IAPI Guide to Agency Remuneration

GUIDE TO AGENCY REMUNERATION

GUIDE TO AGENCY

REMUNERATION A best practice guide to paying Irish Advertising, Communications, Marketing and Media Agencies.

GUIDE TO AGENCY REMUNERATION

CONTENTS

The purpose of this document is to demonstrate the IAPI best practice guide to remunerating Irish Advertising, Communications, Marketing and Media agencies.

Agency rates and remuneration methods

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Section 1 : Industry average hourly rates

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Role based rate card

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Blended rate - creative agencies - example 1

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The guide is split into three key sections.

Blended rate - creative agencies - example 2

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Blended rate - media agencies - example 1

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The first section - identifies two methods of calculating agency hourly rates.

Once the preferred method and rate is agreed, the rate is then applied to a preferred remuneration method.

Blended rate - media agencies - example 2

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The second section - identifies the various remuneration methods applied by agencies in Ireland. The combination of preferred hourly rate and remuneration method will assist both client and agency in determining the cost/value for an agreed scope of work.

Section 2 : Key remuneration methods Commission 12 Retainer fees

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Retainer + performance related incentive payment (prip) 14 Project fees

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Summary 14 Section 3 : The steps to a successful agreement Credit / payment terms

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The steps to a successful agreement

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The third section - steps to a successful agreement.

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Ideas are the beginning points of all fortunes.

s e t a r y c n e Ag on i t a r e n u m e r and methods

Napoleon Hill 1883 - 1970 American MOTIVATIONAL author

There are two key principles which must be agreed in order to establish a client and agency fee structure.

They are:

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1. Hourly rate 2. Remuneration method

In Section 1 we focus on the agency hourly rate, and in Section 2 we examine the various remuneration methods where the agreed hourly rates can be applied in order to determine the agency fee structure.

Section 3 highlights the key steps to a successful agreement.

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role

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ction

1 INDUSTRY AVERAGE hOURlY RATES There are two hourly rate methods that can be applied by both creative and media agencies.

there Are tWo types oF rAtes Applied by Agencies

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role bAsed rAte cArd The first method is where a different rate is allocated to each team member working on the client account. This is known as a role based rate card where there are multiple rates in use.

In June 2013, IApI carried out a survey of all its members to establish the range of hourly rates in use by its members. The results on the opposite page show the industry average hourly rate across all participating members.

induSTry aVerage hourly raTeS

CEO/MD/Deputy MD Board Director Account Director Media Account Director Account Manager Account Executive Media Account Executive planning Director Media Strategy Director Account planner Creative Director Art Director Copywriter Studio Manager Media Director Media Buyer Media planner programmers Digital planner SEO

€250 €225 €140 €140 €125 €100 €100 €225 €200 €120 €225 €140 €140 €120 €125 €80 €100 €100 €120 €80

induSTry billable hourS Total annual hours (52 weeks x 35 hours per week) Less 4 weeks annual leave 2 weeks bank holidays 2 weeks training/conference/illness

1,820

billable hours

1,540

140 70 70

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exAmple 2 blended rAte For creAtive Agencies

blended rAte The second method is where the same hourly rate is allocated to each team member working on the client account. This is known as a blended rate where only one rate is in use. To calculate a true blended rate, the scope of work to be carried out on behalf of the client must be clearly identified and the required inputs of each team member consistent against all projects where the blended rate is applied.

The blended hourly rates used in the following examples are recommended by iapi on the basis of the participating members responses*.

For illustrative purposes, two examples of blended rate calculations for creative agencies are shown.

In this example a more strategic senior team is required to work on the account or campaign as follows:

In this example a general team mix of all staff is applied as follows:

1.

20% per annum of an Account Director

2.

10% per annum of a Board Director

3.

25% per annum of a Creative Director

4.

12% per annum of an Art Director

5.

10% per annum of a Copywriter

6.

30% per annum of a planning Director

1.

15% per annum of an Account Director

2.

30% per annum of an Account Manager

3.

40% per annum of an Account Executive

4.

10% per annum of a Creative Director

5.

17% per annum of an Art Director

6.

15% per annum of a Copywriter

7.

10% per annum of an Account planner

exAmple 1 blended rAte For creAtive Agencies Role

Role

Rate Per Team Member

Total Available Hours

% of time required

Hours required

Fee (Rate x Hours)

Account Director

€140

1,540

20%

308

€43,120

€225

1,540

10%

154

€34,650

1,540

25%

385

1,540

12%

185

1,540

10%

154

1,540

30%

462

Rate Per Team Member

Total Available Hours

% of Time Required

Hours Required

Account Director

€140

1,540

15%

231

€32,340

Board Director

Account Manager

€125

1,540

30%

462

€57,750

Creative Director

1,540

40%

616

1,540

10%

154

1,540

17%

262

1,540

15%

231

1,540

10%

Account Executive Creative Director Art Director Copywriter Account planner

€100

€225

€140

€140

€100

154 2,110

blended rate for assumed hours

(€273,840 / 2,110)

Fee (Rate x Hours)

€61,600

€34,650

€36,680

€32,340

Art Director Copywriter planning Director

€225 €140

€140

€225

1,648

€18,480

blended rate for assumed hours

€130

The blended hourly rate in this example is

€273,840

(€315,805 / 1,648)

€86,625 €25,900 €21,560

€103,950 €315,805

€192

€192 due to the requirement of more senior input.

