Expert: Peter Gabany - 11/25/2009

Question
Hi,
I am mainly confused about the fee structure of ad agencies.  I've been reading about the history of ad agencies and of the 15% commission rate which was the industry norm.  As things evolve, is this rate basically for media agencies, and not creative?  Are creative agencies on a different fee structure?

Thanks!

Answer
Isabella,

Thank you for your question. The idea of agency commission is nearly dead - but they have been saying that for over a decade. But in principle it is gone. Media vendors do still honour the 15% discount on placement but unless you are purchasing well over a $million in media (preferably tens of $millions) your agency would not make any profit if it did not charge fees.

The fee/commission (15%) compensation scenario took over in the 80s and now most of agency and this includes PR, Direct Marketing, Graphic Design and Sales Promo agencies work on a fee structure and the media commission is used more like “gravy”. This is not to say that there is no value in creating a creative, strategic media plan - in fact this is where an agency can actually make or break the campaign, it's just not the largest economic driver of the agency of today.

Compensation models are typically based on $/person hour billed. There are roughly 1,680 person hours to bill in a year and to remain viable one would want to bill the most that they could of those hours. 10 people - 16,800 hours. Bill that out at $100/hour and the agency fees bring in nearly $1.7 million. Obviously the hourly rates vary - upwards to $600/hour for some people but the average that I have seen is about $130/hour.

If you think that an agency that has 25,000 hours of work to do you can determine the staffing of that agency rather quickly. Obviously the more hours that you add the more efficiently the agency must work and to have people billing 1,680 hours/annum each would constitute - poorer creative, premature burn out as this is quite a pace to set.

Sr people will bill fewer hours therefor demand a higher compensation to derive the same if not more fees for the agency. Sr people are often involved in client meetings and the heavy lifting of the agency - management, creative direction, new business acquisition.

Look up Second Wind and Tony Mikes - he speaks about agency compensation a lot.

I trust that this will help.

Cheers,

Pete