Four Main Types of Agency Compensation Explained

When it comes to working with an agency, understanding the different types of compensation models is essential. There are four main types of agency compensation: project-based, time and material, retainer, and commission. Each model has its own advantages and disadvantages, so it's important to understand which one is best for your business. The project-based compensation model is ideal for projects with a clear beginning, middle, and end.

Agency and client agree on a fixed flat rate with defined expectations and scope based on estimated hours and rates. An example of this model is an agency that designs five email templates for a brand or creates a website. The benefit of this model is that the client is informed about the cost and schedule of the project and is familiar with the agency team in charge of the process. However, the difficulties with the project-based compensation model is that the margin of error is small and, when projects change or estimates are out of place, the agency may bill the client for additional costs.

The fixed budget can also hinder project progress by limiting the agency's innovative ideas, not leveraging the agency's full capabilities, or sacrificing quality to meet deadlines. The time and material compensation model is generally based on a negotiated hourly rate with a general estimate of the projected hours it will take to complete a project. The estimate is calculated based on a rate sheet (each agency function has a different hourly rate) or a combined rate (an average of the hourly rate for all functions combined). This model is billed to customer as work is completed.

Actual work may require the agency to exceed or decrease the projected hours in the budget. A brand that uses an agency to help redesign a website that will involve a complex discovery process and unknown deliverables for execution could benefit from this model. A difficulty with the Time and Materials model is the lack of budgetary control. Client and agency must work harder to meet estimated budget, hours, and scope.

The retainer compensation model is generally a static monthly fee for an “hour period” of the agency's marketing service. Similar to the project-based model, the agency team working with the client is consistent and prioritizes the client's ongoing needs. In this model, agencies act as an extension of the internal marketing team. The customer can change their request or change priorities, but if the needs exceed the monthly advance, then change orders can be added to the monthly advance.

The benefit of a Retainer is having a dedicated agency team focused on solving the client's most pressing needs. The agency also builds institutional knowledge over time, as the team remains consistent throughout. From an agency perspective, Retainer offers predictable revenues that allow for a dedicated, customer-focused staff. With a Project or Time and Materials model, the ad hoc team working on a project is likely to dissipate when work is finished and accumulated knowledge is lost. Occasionally, a customer will start with a relationship based on materials or projects of time and materials and move to a Retainer once trust and experience have been established. The fourth type of compensation model is commission.

This type of payment structure usually involves salespeople who are paid based on their performance in terms of sales volume or revenue generated. Commission payments are often used in industries such as real estate or insurance where salespeople are paid based on their ability to close deals. When asking about compensation, most people want to know about direct compensation, in particular base salary and variable wage. The four main types of direct compensation are hourly wage, salary, commission and bonuses. In service-oriented industries, especially retail and accommodation, tips are also sometimes included as one of the main types of compensation. Amid financial pressures, agencies are also exploring alternatives that impact cash flow, including new compensation models.

It is important to know what works best for your agency so you can negotiate a more favorable compensation model. The most common thing is to negotiate a rate with your agency that is billed by the hour once you exceed your withholding allowance.

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