Using the average hourly rates as listed above, and working on the basis that each staff member has 1,540 billable hours available to them per annum (see breakdown on page 7), the blended hourly rate in this example is €130.

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* IApI Census June 2013

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Blended rate

Blended rate

For illustrative purposes, two examples of blended rate calculations for media agencies are shown.

In this example a more strategic senior team is required to work on the account or campaign as follows:

In this example a general team mix of all staff is applied as follows: 1.

5% per annum of a Strategy Director

2.

20% per annum of an Account Director

3.

25% per annum of a Media Planner

4.

30% per annum of an Account Executive

5.

25% per annum of a Media Buyer

6.

15% per annum of a Digital Planner

7.

10% per annum for SEO

2.

15% per annum of a Strategy Director

3.

15% per annum of an Account Director

4.

25% per annum of a Media Planner

5.

30% per annum of an Account Executive

6.

20% per annum of a Media Buyer

7.

15% per annum of a Digital Planner

Role

Rate Per Team Member

Total Available Hours

% of Time Required

Hours Required

Fee (Rate x Hours)

Board Director

€200

1,540

10%

154

€30,800

€200

1,540

15%

231

€46,200

1,540

15%

231

1,540

25%

385

1,540

30%

462

1,540

20%

308

1,540

15%

231

1,540

10%

154

€12,320

2,156

€258,720

Rate Per Team Member

Total Available Hours

% of Time Required

Hours Required

Strategy Director

€200

1,540

5%

77

€15,400

Strategy Director

Account Director

€140

1,540

20%

308

€43,120

Account Director

1,540

25%

385

1,540

30%

462

1,540

25%

385

1,540

15%

231

1,540

10%

154

Media Planner Account Executive Media Buyer Digital Planner SEO

€100

€100

€80

€120

€80

2,002

Blended rate for assumed hours

(€214,060 / 2,002)

The blended hourly rate in this example for Media Agencies is

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10% per annum of a Board Director

Example 2 - BLENDED RATE FOR MEDIA AGENCIES

Example 1 - BLENDED RATE FOR MEDIA AGENCIES Role

1.

€107.

Fee (Rate x Hours)

€38,500

€46,200 €30,800

€27,720

€12,320

€214,060

€107

Media Planner Account Executive Media Buyer Digital Planner SEO

€140

€100

€100 €80

€120

€80

Blended rate for assumed hours

(€258,720 / 2,156)

The blended hourly rate in this example for media agencies is

€32,340 €38,500

€46,200 €24,640

€27,720

€120

€120 due to the requirement of more senior input.

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2 THE KEY REMUNERATION METHODS Once agreement is reached between the client and agency as to which rate method they wish to use, the rate(s) can then be applied to the remuneration methods reviewed in this section.

COMMISSION As a model, commission now tends to only be used by agencies buying media space on behalf of clients (media agencies). The reason is simple – the method for calculation is a percentage of media investment. With the break-up of agencies from full service to independent disciplines, this model has become unsuitable for creative, digital, design etc. Even within media agencies, commission is not the only remuneration model and many clients have sought alternative methods.

Every time an agency places an ad with a media owner, the agency receives a standard 15% off the negotiated price. This 15% differential then allows the agency to work to a suitable remuneration level with clients, either retaining the full 15%, or an agreed level below this.

The commission level agreed between agency and client should be an amount that sees the agency being able to fully manage and service the client across all required disciplines in the given period.

Scenario examples

_ Tracks with media investment, meaning _

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_

Negotiated price for client

Price paid to media owner by agency

Agency remuneration

15% commission retained by agency

€1,000

€850

€150

€1,000

10% commission retained by agency

€1,000

€850

€100

€950

(diff between paid & negotiated rate)

Net client price

With the separation of creative and media functions, retainer fees have become an increasingly popular method for agencies and their clients to charge, and be charged for.

The retainer fee method establishes a fixed fee for a set period (normally 12 months) for a pre-agreed list of outputs.

Once the resource levels are agreed between the agency and client, the hourly or blended rates (as outlined in section 1) are applied, giving a fixed fee for the period in question – e.g. one year. Typically the agency will then invoice the resultant fee into 12 equal monthly instalments.

Before the retainer fee is agreed, a work and resource plan must be put in place, covering all details and activities that will need to happen within the agreed time frame.

This allows the agency to estimate the level of resource required to deliver the services and outputs and price it accordingly.

As market conditions change and the scale of ambitions are re-defined – for example increased market share as a result of a successful marketing campaign – the resources required will need to be altered accordingly. For these reasons, a retainer fee should be re-negotiated on a regular basis to protect both the agency and the client.

28% of all agencies, both creative and media, are currently remunerated using the retainer method.

