Slim pickings for agency raises

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Economic shock waves that ripped through the advertising agency community in 2001 continued unchecked in 2002. The effect is that raises and bonuses will come in below prior-year levels if they're being offered at all, and staffs have grown leaner than they've been in years, according to the 11th annual Advertising Age Salary Survey.

The survey, covering 228 agencies, found:

* Raises for 2003 will range from 3% to 4% of base pay for most positions, although one-fifth to half of the agencies won't provide raises depending on the job.

* Half the agencies in the survey will not distribute bonuses this year, and bonuses that make the cut will be smaller than 2001.

* Agency gross income will decline at 46% of agencies this year, worse than 42% from last year's report.

* More shops reduced (41%) than gained (31%) employment in 2002, as employment levels at 28% of agencies remained frozen.

Survey results essentially wedded 2002 to 2001, the worst year in the agency business in well over a decade.

Still, agencies are preparing for a better year in 2003. Three-quarters of the survey agencies project healthier movement in gross income next year, and 40% of agencies in most regions peg that growth at 10% or more. Likewise, 62% of agencies are planning a net increase in staff in 2003, much more upbeat than last year's survey that found 47% of agencies expected to increase employment in 2002.

Behind this brighter picture is a conviction that agency fortunes rest on new-account gains because the shops have squeezed about all they can out of existing clients. It was on the backs of existing clients that agencies grew in 2002, say 57% of the agencies, whereas 76% of the agencies now say new-business wins will push growth in 2003. "It is not so much that we've gotten aggressive," says Drew Neisser, president-CEO of Renegade Marketing Group, New York, "but clients are saying, `After taking a year off, we're back.' "

"This [return] won't happen overnight," cautions Richard W. Riley, chief financial officer at Sawyer Riley Compton, Atlanta. "Growth will be tied to maintaining the same level of spending from existing clients and adding a little extra business. The extra won't be there for many."

Agency growth in gross income will restore raises and deepen the bonus pool, especially with fixed costs dropping for most agencies, primarily from smaller payrolls. Reduced payrolls extend across all agency sizes. While the average shop in the salary survey dropped 8.5% to 28.3 employees in 2002, employment at the nation's top 40 consolidated agencies (agency networks of at least 180 employees) declined 7.9% (see story on Page S-8).


The average level of raises for 2003 is only a few percentage points below the fat years of the late 1990s, but 23% to 37% of agencies won't provide raises to 10 of 11 positions covered in the survey, and for that 11th position, CEO, 51% have frozen pay. CEO pay is rigid because many of the chief executives in the survey are owner-CEOs who tie their pay directly to profits after meeting payroll and other expenses. Profits have been depressed.

Compared to the level of raises in 2002, the West offers the greatest growth in 2003, with raises up an average 1.7 percentage point per post outside the CEO position, but then the West had the poorest average raises among the regions in 2002.

"The region is still struggling to surface from the dot-com crash. It fell faster and harder than anywhere else in America," says Andy Narraway, general manager at Odiorne Wilde Narraway & Partners, San Francisco, who predicts his agency will grow at least 10% in gross income in 2003.

Raises in the East will decline an average 1.3 percentage points for all positions surveyed, in the South they'll drop an average 1.2 percentage points and in the Midwest stay even with last year. The Midwest offers the lowest salaries for the most positions, but then the Midwest agency set contains the largest share of small agencies. Typically, the smaller the shop, the smaller the pay.


As percentage of base pay, bonuses range from a high of 13% of base pay for CEO (down from 19% last year) to 2% for copywriter and lead account planner, albeit just over half the agencies aren't awarding bonuses this year for any position.

In most cases, bonuses for the agency rank and file will be 1 to 2 percentage points beneath levels distributed in 2001. Bonuses will run from 2 to 6 percentage points below 2001 levels in the executive suite.

