The Beekman Report: Comprehensive Review of Agency Compensation Trends and Benchmarks

May 12, 2008    

Definitions

They Should Be Clear, Consistent and Complete

The use of clear, concise definitions is the foundation of an agency compensation assessment and benchmarking process yet it is often overlooked.

A client recently asked us why one of its agencies with an overhead rate of 100% is so much less than their other two agencies with an overhead rate of 115%. As it turned out, the answer was in the definitions and the "higher" overhead rate was in fact the lower rate when compared apples-to-apples.

Overhead rates are generally expressed as a percent of salaries. The agency using the 100% overhead rate expressed their overhead as a percent of employee costs that included benefits of 22%. The other two agencies expressed their overhead as a percent of employee base salaries (excluding benefits). When the 22% for benefits was moved into overhead it lowered salaries by 22% and increased overhead by 22%, a net effect of a 56% increase in the overhead rate ($100 + 22% = $122 divided by $100 - 22% = $78). This meant the agency with the 100% overhead rate actually had an overhead rate of 156% when using the same definitions as the other two agencies.

While no set of definitions is right or wrong, all definitions should follow the 3 c's: be clear, consistent and complete. For example, it is not right or wrong to include employee bonuses in salaries and, likewise, it is not right or wrong to include employee bonuses in profit. What is most important is that the definitions follow the 3 c's. Why? The example above illustrates the importance of being "clear" and how just using the term "employee cost" versus "employee base  salaries" can play a significant role in calculating overhead rates. "Consistency" allows one to fairly compare similar types of agencies. And "complete" ensures that all reasonable agency costs are accounted for.

Some clients and agencies like to define overhead as anything that is not included in salaries. We advise against this because it is too broad and may result in misunderstandings.

We further suggest all reasonable agency expenses be included in the definitions, and the client/agency contract spell out those expenses. If an expense is overlooked and not included in your definitions, then have the agency clearly define the expense before adding it to your definitions so that both parties will have the same understanding and appropriate transparency.

Below are Beekman's standard definitions, which should prove to be a strong basis for developing a best-in-class client/ agency contract.

Beekman Associates' Standard Definitions

1. Direct Expenses

A. Total Actual Hours

"Total Actual Hours" means (a) the actual number of hours of Direct Staff worked on the Client's account plus (b) the actual number of hours worked on other client accounts plus (c) the actual number of hours worked on non-client (Agency) matters such as new business development, executive and administrative matters, but excluding vacation, holiday and sick time. If "actual" hours are not available because the Agency is projecting for a future period, then historical average hours may be substituted for actual hours, in which case agency must state it is using average hours and give the average hours used. Do not use an agency "standard" hour formula.

Example: If a named Direct Staff person spends 1,000 actual hours on the Client's account during the period in question, 800 actual hours on other client accounts and 200 actual hours on internal agency matters such as new business development, executive and administrative issues (a total of 2,000 actual hours); and earns an annual base salary of $100,000 per payroll registers, then the Direct Base Salary would be allocated as: $50,000 for the Client's account, $40,000 would be allocated to other clients and $10,000 would be allocated to the Agency's Indirect Payroll portion of Overhead.

B. Direct Staff

Direct Staff are those Agency employees who work "hands on" in Direct Departments (as listed below.) Direct Staff does not include any Agency employee, regardless of their department, who's primary responsibility is in the area(s) of finance, accounting, secretarial, administrative, Agency related computer services or executive management. It is assumed that each Direct Staff person listed is a full-time, fullperiod employee of the Agency and any variances thereof should be so indicated.

C. Direct Departments

1. Account Services - Hands-on staff working on Client contact, marketing, planning, merchandising, etc., by principals and by account staff. Account Planners should be included under the "Research/ Account Planning" section and not in this section.
2. Creative - Hands-on staff working on the Client's creative including concepting, copy writing, art direction, finished art, layouts, mechanicals, illustrations, stylists, etc.
3. Account Planning - Hands-on staff working on research, market analysis, account planning, library functions, etc. for the Client's business.

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Source

"The Beekman Report: Comprehensive Review of Agency Compensation Trends and Benchmarks." Beekman Associates, LLC., 2008; ANA Advertising Financial Management Conference, 05/05/08.