Why Incentive Compensation Plans Fall Short

Just about everyone I know in the advertising and marketing world is a devoted follower of AMC’s weekly show, "Mad Men."  If you happened to catch a recent episode,  a central topic was whether Sterling, Cooper, Draper, Pryce -- the mythical agency that is central to the show -- would award bonuses to its staff.

On the show, it’s a subject on everyone’s mind.  But in the real world, everyone might care about bonuses, yet few are willing to talk about them, and even fewer are focused on how they should be paid.  In this case, life does not imitate art.

Recognizing that what our industry needs most is better information, two years ago my colleagues and I set out to conduct the first comprehensive survey of incentive compensation practices in the marketing services arena. Earlier this year we targeted some 4,000 advertising, new media, information, interactive, and digital executives with a second study, designed to update what we know.  

The good news, no surprise, is business appears to be getting better, with executives reporting that 2011 performance was better than 2010, with prospects for this year projected to be even better.  Revenues were up, profits were up, and business appears to be on the rebound.

The bad news: while most of the shops we surveyed pay their employees cash bonuses at year-end, bonus payments did not keep pace with revenue and profit growth. Compared with what previously was customary, it appears most agencies are allocating fewer dollars to incentives, a trend we first spotted nearly three years ago.

But what really is a cause for concern is how bonuses are allocated.  Bonus plans should be strategic, meaning tied to corporate objectives, and designed to encourage an agency’s behavior toward managing cost and driving profitability.  

Instead, bonus plans tend to be arbitrary and ad hoc, with senior management determining who should be paid what, with those on the receiving end having no point of reference about payment, other than their bonus history; “I received $X last year, so I should receive $Y this year.”

There is, in short, no goal alignment between corporate objectives and individual objectives.

Among all the shops we surveyed, digital agencies appear to offer the greatest opportunity for improvement.  Digital agencies enjoyed strong top-line growth that, frankly, was not matched by bottom-line profits.  There are many reason for this -- a focus on growth, investments in personnel, space, technology -- but little attention is paid on how to use a strategically crafted bonus plan to ensure that staff is focused not just on top-line revenue, but also on managing cost to improve profitability, a missed opportunity if ever there was one.

Agencies are paying greater attention than ever before to managing costs and growing profits.  A bonus plan that is strategic -- not arbitrary, tied not just to individual goals, but also to corporate goals, is a powerful tool in an owners’ arsenal.  

As executives plan for this year and beyond, it makes great sense to revisit their bonus plans, to ensure they are doing all they can to help deliver better results.

If you would like to see the full study, visit to request a copy. 



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