Marketing Math Blog

Feb 13
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transparency

Is Agency Ownership of Audience Measurement Providers a Good Idea?

By Advertisers, Advertising Agencies, Advertising Agency Audits, AVBs, Contract Compliance Auditing, Digital Trading Desk, Letter of Agreement Best Practices, Marketing Agency Network, Right to Audit Clauses, Trading Desk No Comments

transparencyRecently, WPP indicated that they were planning to take a large equity stake in comScore, one of the world’s largest online campaign measurement providers. This is in addition to WPP’s recent investment in Rentrak, a television audience measurement service, an organization in which WPP is now the largest institutional shareowner.

With WPP’s continued push into the campaign measurement space, advertisers may begin to question the consequences of an agency holding company’s ownership of audience delivery measurement resources. After all, these campaign measurement service providers gather and analyze data and publish ratings which are utilized to assess the efficacy of the agency’s media purchasing efforts on the advertiser’s behalf.

More broadly, based upon the business activities in which the agency holding companies now routinely engage in, one might legitimately question whether or not the designation of “agent” is even an apt description of the role which advertising firms play in support of their clients. Activities such as media arbitrage or reselling if one prefers, joint media and technology ownership deals with publishers, participation in AVB or volume rebate programs offered by media owners to agency holding companies tied to transactions entered into on behalf of their clients, all raise a legitimate question about “Whose” interests agencies are beholden to.

What recourse do advertisers have? After all, there are often distinct advantages to utilizing large agency holding company brands. Independent agencies, which while unencumbered by questions regarding their fiduciary focus, sometimes lack the scale or depth of resources required to perform in certain situations. Enlightened protectionism in the 21st century requires advertisers to aggressively push for enhanced transparency, improved controls and the unimpeachable right to audit their agency’s contract compliance and financial management performance. In the oft quoted words of President Ronald Reagan; “Trust, but verify.”

As a sound first step, it is essential for advertisers to understand their agency partners’ affiliate relationships. Secondly, it is imperative for advertisers to fashion contract language which requires their agencies to provide full disclosure when an agency affiliate is being utilized on their behalf, how that affiliate is compensated and by whom and whether or not the rates charged by that affiliate are competitive with comparable providers in the market. Whether in the context of ad serving, programmatic buying, trading desk operations or campaign measurement, an advertiser has a right to know when their agency has engaged an affiliate firm. This affords client stakeholders the opportunity to raise any questions or concerns they may have regarding such a selection and its impact on the agency’s objectivity. 

Once affiliate firms have been identified, tracking what percentage of an advertiser’s budget is being spent collectively at the agency holding company level can prove enlightening. More importantly, understanding the value of their account to the holding company based upon total revenues enhances an advertiser’s negotiating position when considering agency remuneration options going forward. 

As the ad industry has grown in size, generating approximately $521.6 billion in revenue in 2014 (source: MAGNA GLOBAL), it has also grown in complexity which is due in large to the rate and rapidity of technological change. Thus, it comes as no surprise that relationships among industry stakeholders have evolved, becoming more complex in their own right. The industry has begun to come to terms with the plurality of such relationships where partners may simultaneously be competitors or buyer agents may also function as sellers. However, “coming to terms” doesn’t mean blind acceptance. Rather it requires a new level of discourse and enhanced controls to protect advertisers and their investment.

Interested in learning more about agency network “affiliate management?” Contact Cliff Campeau, Principal at Advertising Audit & Risk Management, LLC at ccampeau@aarmusa.com for a complimentary consultation on the topic.  

 

Feb 01
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Why Contract Definitions and Demonstrations are Important

By Advertising Agencies, advertising legal, Contract Compliance Auditing, Marketing No Comments

contract complianceFor as long as there have been advertisers and agencies, there have been Client-Agency agreements. Contractual instruments, which are often referred to as “terms of divorce.” This is likely because one of their primary roles is to spell out the guidelines governing how each party must conduct themselves and identifying their respective obligations in the event a relationship is terminated.

