Shops hold tight on '05 pay hikes

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Agency executives are less sanguine heading into 2005 than they were at the threshold of 2004-the breakout year many expected to put three successive years of poor agency performance behind them.

That cautious approach is reflected in agency compensation, employment and income projections reported in this 13th annual Advertising Age Salary Survey. Covering 156 agencies employing 3,824, equally split between male and female, the survey reports raises for 2005 and year-end bonuses will run a percentage point less than a year ago-that is "if" they are doled out at all.

Two-thirds of the agencies predict employment will grow in 2005, but only marginally, as revenue increases at a slower pace than 2004. The Northeast outshines other regions in salary levels, raises for 2005, bonuses, employment gains and growth in revenue in 2004, although on that latter metric, the Midwest, poorest performer in most matters of compensation in 2004, offers the brightest outlook for next year.

"I guess we got our one good year [2004] and can be thankful," quips Drew Neisser, president-CEO of Renegade Marketing, a New York-based unit of marketing organization Dentsu. "Market fundamentals are not good. Client pressure on agency pricing has never been greater. Agency margins are being squeezed. All this means wages will be held down," he says.

Agencies plan to increase salaries from 4% to 5% in 2005 for most positions, compared to 5% to 6% hikes for 2004. But increases are selective. Some agencies are still freezing pay, ranging from 15% of agencies not providing raises for associate creative directors to 36% freezing wages for chief technical officers. The freeze-level is higher in 2005 than in 2004 for front-office personnel and slightly less for agency rank-and-file.

Bonus levels are higher for five of the 13 positions studied this year than in 2003, and lower for five other posts, with three remaining the same (see charts). Bonuses will range from 3% to 5% of base pay for agency rank-and-file and climb to 3% to 17% for the upper echelon. For the 13 positions in this report, the median that identifies the number of agencies not delivering a bonus is 45% in 2004, which falls between a range of 41.3% for creative director (41.3% of agencies not giving bonuses to CDs this year) and 61.4% for chief technology officer. In 2003, the no-bonus median was 55%.

Employment has improved in 2004 among these agencies; 41% of them were in hiring mode, gaining an average of 10 employees; 25% of them decreased staff, each losing an average of four employees. The survey reveals two-thirds of shops expect to gain in net jobs and one-third stay the same in `05.

However, the collective employee pool of 3,824 staffers in 2005 among survey agencies is expected to remain fairly constant, reflecting stagnant agency employment data currently charted by the U.S. Bureau of Labor Statistics. Latest BLS data show traditional agency employment in 2004 averaging 164,000 per month through September, down from 167,900 per month for full-year 2003.

Revenue is up in 2004, according to 62% of agencies, half of whom expect the year to come in at 10%-plus. For 2005, some 75% of agencies anticipate growth, with a third of those expecting to hit 10%-plus, which in actual numbers is slightly less than in 2004. There is reason to be cautious. Agencies note marketers often planned to spend more the past couple of years and didn't follow through.

Structural changes in the industry are putting pressure on agency profitability. The litany includes "the departure of the commission system, the drive by client purchasing departments to cut costs, the client's increased use of consultants in determining agency compensation, and the tying of agency compensation to client performance," says Fred Bidwell, president-CEO of Malone Advertising, Akron, Ohio.

The marketer's increasing focus on the short-term also can crimp agency returns, adds David Weiner, chairman-CEO at Marketing Support, Chicago. His agency expects a 3% to 4% decrease in revenue in 2004, traced largely to maintenance spending in 2004 on incremental business that generated good revenue growth in 2003.

SALARY DYNAMICS

Salaries are a function of market demand conditioned by an agency's internal dynamics. The survey finds average base pay in 2004 below 2003 levels for many positions across most regions, indicating a buyer's market. Pay levels in the Midwest, for example, are below 2003 levels for all but one position, media director. The East and South are paying less for four positions.

The lower average can be expected, says a human resources executive in Cleveland. To get an account exec in a tighter market four years ago, his agency paid the additional fees of headhunter services. One can now post an ad for an AE in the metro daily and get 50 resumes, he says, "and pay them less because of market demand." Agencies also have been forced to downsize from the top down, says Malone's Mr. Bidwell. Salary averages are down, he suggests, because agencies laid off top-tier executives. "I know, because I see a lot of resumes from fiftysomethings."

During the past three years-all considered an employer's market-it has not been unusual for prior-year base pay averages to be larger than current year averages. There is room in the survey dynamics to breed such results: Participants differ from year to year as does the geographic spread and sample size.

One reason raises for 2005 are less than `04 is agencies played catch-up this time last year by giving raises after freezing salaries during the lean years. Yesawich, Pepperdine, Brown & Russell, Orlando, raised salaries to "where they should be" in `04, says Hugh McConnell, exec VP-chief financial officer. As a result, '05 raises won't be quite as high, he says.

And forget about those annual cost-of-living salary bumps. "Nobody can afford them anymore," says Marketing Support's Mr. Weiner. Likewise, there is less entitlement attached to bonuses, especially among non-executives. "Bonuses are reserved for those who make it happen," says Tom Fuller, chief financial officer at WestWayne in Atlanta. His agency uses a bonus to incentivize pay in cases where market-level salaries can't by themselves lure talent from regions of higher pay.

The bonus pool as a percent of profit grew 14% in 2004 from 12% in 2003, a reflection of agency revenue growth that probably led to higher profits. When times are tough, most agency principals hold the line on raises, and pay out more bonuses, especially to key people, says Mr. Bidwell.

FLEX MEASURES

In the past three years, agencies have adopted flex measures to minimize layoffs and better position agencies to take on new business once the economy turns. Sixty percent of survey agencies report they took flex measures in `03 and `04, ranging from salary freezes (32% of the agencies), bonus elimination (28%), job consolidation (17%), selective salary cuts (16%), job sharing (14%), shortened work week (10%) and voluntary time-off (9%).

Other, perhaps one-time, flex measures have included shutting down operations over the holidays in lieu of paying bonuses, something Kuhn & Wittenborn, Kansas City, Mo., is planning this year. Flexing has colored hiring as agencies have discovered they can do more with less. Surveyed agencies are cautious about hiring in 2005, fearing new hirees may have to be laid off if new business gains don't materialize, according to anecdotal evidence.

New business has boosted account services employment in 2004. For every two creatives hired, three account services employees came on board at these agencies. Client services now claims almost 34% of agency personnel vs. 31% in 2003. The management supervisor position was the only one of 13 that recorded higher bonuses in all regions-an indication how agencies are rewarding key people who have heavy contact with clients.

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