Usage of Direct Multipliers

April 29, 2009

The Question

In February 2009, members of the ANA Advertising and Financial Management Committee were polled about how they use direct multipliers.

Committee members were asked:

  1. What role does the direct multiplier (when you divide Direct Labor by the Total fee) play in your compensation model?
  2. How does the direct multiplier (when you divide Direct Labor by the Total fee) impact incentive payment?
  3. Does the direct multiplier (when you divide Direct Labor by the Total fee) affect your overhead calculation?

Four members of the ANA Advertising and Financial Management Committee offered written responses to this benchmark survey.

Within this small sample, members were split. Two members use direct multipliers to determine agency compensation, while the other two members use multipliers for informational purposes only, tracking and benchmarking hourly rates or fees from year to year.

The Responses

Verbatim responses are provided below.

From members who use direct multipliers for informational purposes:

  • "[The direct multiplier] is just information in comparing blended hourly rates and benchmarking from year to year.  Fees are based totally upon anticipated scope of work. [Whether direct multipliers affect overhead calculation] really depends on the contract with the agency and what's included in that agency's overhead pool."
  • "Today we use [direct multipliers] to benchmark fees and heads. We heavily relied on multipliers a few years back. Direct multipliers were used to arrive at the fee. We applied the multiplier to the reported direct salaries required to execute the scope.

    "Note:Our multiplier was a factor that comprehended overhead and profit. Our multiplier was reduced to comprehend a risk/reward component of compensation. So, if we assumed a 15% margin for good results, our multiplier would have reflected something less than that, perhaps 10%. The agency would then be able to achieve 15% if the results were there, through the incentive comp payment. It absolutely impacted overhead because it included a factor for overhead. Basically, our multiplier used an assumption for overhead and profit. I like to refer to it as an allowance. If the agencies' overhead costs were greater than the 'allowance' for overhead, then it was a hit to their profit, and vice versa."

From members who use direct multipliers as a factor in agency compensation:

  • "We compensate our agencies using labor-based fixed retainers. Multipliers are a part of our compensation arrangement. We set aside a portion of our annual fee as part of our incentive compensation program. However, the incentive has no bearing at all on our multipliers, nor vice versa. Multiplier consists of two parts: agency overhead and agency profit. Our total fee is calculated by taking the direct salary costs of our agency staff and multiplying it by the multiplier.  Fee = Salary x (Overheard + Profit), where "Overhead + Profit" is stated another way as 'Multiplier.'"
  • "When we use labor as a component of the agency fees, we look at it more like a cost-plus model, where we use a formula like this:
    • Staff Cost x Overhead Factor x Margin Factor = Hourly Rate
    • Staff Cost = Salary and Benefits. (We try to exclude incentive pay to the staff.)"

"Usage of Direct Multipliers." ANA Advertising and Financial Management Committee, April 2009.