Every year, this publication and others create lists of the biggest advertising agencies, ranking them by the size of their media billings.

There’s only one problem with these lists: They don’t really say much about the relative sizes of ad agencies. That’s not because of the difference between capitalized billings and gross billings, or any other accounting minutiae. It’s because the entire system of compensating ad agencies is changing radically.

Ever since first springing up in the United States in the years after the Civil War, advertising agencies have been paid based on a commission system. That used to mean they would collect about 15 percent of total media billings as the agency fee for creating campaigns and buying the media.

That started to change in the 1980s. The economy was strong, media spending surged, and ad agencies were making a bundle causing their clients to wonder whether they were being overpaid.

There were other causes for change. Media-buying agencies led a trend toward “unbundling,” meaning ad agencies were hired just for creative work while separate companies were hired to buy the media. Obviously, you can’t pay the agency a percentage of billings in that kind of arrangement.

Accelerating the trend toward so-called “media-neutral compensation” is today’s plethora of media choices. With cable, the Internet, hundreds of niche magazines and other various forms of new media, traditional advertising isn’t as powerful as it used to be. The result is that many clients are now looking for integrated marketing solutions, agencies that combine traditional advertising, public relations, direct response, Internet marketing and other disciplines in one. But you can’t pay agencies like that on the basis of media billings.

“I’d go so far as to say that anybody who is still paying (agencies) on a commission system just doesn’t get it,” said consultant Cliff Scott of the Scott Group in Agoura Hills. “(Paying an agency a commission based on media spending) is like saying, ‘I’m going to pay my housekeeper based on how much I pay in property taxes.’ There’s no relationship between the two things.”

The commission system isn’t dead, but few would deny that it’s dying. Chiefs of L.A. agencies say they still have clients that pay on commission, but based on an informal survey, the breakdown is probably about 40 percent commission and 60 percent some other arrangement.

A survey of its members by the Association of National Advertisers bears that out. In 1997, only 35 percent of advertisers said they used a commission system to pay their agencies, down from 61 percent in 1994.

So what are the alternatives? The most popular is a simple fee system, in which the client and agency agree beforehand how much staff time will be needed to do the job, overhead expenses are added, and an agency profit markup is tacked on top.

Richard Zien, managing partner of West L.A.-based Mendelsohn/Zien Inc., arranges fees beforehand based not only on the amount of staff time devoted to a project, but the level of experience and talent of the staffers who will work on the account. Higher-level people will cost the clients more.

“It’s like at a law firm,” Zien said. “Do you want Johnnie Cochran working on your case, or do you want his assistant?”

Increasingly, though, another element is being added. The new popularity of pay-for-performance compensation for corporate leaders, such as stock options, has led to the creation of more incentive-based programs for marketers, too. Many agencies are now accepting arrangements in which they take less money up front in exchange for a bonus if certain performance measures are met the client’s sales increase, say, or there is more traffic in its stores, or consumer awareness of the brand rises.

That agencies are now willing to accept these deals marks a major turnabout from the past. For decades, the industry has staunchly resisted any effort to tie compensation to client sales, saying that the agency has no control over elements like manufacturing, distribution and merchandising. And anyway, it’s nearly impossible to determine whether people are buying a product simply because they saw an ad or for other reasons.

But Diane Krouse, managing director of the West L.A. office of DMB & B;, says it’s easier than ever to measure advertising performance. As an example, she says her agency does a good deal of work trying to attract people to clients’ Web sites. Web traffic is easily measured, so if more people are hitting the site after a campaign runs, DMB & B; gets a nice bonus.

“In spirit, (incentives are) a great thing,” Krouse said. “Agencies and clients should look for the agency to be accountable for marketplace results.”

Many other agency heads agree that the incentive system is a welcome change, because it gives them an opportunity to make more money if they perform well. But not everyone is a believer.

“(Fees and incentives) are just, in essence, a disguise to pay an agency less,” said ad consultant Mike Marsak of Marina del Rey-based Effective Marketing Strategies Inc.

Marsak is a firm believer in the old commission system, and advises all his clients conducting agency reviews to pay the standard 15 percent of media billings. He believes agencies write off clients that pay any other way, because the size of media spending is the best measure of the amount of work an agency will end up doing.

“In the end, clients win the battle and lose the war (with a fee system), because agencies cut back on services,” Marsak said.

Many agency chiefs, however, won’t be a bit sorry to see the commission system go away. That’s because clients often change their minds about media spending midstream. An agency might staff up an account based on a commitment by the client to spend $12 million in the fourth quarter, only to have the client change its mind and decide to spend nothing leaving the agency holding the bag.

Does all this mean that the trades, and the Business Journal for that matter, will stop ranking agencies by media billings and do it by some other measure? Don’t hold your breath.

The fact is that for competitive reasons, very few agencies are willing to divulge their annual revenues, while most are more than happy to reveal their media billings. Without revenue information, media billings are still the best way to measure the relative sizes of ad agencies.

News Editor Dan Turner writes a weekly column on marketing for the Los Angeles Business Journal.