The American Association of Advertising Agencies issues New Best Practice Guidelines t’o Transform’ Compensation Model [REPORT]

The American Association of Advertising Agencies (4A’s) issued a survey report on the subject of agency labor billing rates along with a corresponding position paper containing new best practice guidelines for agency compensation. The 4A’s board approved the new guidelines—as developed by the 4A’s finance committees and outlined in its position paper—which have the potential to dramatically improve the efficacy, efficiency and civility of agency labor-based compensation discussions.

“Our new guidelines are in response to widespread frustration in the marketing community and to the many questions we receive about appropriate ranges for labor-based compensation,” said Nancy Hill, 4A’s CEO and president. “We strongly believe that, going forward, the best and healthiest model for agency pricing is a marketplace whereby the rates are commensurate with the value of an agency’s talent and the value of its work product.”

The 4A’s recommendation and its rationale: Agency labor billing rates should not be based on costs, as they customarily are, but on prevailing market rates set in the marketplace. In this way, compensation will reflect the value, complexity and sophistication of services provided rather than being based on deconstructed agency cost and profit components.

More about the new survey report and position paper from the 4A’s:

The 2015 Labor Billing Survey Report: This report contains robust, statistically sound information on actual billing rates charged to marketers by 326 agencies in 2014—providing the agency and advertiser communities with a mechanism for discussing and benchmarking market-based labor rate ranges.

Tom Finneran, EVP, agency management services, says, “The transparent information contained in this report is designed to help the industry move away from unproductive conversations about overhead rates and profit margins to a more practical discussion of billing rates.”

Best Practice Guidance | Agency Compensation: Market-Based Labor Rates position paper: The position paper contains guidance for agencies to streamline the process of establishing and evaluating their labor billing rates. This new guidance states: “Any form of cost-plus or cost-based construct in pricing can engender a culture of adding up costs rather than creating and articulating value. This is not ideal for clients or agencies.”

These new best practice guidelines afford the marketer and agency communities the opportunity to more efficiently and equitably frame labor rates, which will in turn allow the parties to focus on the critical tasks of aligning scope of deliverables, service expectations and the desired scope of benefits.

To download paper CLICK HERE.