The Association of National Advertisers (ANA) conducted a survey among 180 members with regard to the prominence of media rebates within the U.S. media market. Of note, both the ANA and those members surveyed expressed concern about the existence and appropriateness of this practice.
By way of background, media rebates or volume over-rides have been in use within the European advertising market for several years. In essence, media properties offer advertising agency holding companies a financial incentive tied to their overall purchases of space and or time. These rebates can take the form of cash rebates or no charge media weight which is banked by the agency holding company. These rebates can range between 1% and 15% of the media commitment. The agency community has long contended that this practice did not take place in the U.S. Advertisers on the other hand have always had their doubts about those denials and with apparently good reason.
In the recent ANA survey, 28% of the respondents indicated that they “were aware” of incentives being provided by the media to advertising agencies. Further, 85% of the ANA members surveyed felt that those rebates should be passed along to the advertiser. Yet in spite of these beliefs, only one-third of the respondents had client-agency contract language to that effect. Of note, Bill Duggan, EVP of the ANA stated that; “Frankly what I find personally surprising is that agencies are doing this. It’s in my opinion a totally inappropriate practice.” Some of the ANA members echoed those sentiments indicating that it was a “dark and murky” area of the business that required greater transparency.
Why the concern? Quite simply, the notion that a media seller would offer a media buyer with a financial incentive to increase the level of media purchased from them raises a serious conflict of interest issue. In fact, I cannot think of one cogent argument for the agency to participate at any level in the retention of volume over-rides at either the holding company or operating agency level. The media agency has a fiduciary responsibility to its clients. The advertiser needs to know with certainty that the resource allocation decision being made by its media agency are driven by sound, fact-based analysis tied to optimizing the advertisers return on media investment… not tied to the agency being able to supplement their revenue base.
Having contract language that clearly defines what constitutes a “rebate,” how the advertisers pro-rata share of that rebate is to be calculated, in what currency that rebate is to be paid (cash or media) and the timing of those payments is a must. However, that may not be enough. Why? The utter lack of transparency regarding these deals between global media concerns and global agency groups creates a series of challenges for the advertiser to assess the validity of the rebate amounts identified. In our advertising agency contract compliance auditing practice we have often encountered scenarios where the advertiser was receiving quarterly “rebate” checks, but had no basis for calculating or forecasting the amounts of those rebates. Of note, more often than not, the CFO of the operating agency does not have insight into how the holding company is allocating the rebates back to the client base.
In our opinion, independent contract compliance auditing is a necessary compliment to solid contract language to protect the advertiser’s interest. The knowledge gleaned across multiple audit engagements and the subject matter expertise necessary to even identify the presence of a rebate program, let alone calculate payment levels is crucial.
Let’s remember one fact. The multi-national agency holding companies are publicly traded entities. They are responsible for accreting shareholder value… their shareholders, not the advertisers. The incremental profit margin on volume over-ride programs, interest income from float, the mark-up on in-house studio or trading desk charges and the like is significant. To be clear, no one begrudges an agency from profiting on the investments which they make in building out their infrastructure and resource offering to improve performance or operating efficiencies. The issue is quite simply one of transparency. In the case of rebates, it is the advertisers’ money being invested, not the agency’s. Therefore, any economic benefit should come back to the advertiser, plain and simple.
Hopefully the ANA’s recent survey on this topic results in meaningful dialogue within the advertising community over this practice and how to monitor and control its use within the U.S. market. However, no one should be surprised with regard to the existence of these programs. In a March 3, 2008 BusinessWeek article entitled; “An Adman Tests the Limits” Irwin Gotlieb Chairman of WPP’s Group M media operation stated that the agency had begun to pursue rebate programs with U.S. based outdoor advertising companies and that they were looking at other media channels to expand the concept to in the U.S. market.
Interested in learning more about the utilization of rebates and how to implement the appropriate controls and transparency? Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on this topic.