StrengthS

18% of creative agencies and 55% of media agencies are currently remunerated using the commission method.

RETAINER FEES

clients pay based on level of work generated by their media investment.

Simple mechanic for clients who want all media costs blended into one system (plan, invoice, PO etc.).

Relatively easy to calculate.

Weaknesses

_ Unsuitable for non-media disciplines. _ Can be more suitable for media buying

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services, but not on-going account management or planning needs a client requires (for example where spend is light, but client would like on-going service).

Rewards on media expenditure and not the time and resource allocated to client.

Strengths

_ Establishes exact staffing requirements for the year. _ Guarantees the client a committed resource from the agency for the year. _ Agency and client can manage their annual budgets more easily. _ Reduced administrative time on both sides in calculating and agreeing individual project fees.

Weaknesses

_ Requires definitive and detailed work plan to be prepared in advance. _ There are no direct incentives built in. _ Actual resource requirements may vary significantly from original estimates. _ Can be inflexible if reviews are not built into the process.

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This model gives the strength and stability of the retainer model while adding an incentive component into the agreement, thereby aligning the company’s own marketing objectives with the agency’s performance. There may be a number of variants to this model but typically, it may operate along the lines illustrated below: • The retainer fee for the period is agreed.

and, if achieved, payment of the remaining 15% is made in full.

• A portion of the annual fee (say 15%) is then set aside until year-end, pending the achievement of a number of pre-agreed targets/criteria.

• Where annual targets are exceeded, the agency should also benefit from that outperformance – i.e. up to 115% of the retainer fee may be earned where certain criteria/sales targets are met.

• The remaining portion (85%) is divided equally and billed over 12 months.

• At year-end, actual results/performance are measured against the pRIp criteria

15% of all agencies, both creative and media, are currently remunerated using the retainer + performance related incentive payment method.

In common with all remuneration methods, a project fee will be a combination of the number of hours estimated to carry out the project and the agreed hourly or blended rate.

If there is no fundamental change in scope during the term of the project, the client will expect to be charged the project fee agreed at the outset.

However, where the scope of the project does change before completion, the agency should advise the client immediately of the effect the change will have on the final project fee.

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30% of all agencies, both creative and media, are currently remunerated using the project fee method.

strengths

_ Directly related to single deliverables. _ Simple to control. _ Suits niche services.

WeAknesses

_ Each project needs to be priced individually. _ Level of work can change, staffing _ Impossible for agency to dedicate needs may change.

_ Does not encourage brand building. resource to the client.

ThE STEPS TO A SUCCESSfUl AGREEMENT

strengths

Agency remunerAtion

(in addition to retainer-only strengths) _ Works well with FMCG companies. _ If sales increase so does an

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Both parties should agree to, and be satisfied with, the remuneration model chosen. Both parties should also be happy with the fee structure.

We believe that clients should respect all their suppliers and agree to fair and manageable payment terms. This allows all agencies, both big and small, to better manage their cash flow.

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It is vital to establish the territory covering the appointment: which countries, regions and territories?

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Agency assesses its likely costs and prepares a work plan based on people-hours, and shares with client.

The induSTry STandard iS 30 dayS or leSS.

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Client refers back to marketing budget and relates people-hours cost to agency cost-provision in the budget.

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Both sides agree level of agency remuneration (including the profit margin) at the point where cost provision and the cost of people-hours intersect.

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If applicable, the client and agency agree goals/KpIs as the basis for pRIp.

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At this point, client and agency have to come to terms on how much the client is going to pay the agency, how performance is going to be evaluated and remuneration reviewed in a year’s time.

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provision should be made to revisit the agreement at an agreed date in the future, to ensure that both parties are still happy with the method.

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As a final step - definitive discussions on the form of contract to be used.

agency’s income. _ Can be more motivational.

WeAknesses (in addition to retainer-only weaknesses) _ May not suit service industries. _ Requires detailed post-campaign analysis. _ Does not lend itself to change i.e., increased industry competition, downturn in economic circumstances etc.

proJect Fees Where there is no clear work plan for the year ahead, it is often difficult to calculate a retainer-based remuneration model. In this scenario,individual project by project fees may be negotiated.

ction

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retAiner + perFormAnce relAted incentive pAyment (prip)

summAry Finally, none of the models presented are exclusive and a combination of models is quite common. The form that these hybrid agreements take depends on the combination of the client’s needs and the agency’s flexibility.

Ultimately, the method of remuneration chosen should be fair and equitable to both parties.

Both should profit from the relationship. Both should be happy with the arrangement, allowing them to devote themselves to the work at hand. It’s the basis and essence of successful brand building.

credit / pAyment terms

Fair and manageable terms will depend on a number of factors including credit worthiness and third party payment terms. In many instances, agencies are paying third party suppliers either up front or within 30 days. Clients who look to push payment beyond 30 days are creating operational problems for their agency partners.

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8 Upper Fitzwilliam Street, Dublin 2 t: 01 676 5991 e: info@iapi.com w: www.iapi.ie Our online guide to finding the right agency can be found at www.iapi.ie/findingtherightagency

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