4A's takes aim at compensation consultants

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The American Association of Advertising Agencies is launching an offensive against what it calls "disreputable" compensation consultants, claiming that some employ devious and unethical means.

After gathering information on the consultants from a handful of its members, the Four A's plans to come out publicly against certain consultants in an opinion article due to appear in Advertising Age next week. In it, the Four A's will charge that these firms are using "creative discounted math" and that they disclose confidential information to persuade their marketer clients that through using their services the marketers could save money on agency fees.

Four A's management has not named names, but knowledgeable executives said one particular consultant in the trade group's crosshairs is Manhattan-based Beek- man Associates.

Insiders at the Four A's claim Beekman is "creating artificial standards, providing misinformation and taxing the relationship between agency and client."

Beekman Associates' principals Bob Cauley and Tim Bajraktari, who founded the firm in October 2001, met Aug. 21 with the Four A's Exec VP-Management Services William Nicholson and Exec VP-Chief Financial Officer James Martucci to "open up the lines of communication," said Mr. Cauley. "Our intent is to help both clients and agencies calculate what is fair compensation. To the extent that someone thinks we are doing something wrong, we want to know specifically what it is. The Four A's is a consultant to agencies. We think it is fine and reasonable that advertisers, too, get to utilize consultants."

Specific bones of contention discussed at the meeting, according to Mr. Cauley, were the propriety of an agency defining its overhead costs differently on one account than on another and whether, when determining an agency's hourly compensation rate, agencies and clients should use a standard annual number of hours (generally 1,600, according to Four A's membership surveys) or actual hours worked. Mr. Nicholson disagrees that those matters were discussed, but said, "I'd be happy to talk about them in the future."

several data categories

When hired to conduct an agency-compensation assessment, Beekman, whose clients include Pfizer, Cadbury Schweppes, Kraft Foods, Unilever and General Motors Corp., gathers several categories of data. These include a list of all employees that have worked on the client's account for the past year; the total number of hours each employee worked on the client's account during that period; and aggregate salaries, by department, of all who worked on the client's business also during that time frame. Finally, Beekman asks the agency its overhead costs and profit margin on the account.

After the data is gathered, Beekman crunches it to calculate what the client pays the agency annually on an hourly basis. The firm also compares the agency's data against benchmark data from its proprietary database, and gives that information to both the client and agency being assessed. "What is fair compensation is based on benchmarks," said Mr. Cauley. "We say the costs should be the costs, and the profit should be negotiated and agreed to. So if you are a hot agency, you ought to get a higher profit margin than a cold one."

Lower rate

Beekman's policy of using actual hours worked rather than a standard annual number can potentially result in a lower average hourly rate. "If the standard number of hours is lower than the actual number of hours worked, the agency's salary costs will be artificially inflated," said Mr. Cauley.

Beekman also argues that an agency's overhead rate should be the same from client to client unless there is a specific and reasonable underlying cause. On behalf of agencies, the Four A's says overhead rates may vary depending upon the contractual terms negotiated between clients and agencies.

The Four A's also argues that if Beekman tells a current client information gathered from a prior assignment, then it is violating a nondisclosure agreement. Mr. Cauley said that in most of the compensation assessments, Beekman does not sign nondisclosure agreements, adding "however, we never disclose a specific client/agency metric from a particular client." He agreed, however, that "we do use past knowledge to determine the facts in current assignments."

What choice do agencies have if a client hires a consultant to conduct a compensation assessment? Not much. "When clients call these assessments, they're playing real hard ball," said Jerry Gottlieb, managing partner, McCaffrey Ratner Gottlieb & Lane, a New York agency. "It puts clients in an increasingly powerful position in the relationship. I sincerely doubt these clients do similar assessments of their lawyers and accountants."

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