How Do We Solve The Media Rebate Issue?

By Mike Drexler

Ok. So by now a lot of people in our industry have weighed in on the media rebate issue. It’s been a discussion brought into the limelight by Jon Mandel at an ANA conference and now people are either taking sides or feigning ignorance or just ducking the subject. I think most of the conversation so far does nothing to determine how big a problem it may be and what might be a solution to the so called controversy. Here’s my take on it.

First of all let’s be sure we have the definition right. I mean the connotation.

A “kickback” is certainly a negative word. A “rebate” not so much. There are rebates in almost every industry and it’s perfectly acceptable. The real issue is transparency. Because transparency leads to better accountability. Another concern is objectivity. If an agency gets paid more from a media entity without measuring the success of the task on behalf of the advertiser, and gets to keep it without divulging the incentive, how objective can you really be in using the medium?

It’s interesting that receiving something from the seller has gone on before, but in different forms. The media commission system where the media paid the agency 15% and the agency kept it all, really changed long ago. While the seller paid commission to the agency, in most cases commissions were passed on to the client and the client would pay the agency and the agency would pay the media (gross cost less 15% net). Over time, clients felt 15% was too much and commissions paid to the agency by the client were lowered. Eventually, a fee structure emerged along with a lower commission allowance. Until the independent media buying services came into being in the 1960’s. Then, transparency disappeared. The client was charged one price by the buying service for media inventory and the media was paid another lesser price. (And the spread was all buying service income, much higher than 15% on media spend). That also included barter arrangements too where client product (and some cash) was used to “price” media inventory. And the spread was not revealed.

Internationally (with a few exceptions in certain countries) rebates today are prevalent. In some cases clients know what the rebate is and in some cases they don’t. It’s a common practice overseas that hasn’t really created a furor for decades. And it still goes on as an acceptable way of doing business across the pond. I’m not condoning or condemning the practice, just telling it like it is. The problem is in the U.S. it’s not been front and center and most recently, since the commission’s clients pay agencies for buying have been further reduced and agencies have been getting squeezed, they keep trying to keep the margins up. Digital media and programmatic buying with trading desks and in some cases arbitrage or “owned” inventory has opened a whole new way of agency thinking about income strategies. And rebates have frequently become a way of life.

So now the issue needs to be addressed and the ANA and the 4A’s will be looking into it, scrutinizing agencies and trying to find an acceptable solution all around. If you’re waiting for my opinion here it is. Certainly if rebate practices are adopted the rebates must be divulged to a client. Transparency is the crux of the issue. Rebate transparency will, of course, allow agencies and clients to more appropriately and honestly manage their compensation arrangements.

However, I think compensation paid by clients to agencies is better served on a fee based formula. But fee’s based solely on hours logged (plus overhead and a markup for profit) do not relate agency work directly to client business success. So there should be a compensation formula that is also directed to building client business with measurement and monitoring of agency scope of work, benchmarks and criteria for business results. Sure, it needs to factor in agency profit, but the agency costs broken out overall by direct salaries, overhead and profit should be revealed. And audited.

There is also a pretty good reason for further client incentives to be built into agency compensation based on incremental client success for the agency work. What the criteria should be and the value of their relationship to the client business is where both client and agency need to put their energy because these barometers are essential to a flourishing partnership. The final consideration is how the financial incentive is distributed. It really should go to the people who work on the business and less to those who represent agency corporate overhead. That just seems fair.

Attacking agencies doesn’t solve the problem. Ignoring rebates (or a kickback) and denying it doesn’t either. So here’s hoping that the ANA and 4A’s can look at it with the interests of both clients and agencies getting a good deal. Not like the political standoff our country often finds itself in.