In my experience, nothing messes up a relationship faster than the failure to establish compensation plans that both marketing services providers and their clients understand and agree to. The most common arrangements include a flat fee per project, hourly fees per project, retainers and commission, and markups.

Flat Project Fee

With the flat project fee, the marketing services provider and the client agree on a fee for performing a service. The amount usually is paid upon completion of the service.

With very large projects, the marketing services provider may require a deposit and progress payments. Deposits can range from one-third to 50 percent. The normal pattern is to pay one-third more at the midpoint of the project and pay the balance upon delivery of the finished goods or completion of the project.

Hourly Fee

The hourly fee for services arrangement is different. Usually, a client agrees to an estimate, and a deposit also may be required. Hours are billed monthly. One variation on this arrangement is holding the deposit to be credited against the final payment, which assures the marketing services provider that the final payment will be made.

Retainers and Commissions

Retainers and commission usually are arranged when an ongoing relationship is envisioned. This relationship often begins with a presentation to the client by the marketing services provider, which brings us to speculative presentations. Some clients will invite several marketing services providers to present proposals. The client may say it wants to see speculative ideas.

Some creative providers refuse to present speculative work, but offer to make a “credentials presentation.” Instead of presenting ideas that have been prepared especially for the prospective client, they may present examples of work they have done for companies with similar problems. Other presenters, especially those without relevant experience, may choose to show speculative ideas.

Marketing services providers incur sizable expenses in either event. The staff time and energy required to prepare and give a presentation can be a significant drain on resources. If spec work is required—or deemed advisable by the marketing services provider in order to prove that it should get the business—the cost escalates dramatically.

Some potential clients who ask for spec work will offer a stipend to cover the presenter’s costs. In my experience, this is almost never enough money to cover costs. Therefore, in all but rare occasions, I have counseled that marketing services providers should not accept any prepayment for spec work: It entitles the prospective client to use the ideas without retaining the firm.

Unfortunately, some clients are only on fishing expeditions. They use the ideas they like without regard for the rights of those who developed the ideas. The only way a marketing services provider can be protected from these predators is by being sure the client knows that the work is copyrighted and cannot be used without the marketing services provider’s permission. Many marketing services providers include such a statement on each element in their proposal and presentation.

When is it a good idea for a creative provider to present speculative work? When the potential is sizable enough to make the gamble worthwhile. For example, a contract with a million dollars or more in potential income is probably worth doing speculative work. Clients of that size also can afford to pay more generous stipends. Further consider whether or not the ideas may be presentable to another potential client at a later date. In that case, the work is not wasted if the target client declines to pay for it.

Let’s assume that the client and the marketing services provider agree to do business on a continuing basis. How will the provider be paid? This is when a retainer may be used. The retainer is a payment, typically monthly, for the service delivered during the period. The incentive to a client for paying a retainer is that it requires less bookkeeping. The retainer is a certain amount payable each month that usually represents a discount against the hourly cost for the same services. The assurance of monthly cash flow is an incentive for the marketing services provider.

Retainers usually are combined with separate payment plans for the marketing services provider’s out-of-pocket expenses. These are accounted for as frequently as the amounts require and occasionally include prepayment of scheduled expenses. This is partially because the lag time between when the payment is due to a third party and when the marketing services provider gets paid can put the provider in the position of “financer” while it waits to be paid. If it defers payment until it gets paid, it can incur interest charges and damage relations with its suppliers.

Prepayment of each month’s retainer frequently is negotiated for firms that work in less tangible areas, such as public relations, where the service is valuable but the results are less predictable and more difficult to calculate on a monthly basis.

Some providers that operate on a retainer provide post-period accounting of the hours devoted each month to the service. This gives the client a way to measure hourly costs for the services provided. In these circumstances, since some months may be more work-intensive than others, there often is a provision to reconcile unused hours or underpayment in following months.

Markups

If a marketing services provider is placing media for a client, or placing other third-party work, such as printing or production, a markup is usually involved. This is paid in recognition of the time and expertise required to provide the services effectively. Some media pay commissions to the party that contracts for the medium and provides produced materials. This customarily is 15 percent of the gross charge. So, if a medium normally charges $100, it will give the marketing services provider a credit for $15 of the charge, requiring it to pay just $85.

Media that do not pay commissions usually will have their charges marked up 17.65 percent to cover the marketing services provider’s fees. This number is often a matter of confusion for clients who have been told that media commission is 15 percent. In order to equal $100, then 17.65 percent is the percent of $85 that must be added to the cost.

There are two variations on this theme. In one case, clients with very large media and printing/production budgets may ask their marketing services provider to provide the services at no additional charge, receiving compensation through the commissions and markups. Other clients may want to retain the commissions and markups and pay a more generous retainer to cover the provider’s cost for media and production supervision services.

Marketing services providers should take care to understand the trade-offs in any compensation system. Clients will negotiate arrangements that are most favorable for them. Service providers should know if a budget is likely to be increased or decreased over the course of the relationship. Contracts should include clauses that assure that both parties are treated fairly. Every client should want its marketing services provider to make a profit. A company that is losing money will neglect the clients that don’t generate profit and, if enough clients aren’t profitable, it will go out of business, leaving the client in the lurch.

Most fundamental of all, both parties should be sure they understand what they are committing to in the agreement. Contracts should be signed before work proceeds. A colleague recently told me about a proposal that had been proffered to a client at the client’s invitation. After the terms of a verbal agreement were fulfilled, the client claimed to be unhappy with the work and refused to pay. Rather than pursue collection or legal action, the marketing services provider decided to eat the loss. If there had been a signed agreement, both the client and the provider would have understood their promises and would have been prepared to stand by them.

William Earnest Waites is the former chairman and co-creative director of Spiro & Waites Advertising, Marketing & Public Relations. He also has held senior creative and management positions with Young & Rubicam and Ogilvy Mather.