If agencies want to increase profits should they look at salaries?

Reports last week that Lowe London is putting “platinum handcuffs” on creative chief Ed Morris to stop him leaving came as the advertising industry’s trade bodies called for agencies to almost double the profit margin they charge to clients.

One leading marketer says that if agencies want to raise their profit margins, they should cut back on excessive staff salaries, rather than charging brand owners more. Others argue that agencies and their staff should be paid according to the value they add to brands.

It is understood that Lowe is offering to raise Morris’ salary to &£450,000 a year, and give him further bonuses and shares in Lowe’s parent Interpublic. There is a possibility that his name will be included in the agency’s new moniker.

The three-year deal is said to be a declaration by Lowe London that it is determined to fight on despite the loss of its &£45m Tesco account to Sir Frank Lowe’s agency The Red Brick Road. It follows the loss of Lowe chairman and creative chief Paul Weinberger and up to 30 staff to Sir Frank’s new venture.

According to Bob Willott, editor of Marketing Services Financial Intelligence, the sums reportedly offered to Morris are not unusual for a top creative in a leading agency. But he adds: “If he is worth that much, why weren’t they paying it to him before? It is interesting how employers wake up to the value of key people when they are made an offer by someone else.”

Willott says it is difficult for employers to accurately assess how much a member of staff should be paid: “There is over-payment in the ad industry. Sometimes you judge people to be more important than they really are.” This can have a knock-on effect, he believes, ratcheting up the salaries of more capable staff within the industry and distorting the jobs market.

The reports about Morris come as the Institute of Practitioners in Advertising attempts to raise the margins brand owners pay for advertising work. David Pattison, IPA president and chief executive of media agency PHD, last week used the launch of a set of cross-industry guidelines on agency remuneration to call for the profit margins paid to agencies by clients to be restored to previous levels of 20 per cent, from an average of about 12 per cent. Clients pay profit margins on top of the hourly rates for agency staff working on their business, plus the expenses of producing the work.

Pattison says: “Agency remuneration and margins are under pressure and we have to say what is a fair figure. Good companies that do good work should aim for 20 per cent profit margins.”

But one top marketer believes that agencies are already handsomely rewarded. He says the salaries earned by some agency bosses are “an obscenity”. Agencies are small- and medium-sized businesses employing less than 200 people, yet their bosses’ pay can be on a par with that of board-level directors of publicly listed, multinational corporations. The marketer believes agencies are oblivious to the cost-cutting and value-for-money ethos instilled in client companies over recent years.

He concludes: “Most client companies have been so pared back there is no luxury at all. Brand managers earn &£35k to &£45k a year, but they do not add ten times the value. They are highly paid for producing fluff.”

David Benady

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