The fact of the matter is, a contract is much more than that. It is a binding agreement between advertisers and their agencies which should identify the terms and conditions that will govern all facets of the relationship, ranging from how an agency is to be compensated to the level of staffing that an agency will deploy on a client’s behalf, to the scope of work to be undertaken by the agency. An effective contract also asserts both parties expectations for how they will conduct themselves while providing a mutual understanding for how the agency will steward a client’s marketing investment from a performance, financial and legal perspective.

Unfortunately, when it comes to contracts, there are too few “industry standards” within the advertising marketplace, varied definitions for descriptive terms and too often a lack of clarity around what is being represented by certain aspects of the agreement language. These gaps create gray areas which are seldom understood, much less agreed to by both parties. Unchecked, these gaps can be costly, particularly to advertisers that aren’t supported by knowledgeable industry experts and attorneys with solid industry experience.

As contract compliance auditors we have reviewed hundreds of Client-Agency agreements and have sat across the table from advertisers and agencies to help mediate gaps in understanding over even the most basic terms or representations. Examples include the definition of “Gross Media,” the assumption that individuals listed in an agency “Staffing Plan” are full-time employees of the agency (rather than contractors or part-timers) and or whether or not the awarding of work to agency affiliates is allowed, let alone how that activity is to be billed.

Let’s examine the financial impact of one of these items. Hypothetically, an advertiser with a $100 million media budget engages a media buying agency. The agreement indicates that media is to be placed on a net basis and that the agency will be paid a commission of 2% on that activity. This appears to be a relatively straightforward description. So the question is; “How much commission should the agency earn?”

  1. $2,000,000
  2. $2,040,000
  3. $2,353,000

It would not be unusual for a lay legal or procurement advisor assisting an advertiser in drafting or reviewing contract language to assume that the answer was 1) $2,000,000. Their assumption in this instance is that the agency’s commission would be calculated by multiplying the net media spend by the agreed upon commission rate.

On the other hand, a seasoned agency finance executive would advocate that the correct answer is 3) $2,353,000. How did they arrive at this figure, which is $353,000 higher than the prior scenario? By “grossing up” the net media spend by 17.65% and then multiplying that total by the agreed upon commission rate. Why would they do this? The answer would likely be; “that is the standard methodology used in the industry.”

This view has its roots in the golden days of advertising, when agencies delivered “full-service” and earned a 15% commission on their clients’ gross advertising investment. In that era, a biller would have to mark-up a net expenditure by 17.65 % in order to account for the 15% commission rate:

  • 15% divided by (100% – 15%) or 85% = .1765
  • If the net expenditure was $85, the total cost would be calculated by multiplying or “grossing up” the net amount by 1.1765 to arrive at a total cost to the advertiser of $100.
  • On the $100 gross expenditure the agency would earn $15 or 15%.

One might legitimately question why an agency would gross up a net expense by 17.65%? After all, it has been many years since full-service agencies were compensated at that rate. Should not the mark-up amount be specific to the negotiated commission rate? Using this approach for the 2% commission example could suggest that the correct answer to the aforementioned question would be 2) $2,040,000:

  • 2% divided by (100% – 2%) or 98% = .0204
  • $100,000,000 net media “grossed up” would be calculated by multiplying the net amount by 1.0204 to arrive at a gross amount of $102,040,000.
  • The agency’s commission on the grossed up media total would be $2,040,000

So which methodology represents the proper approach for calculating an agency’s commission in this example? Unfortunately, there is no definitive answer. This is a classic case where had a term such as “Commission” or “Gross Amount” included an example of how such formulas were to be applied, it would have clarified the intended agency remuneration, staving off a potentially difficult conversation between client and agency long after the ink on the agreement had dried. We can all learn from the words of the 18th century Scottish philosopher, Thomas Reid:

“There is no greater impediment to the advancement of knowledge than the ambiguity of words.”

 Interested in a securing a second-opinion regarding the clarity and soundness of your organization’s agency agreements? Contact Cliff Campeau, Principal of AARM at ccampeau@aarmusa.com.

