The Hidden Danger of Commissions and Referral Fees

In short: Commissions, referral fees and media margins can leave a client unsure whose side its adviser is on. Glenn Donaldson looks at NSW’s new media tender, which writes the answer into the contract, and asks how many businesses know how their own agencies and advisers are paid.

Marketing runs on advice. Agencies recommend media plans, and suppliers refer work to each other. Sometimes money changes hands along the way, and the client doesn’t always know.

Most of the time a commission probably doesn’t change the advice. The trouble is the doubt it creates, which may not be worth the income.

Marketing, creative and media have long been built on links, associations, related businesses and a fair amount of special treatment. In a disaggregated industry, a referral fee can look like a sensible way to add revenue. But when does the perception start to outweigh the benefit - the first time a fee changes hands, or after five years of fees between associated businesses?

If the suspicion does tip over one day, the commission may turn out to have kept a sub-standard product or service going, when competition on merit would have found the real winner.

Recently the question turned up on a much larger scale. The NSW Government has put its whole-of-government media account, worth about $82 million a year, to tender. The agency that wins it must act only as the government’s agent: it can’t buy media itself and resell it at its own price, known as principal trading, without written approval. It has to disclose mark-ups, rebates and incentives, and auditors get access to the buying systems.

Mark Ritson has called this the Parramatta Clause and asked why every marketer doesn’t insist on one. What struck me was how ordinary the terms are. As he points out, they put in writing what “agency” used to mean, which is working for the client.

Whether it works is another matter. Contracts this size are hard to run well, and the procurement teams writing and managing them, however well-intentioned, don’t always have the deep media knowledge the job needs. Even a well-written clause has limits. Mark Leone of MadClarity points out that an agency barred from taking a margin on a client’s media can still use that client’s buying power to secure inventory it resells to others.

The incentive problem doesn’t go away either. If an agency earns a margin on the media it sells, or a percentage of whatever is spent, where is its reason to buy for less, or to buy less? Every dollar of margin the client can’t see is a dollar that isn’t buying media. NSW’s current contract pays its agency a percentage of all media spend; the new tender stops the margin on media, but how the fee itself will be set won’t be settled until the next stage. Someone still has to judge what the best market rate is.

The same doubt applies to a referral, whatever the size of the sum. If a supplier pays for the introduction, did the business get the best partner, or the best-paying one?

What NSW has shown is that the question can be put in writing. Transparency is a scored part of the tender, and bidders have to explain how they handle rebates, and how they manage conflicts of interest. A business doesn’t need an $82 million account to ask its own agencies and advisers the same thing.

For the record, Revellion doesn’t pay referral fees to win work, and doesn’t accept them for work it passes on to others.

So when did you last ask your agencies and advisers how they’re paid, and by whom? If a fee does change hands, would you rather know before the recommendation is made, or after?