Effectiveness key to bonus awards

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Agency employee bonuses and awards and client remuneration schemes are destined to ride the same horse.

Client payment to agencies increasingly is tied to the success of advertising and marketing based on sales or other measurements. This trend is putting added pressure on agencies to establish performance goals with their clients that don't shortchange the agencies.

Performance continues to be the obvious key to bonuses. A combined 80% of reporting agencies indicate their bonues are tied either to a predetermined formula (largely profitability) or operational goals.

Seventy percent of the agencies additionally pay out company-wide awards and 59% pay one-time awards, the former up from 63% in last year's report and the latter up from 58%.

Profitability must be growing, although the survey does not seek data on profitability. The survey does indicate bonuses are rising to 8.3% of base pay, up from 7.9% last year; and agency revenue -- albeit not the bottom line -- is up more than 10% for half the agencies in the survey.

Even with such statistics, there is anecdotal evidence to indicate that agencies are not handing out across-the-board bonuses this year.

"We had a flat year up until about two months ago," says Steve Renier, human resources manager at Martin/Williams, Minneapolis. "I don't know what kind of bonuses we're looking at, if any."

Agency profitability increasingly is tied directly to a client's profitability goals, says Sara Jones, CFO of Sawyer Riley Compton, Atlanta, noting a lot of agencies are negotiating contracts with clients. Contracts usually call for a low monthly fee plus an incentive-based clause tied to success in the marketplace.

These types of contracts can create a lose-lose situation for the agencies. If goals aren't reached -- and maybe they were incorrectly set -- then the agency is stuck with the low monthly fee. If the client makes its sales goals, then it may mumble about paying the incentive and wonder if the goal was too low.

To hold down the disenchantment, agencies are insisting on a minimum fee level should the client make sizable cuts in its billings (fee structures often are based on historic billings volume).

A growth in fee income as a percentage of total agency remuneration is indicative of new pay schemes offered by the client. All agency-size categories in the survey show growth in fees from 1998 to 1999, and a corresponding decline in commissions from media.

The larger the agency, the greater its reliance on client payment by fees over media commission. The latter form of pay is about equal in overall weight to markups for materials and services -- the third component of client pay.

However, among the largest agencies in the survey ($15.1 million and above in gross income) markups for materials and services (24% of gross income) were higher than media commissions (18%). Fee income in this size agency was 58%, up from 51% in 1998.

BONUSES RISE MARGINALLY

The average bonus for most agency employees will grow less than half a percentage point in 1999 over 1998, although bonuses will decline at the top echelon. For all agencies, the CEO bonus is down from 33% of base pay in '98 to 26% in '99, and CFO bonus is down from 17% to 11%. The creative director's bonus is up from 14% to 16% of base pay.

Among agencies in the South, bonuses will drop for most positions. In the West, they will increase for all but art directors. With the exception of the West, bonuses declined for CEOs and CFOs across regions.

Midwest agencies are least likely to award bonuses based on a predetermined formula (33%), while those in the South are most likely to base bonuses on a predetermined formula (56%). Of those southern agencies, profitability dominates the bonus pay structure over operational goals.

Agencies in the East are least likely to emphasize profit in the formula, although only 35% of eastern agencies award bonuses on a predetermined basis, smallest of any region.

INCENTIVE SCHEMES

Regardless of size, most agencies increased their practice of providing company-wide awards in 1999. Such awards draw 100% participation from the largest shops, bottoming out at 64% of agencies in the $3.7 million to $7.5 million gross income range.

One-time awards range from 75% participation among the largest shops to 46% among shops $7.6 million to $15 million gross income.

Stock options, the most embattled of incentives, declined in all agency sizes from 1998 to 1999. The most notable vacuum for stock options rests in larger agencies with gross income of $7.6 million and higher.

Stock options are likely to have run head-on into Generation Xers and agency consolidation. Stock options tend to be tied to security issues. Over time, employees with stock options have found they're not that beneficial unless the agency is highly profitable.

"GenXers are mobile and don't have the same issues of security. They want compensation for work and not fluff," says an agency executive.

Acquisitions have reduced the pool of agencies offering such perquisites, and with the merged partner, there often is less flexibility in offering stock options. There are exceptions. Martin/Williams employees just gained the option in September to participate in the stock purchase plan established by parent Omnicom Group.

