Ad Agency Compensation is All About Value Creation

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Legend has it that Pablo Picasso was sketching in the park when a woman approached him. After studying her for a moment, he used a single pencil stroke to create her portrait. He handed the women his work of art. When asked how much he was owed, Picasso asked for five thousand dollars. The woman questioned why did the portrait cost so much given it took him less than one minute to draw it. To which Picasso responded, "Madame, it took me my entire life."

The legend of Picasso is at the heart of a contemporary challenge in the advertising industry - the value and cost of ideas. There lies the problem. As an industry we are obsessed with ideas. We complain when these ideas are not accepted. We feel cheated by having to put a price tag on the enterprise of our ideas - how can I be asked to price passion and the selfless pursuit of an idea?

When we recognize we are in the business of "value creation" can we begin to straight from the source  our thinking from "'What does it cost us to generate work and ideas a client wants?" to "What is the value of the services and materials we are creating for the client?"

Value creation forces us to decentralize the idea creation process. Instead, everyone's job must become value creation. Value creation forces us to establish a strong personal and commercial relationship with our clients; truly understand their business as opposed to their latest brief. Value creation demands we measure and place more value on the outcome of our work.

Our latest idea is more than a campaign concept; it is value creation. Was the agency responsible for creating the Staples' plastic Easy Button, a $4.99 gadget (that's sold more than 1 million units since its launch in 2005) aware of that? Apparently not because they received no financial reward beyond their original fees.

Financial advisors are paid on the basis of value creation. This is accepted given their decisions have a direct and measurable impact on wealth. Digital marketing, like no other channel allows us to directly measure the value created for a brand, be it revenue or perception. This is part of the problem with digital marketing, value creation has been completely tied to quantitative metrics - sales, revenue, ROI.

If value creation is proven and measured every day, the degree of compensation then becomes a question of positioning. If clients regard an agency as just another operator on their marketing conveyor belt, value creation is not possible. Value creation requires partnership. Unfortunately most clients regard their agencies as just operators in a large conveyor belt. In response, and to extend their control and influence, agencies try to be the "jack of all trades", operators in all realms of digital marketing. The focus is then on depth of offering as opposed to value creation. These new services are generally sold to clients at a discount - lowering overall compensation levels.