There are many people who blame doctor’s fee-for-service compensation models as one of the reasons of increasing health care costs; costs which are pushing the country towards bankruptcy. The problem is that doctors are incentivized to do more than is actually needed, since the more care they provide, the more money they get. In addition, expensive procedures earn them even more money which drive costs higher still.

Are advertising agency’s incentives also poorly structured in a way that is causing unhappy clients and poor results? Paying a percentage of the total media cost to the agency can incentivize agencies to choose media that is more expensive rather than effective. Paying an hourly fee means the agency is rewarded for the amount of time spent on the work, not the quality of the work. And just like a doctors expensive procedures, agencies like to pick big expensive ideas to wow their clients even if it’s not the best fit for their needs.

In a recent article in Businessweek, John Windsor of Victors & Spoils explained where he sees the current state of advertising:
“Advertising is all about relationships, and at the heart of the client/agency relationship is trust. That trust has been eroded by a lack of transparency and, often, resistance to change. Over the past few months, I’ve spent a lot of time with the chief marketing officers of Fortune 500 companies. The theme is consistent. They tell me stories of being charged $10,000 per second of video editing for clips to go on YouTube, $1,000 for a single foamcore presentation board, and $25,000 for event banners; an unwillingness to collaborate; and myriad indirect charges for parties and travel.

Somewhere along the way, the big-agency business became a lifestyle. But clients, who want the best creative work, don’t want to pay for it anymore. And they’re figuring out that they don’t have to. Smart agencies need to adapt their business models and fast, or they won’t have the opportunity to rebuild these relationships.”

I get the feeling that agency compensation models are outdated and the majority of agency/client relationships are steeped in an “us versus them” mentality rather than a trust mentality like John talks about. How to fix this? What about pay-per-performance? Or an agency could be treated more like an in-house marketing department where they are paid a set amount and expected to reach a certain level of results. I think an agency should leave the client better off than they were before, not just in terms of increased marketing share, but in terms of organization of company goals and direction, higher level of education and understanding of the market and better ability to take care of themselves. These ideas aren’t without their problems but eventually someone is going to figure out the right mix and make a lot of money adding value to the client, not just ideas and spent money.