Feb 01
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principal media

Progressing Toward a Viewable Impression Standard

By Contract Compliance Auditing, Digital Media No Comments

digital media viewabilityAs we have learned in both business and politics, “declaring” victory and actually earning one can represent two different positions on the continuum of success. That said, the news on Friday is that the ANA, 4A’s and IAB have agreed that viewable impressions will ultimately be the method for assessing digital media efficacy… not click-through.

Clearly, this is a positive first step toward reform in digital ad campaign measurement. However, much work remains to be done in addressing concerns over the variety of measurement services and the accuracy of their respective methods for assessing viewable impressions.

Several years ago, the aforementioned trade associations formed the “Making Measurement Make Sense” (3Ms) task force to work toward a multilateral solution to this measurement challenge. Of late, the task force has been working closely with the Media Ratings Council (MRC) to assist in establishing measurement standards that will smooth out some of the counting discrepancies between publishers and digital ad measurement providers which currently exist when it comes to viewable impressions.

Interested in learning more? Check out the Ad Age article regarding this announcement.

Jan 05
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I Resolve to…

By Contract Compliance Auditing No Comments

marketing accountability resolutionOver the course of the last two plus millennia with every new year people around the world have used the occasion to allow themselves an opportunity for introspection, with the goal of betterment. 

This practice of making New Year’s resolutions began in Rome in pre-Christian times, around 62 BC during the rule of Julius Caesar. In the early days of this tradition, individuals made resolutions with a moral flavor, such as promising to “be good to others.” Over time, the nature of these annual resolutions evolved to include pledges of self-improvement whether in the context of an individual’s physical of fiscal health, personal and or professional relationships and or the manner in which they conducted themselves in society.  

So in the spirit of business morality and betterment, we wanted to share a few thoughts on resolutions that we believe would bolster client-agency relations, improve an advertiser’s return on marketing investment and allow marketing to more fully support their organization’s enterprise accountability initiatives. 

  • Clearly communicate expectations to each of our marketing agency partners as it relates to desired marketplace outcomes, agency performance, rules of engagement and how those results will be monitored and measured.
  • Establish channels and guidelines for timely, open and honest two-way communications between the organization and each of our agency partners.
  • Enhance processes and adapt reporting that will improve the organization’s visibility into the disposition of our marketing investment at each stage of the planning, production, investment and reconciliation cycles.
  • Gain greater clarity into the level of savings, discounts, rebates and activity based incentives that are available to our organization from our agency and each and every third party vendor.
  • Be aware of the contractual terms and conditions governing our agency relationships and periodically review each agency’s compliance to those terms to improve our governance of those relationships.
  • Invite peer level cross-functional reviews of the financial management of the organization’s marketing spend, including marketing, finance, procurement and internal audit.
  • Identify opportunities to reduce both the time and expense associated with our estimated billing process, lowering A/ P expense and increasing interest income opportunities for the organization.
  • Consider utilizing independent specialists to assist in the agency contract compliance and performance aspect of our media, creative and specialty agency partners to identify “Best Practice” tools and methodologies that can reduce waste and improve controls. 

Adopting and implementing any or all of the above resolutions is a great way to kick-off 2015 and to elevate the organization’s marketing financial stewardship performance to the next level. To reference a popular quote from Benjamin Franklin’s Poor Richard’s Almanac: 

“Be at War with your Vices, at Peace with your Neighbors, and let every New-Year find you a better Man.” 

Best wishes for a successful New Year!

 

Jan 05
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The Ad Viewability Debate Rages On

By Digital Media, Marketing, Marketing Accountability, Media No Comments

ad viewabilityThere has been much discussion in the wake of the Interactive Advertising Bureau’s (IAB) mid-December release of their proposed “standard” for the measurement of digital media delivery in 2015. 

Advertisers, agencies and publishers should celebrate the progress being made and the healthy nature of the dialog now occurring between each of the participating stakeholders in this important sector of the global advertising marketplace. Having said that, the pace of change and the level of investment being made by the three major industry associations whose members have the most at stake has been disappointingly slow. 

By way of background the Association of National Advertisers (ANA), American Association of Advertising Agencies (4As) and the IAB formed the Measurement Makes Sense (3MS) task force in 2011 with the goal of “fixing digital measurement.” According to the IAB, the three industry groups have spent $6 million collectively in pursuit of this goal.  

