

really see a major role for royalties as payment for work produced and

used in one market. He’s more than happy with the fee system, which he

believes creates a strong working relationship between the individual

agency employee and the client.



Yet Ralston endorses a mixed funding formula that can be used by

multinational advertisers to reward their local agencies. For example,

the local agency could be paid on a fee basis for the service it

supplies and on a royalties basis for creative work that gets exported

into other markets. Barker and Ralston already works in this way with

Saab.



And for Ralston, one of the main advantages of royalties is their role

in bringing more reality to the business of producing advertising by,

potentially, generating more revenue. ‘People put a huge amount of time

and energy into their work and there’s rarely much of a profit to be

made. Anything that allows agencies to generate more income to invest in

their businesses will have great benefits for the agency and the

client.’,



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