Group productivity/gain sharing awards generally are attractive to about a quarter of agencies within each size range.

LIFESTYLE PERQUISITES RISE

Profit sharing, professional membership/dues and a company car continue to be the perks most widely offered to executives, vice president level and above.

Overall, there is greater emphasis on offering childcare reimbursement and professional membership/dues to top-level executives in 1999 over 1998 and less emphasis on offering a company car, pension and stock options.

Some executive positions have been targeted for fewer privileges. Executive vice presidents are less likely to receive tax/financial counseling and social club/athletic club memberships this year than last. They, too, are among the executive ranks for whom greater restrictions are being placed on company cars, pension and stock options.

The profitability pot isn't tied solely to client remuneration, either. Lotas Minard Patton McIver, New York, just moved to its present address on 36th Street from 57th Street, cutting rent in half, says Ed Hackimer, comptroller, noting salaries and rent are an agency's two biggest costs. Bonus agency-size categories in the survey show growth in fees from 1998 to 1999, and a corresponding decline in commissions from media.

The larger the agency, the greater its reliance on client payment by fees over media commission. The latter form of pay is about equal in overall weight to markups for materials and services -- the third component of client pay.

However, among the largest agencies in the survey ($15.1 million and above in gross income) markups for materials and services (24% of gross income) were higher than media commissions (18%). Fee income in this size agency was 58%, up from 51% in 1998.

BONUSES RISE MARGINALLY

The average bonus for most agency employees will grow less than half a percentage point in 1999 over 1998, although bonuses will decline at the top echelon. For all agencies, the CEO bonus is down from 33% of base pay in '98 to 26% in '99, and CFO bonus is down from 17% to 11%. The creative director's bonus is up from 14% to 16% of base pay.

Among agencies in the South, bonuses will drop for most positions. In the West, they will increase for all but art directors. With the exception of the West, bonuses declined for CEOs and CFOs across regions.

Midwest agencies are least likely to award bonuses based on a predetermined formula (33%), while those in the South are most likely to base bonuses on a predetermined formula (56%). Of those southern agencies, profitability dominates the bonus pay structure over operational goals.

Agencies in the East are least likely to emphasize profit in the formula, although only 35% of eastern agencies award bonuses on a predetermined basis, smallest of any region.

INCENTIVE SCHEMES

Regardless of size, most agencies increased their practice of providing company-wide awards in 1999. Such awards draw 100% participation from the largest shops, bottoming out at 64% of agencies in the $3.7 million to $7.5 million gross income range.

One-time awards range from 75% participation among the largest shops to 46% among shops $7.6 million to $15 million gross income.

Stock options, the most embattled of incentives, declined in all agency sizes from 1998 to 1999. The most notable vacuum for stock options rests in larger agencies with gross income of $7.6 million and higher.

Stock options are likely to have run head-on into Generation Xers and agency consolidation. Stock options tend to be tied to security issues. Over time, employees with stock options have found they're not that beneficial unless the agency is highly profitable.

"GenXers are mobile and don't have the same issues of security. They want compensation for work and not fluff," says an agency executive.

Acquisitions have reduced the pool of agencies offering such perquisites, and with the merged partner, there often is less flexibility in offering stock options. There are exceptions. Martin/Williams employees just gained the option in September to participate in the stock purchase plan established by parent Omnicom Group.

Group productivity/gain sharing awards generally are attractive to about a quarter of agencies within each size range.

LIFESTYLE PERQUISITES RISE

Profit sharing, professional membership/dues and a company car continue to be the perks most widely offered to executives, vice president level and above.

Overall, there is greater emphasis on offering childcare reimbursement and professional membership/dues to top-level executives in 1999 over 1998 and less emphasis on offering a company car, pension and stock options.

Some executive positions have been targeted for fewer privileges. Executive vice presidents are less likely to receive tax/financial counseling and social club/athletic club memberships this year than last. They, too, are among the executive ranks for whom greater restrictions are being placed on company cars, pension and stock options.

The profitability pot isn't tied solely to client remuneration, either. Lotas Minard Patton McIver, New York, just moved to its present address on 36th Street from 57th Street, cutting rent in half, says Ed Hackimer, comptroller, noting salaries and rent are an agency's two biggest costs.

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