Not to diminish either the effort or the investment, during this same time frame digital spending has increased from $86.6 billion in 2011 to an estimated $142.0 billion in 2014, up 17.2% year-over-year, is forecast to represent 30% of global ad expenditures in 2015 and will likely eclipse TV spending by 2017. Which in this author’s humble opinion supports the observation that the industry has simply not done enough to remedy the limitations that exist when it comes to validating digital media delivery. 

On the surface, many were surprised at the progressive stance taken by the IAB in suggesting that the industry adapt a “70% viewability threshold” for measured impressions in 2015. The question others are asking is, “Progressive relative to what?” The IAB suggested that up until its proposed 2015 transitional guidelines that the “industry standard” was a definition of viewablility issued by the Media Ratings Council (MRC). The MRC’s definition considered a desktop display ad to be viewable if 50% of the ad’s pixels were in view for at least one second and two seconds for desktop video ads.  

It should be noted that the MRC’s definition, which was introduced in the spring of 2014, was never adopted by the advertising industry as a standard to guide publisher/ advertiser negotiations. Thus, it was no surprise when the 4A’s immediately issued an opinion to its membership to reject the IAB’s online viewability guidelines. According to one industry executive, Todd Gordon, EVP of Magna Global, a leading media planning and buying agency, “Running a campaign and paying for 30% of the ads not being viewable isn’t acceptable to us or our clients.” 

In the press release announcing their proposed 2015 guidelines, the IAB trumpeted the “shift from a served impression to a viewable impression” as “yet another step to greater accountability in digital media.” So it was something of a surprise and contradiction to learn that the first of their seven proposed “2015 Transaction Principles” suggested that “all billing continue to be based on the number of served impressions during a campaign.” Additionally, the proposed guidelines segregate served impressions into two categories, measured and non-measured, with the 70% viewability guideline applying only to measured impressions. Understandably, advertisers might view this as something of a disconnect as it relates to the transition to a viewable impression standard. 

We understand that digital campaign viewability measurement is a challenging proposition due to variances in the types of ad units being utilized and the different audience delivery measurement methodologies in use today. However, the IAB’s proposed guidelines continue to place the lion’s share of the financial burden for these shortcomings square on the backs of the advertiser community. Given that the composition of the IAB’s membership is largely made up of publishers, which have benefitted tremendously from the dramatic growth in digital media revenues, we believe that the 4As was right to reject the IAB’s proposed guidelines, with the goal of pushing for a more balanced standard, with more aggressive viewable impression delivery guarantees. 

And while continued dialog between the ANA, 4As and IAB on this topic is encouraging, we know from experience how long and arduous a journey toward an industry “standard” can be. It is for this reason, that we applaud the efforts of those advertisers and their agencies that have taken matters into their own hands and begun to eschew digital ad inventory of questionable value or with limited delivery guarantees. It has been reported that advertisers such as Kraft, for example, have “rejected up to 85%” of the digital ad inventory offered to them.  

Historically, we know that when advertisers self-police their ad investments, audit contract compliance and supplier performance and withhold ad dollars where appropriate, agencies and publishers will begin to take the notion of transformative change as it relates to digital media much more seriously. As Kevin Scholl, Digital Marketing Director at Red Roof Inn aptly stated in a recent Adweek interview on the viewability issue, “If we were buying in spaces with lame guarantees, we had to question continue buying there – or evolve how were buying.” 

Let us know your thoughts on this important issue by emailing Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com.

 

 

Dec 02
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Advertisers, Did You Get What You Paid For?

By Billing Reconciliation, Contract Compliance Auditing, Marketing Budgets, Right to Audit Clauses No Comments

contract compliance auditingGiven the complexity and opacity of the advertising ecosystem, at least from a billing and reconciliation perspective, it can be very difficult for an advertiser to assess if their organization received full value for their advertising investment.

Consider that most agency billing to clients is done on an estimated basis, that supporting invoice detail is often limited and that seldom is 3rd party vendor invoice documentation contained with an agency’s billing to the advertiser. Not to mention the fact that production jobs can take several months to close, that media post-buy analyses typically occur three to six months after a campaign’s initial month-of-service billing or that agency time-of-staff summaries may only be provided semi-annually or at year end… if at all. 

