Tag Archives: entry level salaries

Turnover: Temporary Anomaly or Omnipresent Reality

26 Feb

 

 

agency compensationChief Marketing Officers come and go every twenty-three months or so. The average Client-Agency relationship tenure is thought to be around three years. So has anyone really noticed that average ad agency turnover is reportedly running between 28 – 30 percent? 

In an industry where change and upheaval have become constants, the agency talent crisis has likely not received the attention that it deserves… outside of the agency community. Clearly, this is a dynamic that agencies in general and agency HR executives specifically are acutely aware and are trying to address. After all, in a service business that is highly reliant on talented professionals with diverse skill sets to create and deliver their product, the talent challenge cuts to the heart of agency sustainability. 

During the fall of 2014, Digiday published an article entitled; “Anatomy of an Agency Talent Crisis” which suggested that entry-level salaries were one of the primary challenges in attracting college graduates to even consider a career in advertising. In light of the 4A’s annual talent survey findings, which found that “most entry-level salaries” for agency personnel “were between $25,000 – $35,000,” most agency insiders understand the challenges in attracting and retaining top tier talent. 

The question, which has not been addressed is; “Why aren’t agencies paying more to secure top college graduates?” If a capable young person armed with a college degree can earn a starting salary of $70,000 by going to work for Accenture, McKinsey, Booz & Company, Adobe, Google or Microsoft then it stands to reason that advertising agencies must close the salary gap if they hope to attract their fair share of talent. As the American inventor and businessman, Charles Kettering once said: 

“We should all be concerned about the future because we will have to spend the rest of our lives there.” 

Importantly, this is a decision which the agency community owns. Their ability to pay higher salaries to attract young graduates is not hindered by the fees being paid by advertisers. Unfortunately, many advertisers have little exposure to many of the agency “worker bees” deployed on their account, spending most of their time interacting with more senior “point people” such as account directors, creative directors or senior media planners. As such, advertisers may have little transparency into the high turnover rates being experienced within the agency community. 

That’s not to say that advertisers aren’t paying a price from a learning curve perspective, which can affect the caliber of an agency’s work or the number of iterations required to generate satisfactory outputs. 

What is intriguing when looking at the fully-loaded hourly rates being charged by agencies, is that there appears to be plenty of room to increase compensation for junior to mid-level personnel. 

There are a couple of issues which impact an agency’s willingness to free up funds to address the pay scale issue. The first is the growing salary disparity between entry-level personnel and senior executives. One need look no further than the 4A’s own 2014 talent survey, which found that in the same year in which entry-level personnel were earning on average between $25,000 – $35,000, they had an agency report a $1,000,000 base salary for a Chief Creative Director position. 

Additionally, agency holding companies are growing and require resources to fuel their expansionary appetite. This growth comes largely via acquisitions of specialist agencies and investing to support in-network horizontal integration strategies which have spawned the birth of digital media trading desks and the creation of global cross-platform production hubs. 

Ultimately, market dynamics will force the agency community’s hand when it comes to a reapportioning or prioritization of resources to address the competitiveness of their salary offerings. Smart agencies will move to address this issue, recognizing that the lack of success in recruiting top college graduates combined with 30% staff turnover rates, is clearly not a formula for success.

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Clients Paying Too Much, Agencies Too Little

13 Oct

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.

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