Apart from a salary freeze, the bonus was the most expendable compensation item as agencies adopted all sorts of flexible measures to protect the agency "family" and maintain optimal staffing to ensure competitiveness once the economy turns the corner.

Half the agencies in the survey took so-called flex measures: 32% of those eliminated bonuses, 23.6% made selective salary cuts, 11.6% turned to job sharing, 11.6% shortened their workweek and 8.3% scheduled voluntary time off without pay.

"We've had a salary freeze for two years now, but we realize our good people can go across the street if we don't increase their pay, so last year we paid bonuses out of operations rather than as a percentage of net profits. It's too early to tell if we'll pay a bonus this year," says Mr. Riley at Sawyer Riley Compton.

Profit sharing and professional memberships/dues remain the chief perks at the senior agency level with very little year-to-year variance. But stock options and pension benefits met with erosion in 2002. The number of agencies offering these benefits to senior-level employees in 2002 vs. 2001 dropped from 2 to 11 percentage points, depending on the post.

"Stock options are now in great disfavor," says Rebecca Fielden, VP-compensation and benefits at Interpublic Group of Cos.' Martin Agency, Richmond, Va. "Our own phantom stock program was a hot topic among senior execs several years ago, but the economic downturn never let it get off the ground."

"While clients are fighting to keep options, agencies aren't in a strong position to justify them," says Mr. Narraway, "especially if they must be declared an expense on your financials." Stock options also tend not to be popular among agencies if the shop isn't highly profitable.

The survey reports 74% of agencies predict growth in gross income in 2003 and only 11% believe gross income will drop. For those anticipating an increase, 39% expect gross income to grow by 10% or more.

Gross income growth in 2003 will be tied to new-client gains (76% of agencies). Only 15% of respondents in 2002 saw new-client gains as the panacea for agency growth. By contrast, growth this year is associated with spending gains from existing clients (57% of agencies)-that is, when growth came at all.

"Our goal is to grow at least 25% and mostly from new-client gains. Most agencies are counting on the economy bouncing back and for marketing budgets to increase. But it's hard to get a good feel from clients how much the increase will be," says Clarence N. Foxworthy, chief financial officer at NKH&W, Kansas City, Mo.

A similar 25% goal in new business is set by Sawyer Riley Compton. "If you don't add 25% new business each year, you're not growing," says Mr. Riley. Short-term demands from Wall Street and a revolving door in marketing managers have meant less loyalty to brands and agencies serving them, he says. Accounts now turn over every four to five years if not sooner.

In non-strategic management levels, male/female income differences favor men in most positions regardless of agency size. Parity between the sexes occurs most often in agencies with annual gross income of less than $7.5 million. Among all agency job functions, salaries between the sexes are closest for copywriter and associate creative director. In strategic management functions, salaries tend to be higher for males.

Women are narrowing the pay gap: In seven of 11 positions the differential between women's pay and men's pay shortened in 2002. Pay parity is present in three slots-associate creative director (women's pay is within 97.6% of men's), copywriter (96.5%) and art director (92.7%). In these positions, men outnumber women 2.3-to-1.


The Salary Survey, prepared by Ad Age and market research company Irwin Broh & Associates, found 4,145 employees in the 228 agencies surveyed. Men held down 53.8% of the posts and numerically dominated the upper five positions (CEO, chief financial officer, chief technology officer, creative director and associate creative director) 2.77-to-1. Women outnumbered men 1.12-to-1 in the six other positions, in particular account executive (2.11-to-1).

The survey drew a 6.5% response rate from questionnaires mailed to agency executives. Prior-year data are based on 262 responses from a different set of agencies. Most responses, 44%, come from agencies in the smallest survey category, less than $3.6 million in gross income; 32% from the $3.6 million-$7.5 million gross income level; 13% from $7.6 million-$15 million; and 11% from $15.1 million and above. Midwest agencies led in total responses at 31% followed by the South at 28%, East 22% and West 19%.

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