Many advertiser/ agency agreements provide guidelines to help mitigate some of the concerns that may arise with regard to the notion of receiving full budgetary value.  Document retention clauses, expense billing detail requirements, accounts payable timing parameters and audit rights language are examples of the terms and conditions which are negotiated into agreements to safeguard advertisers. Ironically, very few advertisers take advantage of these contractual protections to conduct detailed reviews of the billing and financial stewardship portion of their respective agency partners’ performance.

However, pressure has begun to mount from stakeholder groups within client organizations that are not directly involved in the agency relationship management loop to provide a higher level of accountability when it comes to the disposition of their marketing funds.  Further, functions such as finance, internal audit and procurement have even stepped up to provide funding and or personnel support to help their counterparts in marketing implement billing, financial management and contract compliance reviews of their agency networks.

This type of testing and analysis should be welcomed with open arms by both the Marketing Team and an advertiser’s agency partners. Let’s face it, marketing teams, which are often resource constrained, have their hands full with their primary responsibility… demand generation. Further, some of the competencies and experience which best lend themselves to conducting financial testing may not be represented on staff within the marketing group. Similarly, agency finance teams have become both accustomed to and quite adept at entertaining advertisers and or their audit partners in conducting billing reconciliations and contract compliance reviews.

If such support is not forthcoming, marketers may want to actively solicit the involvement of their corporate services peers to implement a marketing accountability initiative. Inviting this type of internal scrutiny has more benefits than negatives. Consider the words of Edward Coke, the noted English barrister, judge and politician:

“Certainty is the mother of quiet and repose, and uncertainty the cause of variance and contentions.”

Removing any uncertainty regarding the organization’s advertising investment and the efficacy of each agencies billing and reconciliation processes has asset value for marketers which extends well beyond answering the basic question; “Did we get what we paid for?”

 

 

Nov 14
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When Does the Money Spent on Creative Become an Extremely Good Value?

By Contract Compliance Auditing No Comments

creating brilliant advertisingGuest article by Marek Lis, Owner/ Founder of Alchemy Insights

Brilliant advertising is one of the most cost effective ways to create value. The compounding effect of better performance each time the ads appear is a kind of “butterfly effect” resulting in and huge returns on investment. That is, as long as you can create brilliant ads. 

Then, what is the secret? 

In this video we explore the secret ingredients to producing truly great advertising. In it we interview Steve Hayden who was responsible for Apple’s famous “1984” spot that launched the Mac. “Stop The World in its Tracks” is the story behind the making of that great ad and how advertisers can create the right conditions for brilliant advertising. We think you will find the video to be both extremely useful and enjoyable … Watch Video 

Interested in learning more about creating breakthrough advertising?  Contact Marek Lis, Owner/ Founder of Alchemy Insights at (646) 415-8015 or via email at marek@alchemyinsights.com.

Nov 04
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For Advertisers Concerned About Transparency, There is an Immediate Solution

By Advertisers, advertising legal, Contract Compliance Auditing, Letter of Agreement Best Practices One Comment

transparency concernsLet’s face it the advertising industry is a complex, fast-moving and ever evolving marketing eco-system which at times can mystify even its most experienced participants.  The expansion in both the number and types of media channels combined with the technology revolution that has ushered in tools such as digital asset management systems and programmatic buying platforms have only served to fuel advertiser concerns about their advertising investment.

The Association of National Advertisers (ANA) has twice this year issued statements regarding their membership’s concerns about the “transparency crisis” enveloping certain industry practices.  In May they announced that they were stepping up their “scrutiny of media practices” with the goal of shedding some light on the “dealings” between agencies and publishers.  Based upon a study which the organization had completed in February, 2014 forty-six percent of the ANA members’ surveyed expressed concern over the “transparency of media buys.” This was followed by a blog post in October in which the ANA acknowledged concern over a position paper issued by the trade group AICE dealing with agency in-house production practices entitled; “A Push for Greater Transparency, Ethics, and Fairness.”

