Advertisers are squeezing agency fees, and new business remains scarce. With most agencies hooking growth to new-account wins in 2004, it will take more clients to generate prior levels of remuneration, say agency executives interviewed for this report. And they expect their agencies to do this.
A hiring environment also is not likely to accompany new-business wins, but trail those wins by several months even though agency staffs are stretched to the limit, some say by mythic proportions. "We'll turn to free-lancers to meet short-term account gains until we know those gains are long-term. Then we'll hire," reports an executive at Digitas, a Boston-based interactive/direct response shop.
Slow business and this attendant increase in free-lance work have led executives to term 2004 a year of advertising recovery and not one of jobs recovery. They see employment improving only marginally.
To many, the ad recovery at this point seems more potential than real. "There's a flurry of [requests for proposals], but this hasn't transferred into new business yet. Agencies just seem to be trading accounts," says Marty Keirzek, chief financial officer of Grant/Jacoby, Chicago. "And if we could just get 10% of all those new RFPs," wishes Frank DeMarco, managing partner at Outside the Box Interactive, New York.
The survey of 215 agencies puts raises for 2004 at 5%-6% for 11 of 13 agency positions monitored, up from 4% for those same posts in each of the previous two depressed years. Only the CEO and chief financial officer will draw better raises, 10% and 7%, respectively (see chart above).
But the study also found that more than 25% of the agencies won't give raises. That's the median that lies between 18% of agencies not boosting pay for account planner to 51% of agencies holding the line on CEO pay, numbers replicating those of the past two years.
BONUSES BLEAK FOR MANY
Bonuses this year will be 4.6% of base pay, the midpoint of the 13 posts that carry a bonus range of 2.2% of base pay for media planner to 14.9% for CEO. Yet, 56% of agencies won't dole out bonuses. That's the median between extremes of 44% withholding bonuses from account planners to 62% denying bonuses to copywriters. The median is slightly down from 58% of agencies pulling bonuses in 2002.
"Ultimately, 2003 was really about the end of battening down the hatches," says Drew Neisser, president-CEO of Renegade Marketing Group, New York. "Everyone has been tight with money because they could be-there's been so little hiring." But after three years of minimal salary and bonus movement, "there is finally pressure to reward the stars," says Mr. Neisser, who excludes the agency rank-and-file from this "pressure."
Salaries at Gardner Geary Coll, San Francisco, will only increase for employees with a lot of client contact, says Doug Hannah, VP and CFO. "This has to be typical of the market because our people would be out the door if it weren't." Salary dynamics have a lot to do with location. Gardner froze salaries the past two years in a no-growth market in which salaries had been inflated by the dot-com craze.
Mr. Hannah says profits are slightly better this year than last and will pay bonuses for the first time in three years. "We probably could have paid bonuses the past two years but were scared to," he says, "but I think the worst is over."
In Dallas, Ornelas & Associates set raises at 4%-5% this summer after freezing salaries but paying bonuses the past two years. "We gave good raises to remain competitive. It costs us a lot of money to replace people," says CFO Karen Stanton. Hispanic agency competitiveness extends beyond the local market to hire people who can move with ease through two languages and two cultures. Ornelas nabbed a senior creative this year from Mexico City.
The growing Hispanic market has run counter to the general market. Ornelas opened a shop in Los Angeles last year. Los Angeles Hispanic shop La Agencia de Orci & Asociados opens in New York early next year. "If you're [a client] not kicking ass in L.A. or Dallas, your getting your ass kicked by others who understand the Hispanic market," says Hector Orci, CEO.
Head counts grew at 33% of the surveyed agencies this year, with six the net growth in employment, a slight improvement over 2002 when 31% of agencies gained in employment, with seven the average net gain, and 2001 when 30.8% of agencies were gainers, averaging a net gain of six.
On the flip side, employment at 34% of the agencies declined in 2003, at a net loss of eight people. This is an improvement on the 41% of agencies that declined in 2002 by an average head count of 11 and the 43% of agencies that dropped a net of 19 employees in 2001 from 2000.
Agencies say they've learned they can do more with less, referring to numerous flex measures taken to minimize layoffs. These have included job sharing and consolidation, voluntary time off, a shortened workweek, and freezes on raises and bonuses. The more clients negotiate down, the less the yield and the more agencies must "flex," says Renegade's Mr. Neisser. Flexing can be extended to the use of free-lancers, which is seen as a stopgap to hiring but usually not as a tactic to avoid hiring altogether, a murky difference to some."Free-lancers allow us to expand the office when we need to," says Renee White Fraser, president-CEO of Fraser Communications, Santa Monica, Calif.
New York interactive shop Outside the Box isn't only stretched to the limit but has re-created itself. Its creatives serve as account reps. Existing personnel have added print capabilities and business-to-business-type functions like ordering, inventory and special e-mailing to the agency's more traditional Web design and banner work. Outside the Box no longer keeps HTML-ers (Web-page coders) on staff, brings in interns to handle some office functions and uses a large pool of free-lancers.
There's nothing like new business to stimulate hiring. Havas' McKinney & Silver, Raleigh, N.C., is boosting staff by 14 to 150 to service the newly won Travelocity account, which has meant adding an interactive department, says Elizabeth Woodruff, agency finance manager.
AGENCY REVENUE RISING
Having weathered three drought years, agencies are bullish about revenue gains in 2004. Some 82% of agencies surveyed expect an increase in revenue and only 6% a decrease. A third peg growth at 10%-plus.
Of those same participants, 55% reported revenue gains in 2003, up from only 43% that grew in 2002 and 48% in 2001 reported in previous studies. In 2003, half the agencies with revenue gains measure their growth at 10%-plus, about the same as in the previous two years.
Some are just happy to have weathered the downturn. "We're one portal that's still open," says Mr. Hannah of Gardner Geary Coll, referring to what he called the "Portal of Creativity" poster showing agency front doors in San Francisco. "Only seven or eight of those agencies are still open."
The number of agencies expecting 10%-plus revenue growth seems pretty high to Mr. Neisser, who says "but we've all put on our rose-colored glasses, and dammit, we say its going to happen" as if saying it will make it so.