Tag Archives: Time-of-Staff Reporting

What Is the Basis for Variable Commission Rates?

15 May

dreamstime_m_35343815Until the late 1980s, agency remuneration models that were based upon commissions charged on ad spend were typically universally applied across media types. As alternative media channels began to expand, agencies began to charge variable commission rates, based upon media type.

The question to be asked is “Why?” and, is this approach still appropriate?

Presumably, planning, buying, and monitoring certain types of media required more time on the part of agency personnel and or certain experience levels, thus the higher rates. It is fair to question whether or not that premise still holds true. The most obvious area to question is the higher commission rates charged for programmatic advertising, which utilizes automated technology to execute and monitor media buys as opposed to traditional, manual buying methods.

Unfortunately, advertisers that employ a commission-based agency pay-model typically don’t see agency staffing plans or time-of-staff reporting. Thus, the ability for an advertiser to assess the resource level required to plan and place its media mix is limited at best.

Another concern regarding the variable commission rate pay-model is the potential for the higher rates charged for certain media types to bias an agency’s media mix recommendations. The possibility that an agency would approach the allocation process with the goal of optimizing its revenue, rather than the advertiser’s media investment certainly exists.

So, what should advertisers do? The answer is straightforward. Require their media agency partners to submit formal staffing plans, with an estimate of hours and utilization rates by employee/ position along with their annual commission rate schedule… just as they would with a retainer or labor-based fee compensation method. Further, advertisers should require agencies to provide monthly time-of-staff reporting, so that both parties can assess the resource levels, staff seniority and experience required to execute the scope of work.

With clear insights into an agency’s staff investment, advertisers can now knowledgeably adjust their remuneration programs, if needed. The goal, as always, is to equitably compensate media agency partners to effectively plan and execute an advertiser’s media program, while eliminating bias and optimizing working media levels.

Advertisers would be wise to heed the words of Oliver Markus Malloy, the German American novelist and to analyze the impact and efficiency of their variable commission rate compensation programs more closely:

“We live in this bubble of ignorance. Most people know nothing about history, or the historical context of the traditions they still follow today. People do things without knowing why they’re doing them.” 

4 Keys for Optimizing Direct Labor Based Remuneration Systems

9 Jul

punch clockAttorneys do it. So do accountants, consultants, architects and engineers.

What are these firms doing? Tracking billable hours. Why? Because time and material based compensation remains the predominant method of billing for professional services firms and this includes advertising agencies. In fact, according to the Association of National Advertisers’ 2017 “Trends in Agency Compensation” study, labor-based fees remained the “most used” method of remuneration for marketers of their ad agency partners.

There are many inherent benefits to direct labor based compensation systems from both an agency and advertiser perspective including simplicity and clarity, particularly for marketers utilizing multiple agency partners that may be collaborating on overarching campaigns or playing specific roles on comprehensive, integrated projects.

We believe there are four key steps to successfully implementing and managing direct labor based remuneration systems:

  1. Establishment of a clear, concise Statement of Work (SOW), with specific deliverables and estimated timelines.
  2. An agency Staffing Plan that identifies the individuals that will be assigned to the client’s business along with information detailing their department, title, bill rate and utilization rate.
  3. Build-up detail supporting the agency’s suggested billable hourly rate (i.e. direct labor, overhead, profit margin) to accompany the agency’s annual fee proposal.
  4. Timely, accurate time-of-staff reporting to facilitate the monitoring of burn rates and to support the fee reconciliation process.

While there are contractual language considerations that will also help to insure transparency and establish client and agency expectations, including limiting agency revenue to that which is agreed upon as part of the remuneration program, we want to focus our thoughts and recommendations on tracking billable hours.

Aligning advertiser expectations with agency resource requirements is the basis for any compensation system. Thus collaborating on an annual Statement of Work, complete with detailed deliverables and timelines is a critical first step in the process. The resulting document will inform the agency’s efforts to construct its Staffing Plan, which in turn will form the basis for its fee proposal.

Experience suggests that conversations should be had in advance of the agency’s development of its Staffing Plan. Specifically, the parties will need to agree upon the basis for the annual full-time equivalent (FTE) calculation and the rules related to the application of agency employee time in excess of the FTE standard for fully-utilized employees and how utilization rates are impacted by an employee’s “total” annual recorded time. As it relates to FTE standard, there is no normative data for the advertising industry. That said, an 1,800 to 1,875-hour standard (35 hours per week, multiplied by 50 weeks per year) represents a typical FTE range.

Once the SOW and Staffing Plan have been agreed to, reviewing and coming to agreement on the basis for the proposed billable rates is the next step in the fee negotiation process. The basic formula for calculating a billable hourly rate is as follows:

Billable Rate = (Direct Labor Costs + Overhead + Profit) / Total Projected Annual Hours

Ideally, billable hourly rates would be calculated by employee or by function, without revealing specific employee salary detail. As a fall back, calculating billable hourly rates by department are clearly preferable to a blended hourly rate for the agency as a whole. Thus for an agency associate with direct labor costs (salary + benefits) of $100,000 per year, an overhead factor of 1.0 x direct laborpunch clock, a target profit percentage of 15% and an 1,875 FTE standard, the billable hourly rate calculation would look as follows:

Billable Rate of $114.67 = ($100,000 + $100,000 + $15,000) / 1,875 hours                                                                                                                                             

From a reporting perspective, monthly time-of-staff reports detailing “actual” versus “planned” hours by individual are ideal to serve as the basis for regular discussions between client and agency on burn rates and what, if any, course corrections are required. The goal of the reporting and resulting conversations are to ensure that there are “no surprises” that would adversely impact either party. A formal time-of-staff reconciliation should be conducted annually, preferably by an independent third-party to validate that the time reported by the agency is consistent with the time in the agency’s time-keeping system.

Following the aforementioned steps will help protect the interests of both client and agency and will lead to a compensation program that is both transparent and fair.

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