The good news is that advertisers need not wait for the various industry associations and their members to form task forces or appoint committees to assess the risk and propose potential solutions to the “transparency crisis.”  While these are important steps to be taken, they are time consuming, the potential outcomes are uncertain and the proposed solutions will not be tailored to a specific advertiser’s needs.  So what can an advertiser do today to thoroughly vet these issues and reassure their stakeholders that any attendant risks have been mitigated and to validate that they are receiving fair value for the advertising investment being made?

The answer is as close as a copy of the executed contract which is in place between the advertiser and the agency.  Specifically, the solution can be found in the “Right to Audit” clause, which is a staple in an overwhelming majority of client-agency agreements.  In short, this important clause affords advertisers the opportunity to examine the agency’s records of expenditures pertaining to the agency’s billing to the client for the purpose of validating media bills, production bills, studio costs and reconciling agency fees.

Audit clauses are inserted into contracts because they are an important financial control.  Yet, too often advertisers treat their right to audit as a fall back option, which all too frequently is never acted upon.  When this clause is not acted upon, the advertiser forgoes the opportunity to implement standard compliance testing, which in turn limits their opportunity to validate agency billings and gain a certain level of comfort that comes with transparency into the agency’s financial stewardship of their advertising budget.

Once audit rights have been established, industry “Best Practice” would suggest that implementing periodic and routine testing is a must for introducing and maintaining ongoing preventative control measures.  The resulting testing which occurs as part of the audit process can help to deter wasteful practices, identify errant billing transactions and to monitor key financial metrics. All told, a well defined contract compliance audit program can help an individual advertiser address the “transparency crisis” while providing the organization the necessary legal and financial safeguards.

Of note, the agency community has come to accept independent audits as a normal part of an advertiser’s broader corporate or marketing accountability initiative.  Any pushback on this front should be viewed as a “red flag.”  For those agencies which have implemented sound financial stewardship practices there is nothing to fear from an advertiser’s review of their performance in this important area.  Quite the contrary, a well conceived, balanced independent audit process can yield insights and recommendations which also benefit the agency.  Lailah Gifty, a Ghaniaian and founder of the Smart Youth Volunteers Foundation, rightfully said:

“Never believe all that you hear. Always verify the original source of information.”

Those advertisers conducting business without a comprehensive “Right to Audit” clause are simply at risk, forgoing the most important control mechanism available to them to protect their interests.  For those advertisers, which have secured audit rights, but have failed to act upon this right, you are unnecessarily exposing your organization to legal and financial risks.

The “transparency crisis” cited by the ANA is a legitimate issue, which the industry will successfully address in due course.  The question to be asked of advertisers is; “Are you prepared to wait for a broad-based industry solution? Or do you leverage the contractual rights which you have already secured to address these concerns now?”

If you’re interested in learning more about how you might improve your agency contracts or the benefits of advertising agency contract compliance audits contact Cliff Campeau, Principal with Advertising Audit & Risk Management at ccampeau@aarmusa.com for your complimentary consultation.

Oct 16
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Transparency Concerns Extend from Media to In-House Production Services

By Advertisers, Advertising Agencies, Production Services No Comments

agency in-house productionEarlier this week The Association of Independent Creative Editors (AICE) posted a statement dealing with untoward agency business practices in the area of in-house production services on its website.

This action was enough to get the attention of two important industry stakeholders; AdAge who wrote an article entitled; “Trade Group Blasts Agencies for Shady In-House Post Practices” and the Association of National Advertisers (ANA) which voiced support of the AICE for going public with their concerns in an association blog post.

The AICE’s claims include the claims that “agencies lack transparency, ethics and fairness” when it comes to securing business for their in-house production units. While the AICE may have a certain level of bias, the directness of their statements and the allegations being leveled should cause advertisers to reflect on this particular agency service offering.

In our agency contract compliance auditing practice, one of the trends that we have noted over the last several years has been the increased level of advertiser billings which are running through agency production services groups. Perhaps more importantly, beyond the publication of a “rate card” for select production services, there is little in the way of transparency into the composition or competitiveness of those rates. Yet here to for it is an area that has attracted little in the way of advertiser attention.

