This article is one in a series of articles on Agency Accounting that can be found in the Accounting Section of the Library on this site.

Agency compensation is based on a formula that in general tries to cover the amount of time the agency is going to spend on the client’s business. Although the agency may get commission on media or production purchasing, or even additional income from the creative services area, the fee is the main form of agency compensation.

In earlier articles I mentioned how the agency might figure out it’s hourly rate and the amount of chargeable hours an employee is billable. This rate multiplied by the hours is equivalent to one agency FTE billable cost. (Keep in mind that the FTE doesn’t mean you are locked into a dedicated staff member, the FTE is used as a time equivalent.)

Here are some examples of fee arrangements that vary hourly rates and overall billable hours per FTE. In some cases, it may be better to lower or raise your rate depending on the amount of hours you think will be billable to the client.

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In the past, traditional agency management felt that their compensation for their company would be higher if they convinced their clients to hire them on a fee basis.

Recently their has been a trend towards alternative agency/client compensation. However, in most cases, agency’s will still use a fee system that is comprised of an estimated cost that calculates X amount of hours at an hourly rate of Y. Although an agency fee might be comprised of multiple hourly rates for individual staff members, one way to reduce, or discount the hourly rate, is to take the average hourly cost for the staff (or what is often referred to as a “blended” rate) and apply that cost to all of the estimated time. Although the blended rate is often used, the agency will still set out to determine the individual rates for each staff member.

Agencies will often not have the same internal calculated rates, since each business will have it’s own unique overhead and salary costs that would apply to only that company. However, agencies centered in certain geographical locations may have rates that are comparable.

This standard for configuring agency/client fee agreements is often based on the number of FTE’s assigned to the client’s account. One FTE stands for “fulltime employee equivalent.”

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In many cases additional forms of compensation will be made to the agency that is on top of the agency fee. This compensation may be in the form of commissions on production or media purchases, charges for the agency’s creative services department or other forms of agency charges.

Commission

Dramatic changes in agency compensation have occurred over the years, “According to the 2004 ANA Agency Compensation survey, a mere 10% of the 112 major advertisers surveyed said they still pay commissions, down from 21% in 2000. Nearly three quarters (74%) rely on either fixed/hourly fees or a blended compensation model that includes fees and commissions (8%).” (Source ANA Press Release)

However, in the past, agencies have traditional been able to charge a commission on out-of-pocket client costs in relation to media or production (print) purchasing. Although there has been a trend away from charging commission, agencies will strive to do what is financially in the best interest of themselves and their clients. Some agencies increase their rates to compensate for the loss of
commission, where some agencies have gone completely away from charging them.

In the past the traditional rate of commission on print or production related purchasing was .17625% and varies from 0% to 20%. Production commission is traditional charged on outside
vendor bills for items such as scans, art purchases, color house work, printing and manufacturing.
Media commission has also varied from 0%, 3%, 5%, and up to 15%. Media commission is traditional charged on purchasing advertising space in print, out-of-home, broadcast and other mediums.

Services not normally included in the fee.

Fee agreements should be very specific about what types of services the agency will provide, and additional services not provided in the fee will then be estimated and billed to the client on a project by project basis. This may be typical of clients who originally asked for traditional ad campaigns, but not internet related work or perhaps PR or research related projects.

Creative Services (Production & Studio Services compensation)

Traditionally, agency fee compensation included all staff members related to the clients work minus the production studio. In some agencies, sperate production estimates will be created for the client to include hourly or flat rate charges for studio mechanicals, proofreading, color copies, final file creation, final file releases, discs, programming and more. And in a few circumstances, the production estimates may include production management and traffic or project management.

Trends
There has also been a trend for agencies to bring traditional color house related work inhouse. This enables the agency to charge for color house related items that it would have normally passed through as out-of-pocket costs. These production services may include high resolution scans, retouching, proofs and final file creation and releasing.

To read more about trends in agency compensation, read the new 2004 ANA Compensation report, available at the ANA bookstore at: www.ana.net

The AAAA also has a variety of agency compensation related publications available at www.aaaa.org

Out-of-pocket or OOPs, are expenses that come in two forms.

One, where goods and services are bought outside of the agency for the sole use of the client, and accordingly, must be billed to the client.

Two, where goods and services are bought outside of the agency for use solely by the agency.
Both forms of expenses, however, should be tracked and approved prior to purchasing. For your clients, you are contractually obligated to have prior approval, and clients have the right to refuse payment if the costs exceed the pre-approved amount. For internal costs, the agency needs to keep track of what it spends.

Approval of purchases starts by issuing a purchase order request that will initiate an approval process and a generation of a purchase order. In many cases, the production/media manager for the agency can issue approval and purchase orders on behalf of the client/agency by confirming the agency has a signed agreement or estimate from the client the covers the costs on the purchase order request.

Costs for the agency should only be approved by the assigned supervisors and acquired by issuing a purchase order generated by the accounting department (or authorized production person).

This sounds like a rather simple concept, but having worked in many agencies, this is one of the most easiest traps that people fall into. Someone on the staff authorizes purchasing something, doesn't issue a po, the client never gets a chance to approve it, and then the client refuses to pay it.