Interested in learning more? You can read the AICE’s post in its entirety by clicking here.

Oct 13
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Clients Paying Too Much, Agencies Too Little

By Advertisers, Advertising Agencies, Agency Compensation No Comments

agency compensationAs one who has experience on both the agency and client side, it was with great interest that I read Shareen Pathalk’s article; “Anatomy of an Agency Talent Crisis” on Digiday.  

Before we examine the talent challenges identified by the author, let’s take a look at the current agency compensation landscape.  As advertisers and agency practitioners know, agency remuneration practices have clearly migrated from a commission based system to a fee based model, which is now employed in approximately three out of every four client-agency relationships (source: ANA Agency Compensation Survey, 2013). 

Further, a majority of those relationships utilize a labor-based rather than output based or fixed fee approach.  Thus, one way for agencies to optimize revenues involves deploying more experienced, personnel with higher bill rates on client assignments… at the expense of less experienced individuals compensated at a lower rate.  In labor-based remuneration systems, higher bill rates are directly correlated with higher compensation levels.

This dynamic, which emphasizes “experience” is at least partially responsible for one of the advertising industry’s challenges… attracting fresh talent.  Why?  Entry level agency salaries, which have always been low relative to other potential career endeavors, are failing to entice new graduates to pursue a career in advertising, even though there is much about the industry which appeals to them.  As support, the author references the ANA’s 2014 Employee Compensation survey which found that “most entry level salaries” were between “$25,000 – $35,000.  Further, the author suggests that much of the work available is “either too temporary or too high-level for the applicant pool.” 

For an industry which relies so heavily on people, it is imperative that agencies find a way to address this dynamic in order to attract their fair share of intelligent, energetic college graduates looking for meaningful career opportunities.  So what’s stopping agencies from paying better wages for entry-level talent?  According to Nancy Hill, President, CEO of the 4A’s; “The benchmarks are in a place where we can’t raise our salaries.”   While it is not entirely clear which “benchmarks” Ms. Hill is referring to, one potential concern is likely the agency communities desire to maintain their cost competitiveness in the eyes of the advertisers. 

While this has some merit, direct labor cost is but one component of an agency fee and the corresponding bill rates which it charges advertisers.  Overhead rates for example can vary greatly from one agency to another often running between .85 and 1.25 times an agency’s direct labor cost.  Additionally, profit margins used to calculate base fees also differ from one shop to the next.  

For the sake of example, let’s look at two hypothetical scenarios.  Agency #1 is offering entry level media planners $28,000 per year in salary and presently uses an overhead multiplier of 1.25 x direct labor and a profit margin of fifteen percent applied to the combination of direct labor and overhead.  Based upon an eighteen-hundred hour annual full-time equivalent level, this would result in a fully-loaded hourly rate of $40.25 for that media planner.  Agency #2 is offering entry level media planners $35,000 per annum, uses an overhead multiplier of .85 and a profit margin of seventeen percent.  In this latter example, the fully-loaded hourly rate would be $39.27. 

In our experience as agency contract compliance auditors, working with several of the world’s leading advertisers, we have a breadth of experience in reviewing agency remuneration practices.  As such, there are two things which we can share.  First and foremost, in our opinion the difference in bill rates in the aforementioned example is imperceptible from an advertiser’s perspective.  This is largely because most labor based compensation agreements utilize functional or departmental billing rates, rather than actual direct salary costs as a base for calculating fees.  Ask any advertiser when they saw a billable hourly rate of less than $55 for an assistant media planner, which is still significantly higher than either of the fully-loaded rates referenced above.  Secondly, there is a great deal of subjectivity utilized by agencies in establishing overhead rates and much of the methodology employed to calculate those rates is not transparent to the advertiser or subject to independent review.   

The net take away… agency’s have a choice when it comes to talent recruitment, development and retention.  The fact is, there are no advertiser imposed constraints or industry benchmarks which restrict an agency’s ability to rethink entry level salaries or in limiting what an agency spends on training and development of their new hires.  Perhaps the only impediment is the lack of creativity currently being demonstrated by many in the agency community when it comes to talent management.