PALAZZO Incentive Compensation Study Reveals Bonuses Don't Reflect Agency Performance

Marketing Agencies Miss Opportunities to Modify Behavior, Drive Business Profits

News provided by

Apr 20, 2010, 12:34 ET

NEW YORK, April 20 /PRNewswire/ -- While bonuses are shrinking in many industries, over 92 percent of marketing and advertising agencies actually gave 2009 bonuses to employees at all levels. But profit before tax allocations were lower with few agencies creating strategic links between bonus pay-outs and company performance, according to a study released today by PALAZZO Advisory | Acquisition (www.palazzonyc.com).

PALAZZO's Incentive Compensation Study represents the industry's most extensive of its kind. Overall results indicate that the industry is ignoring a potentially powerful tool to improve company operations, employee morale and financial results.

"In an economy where every dollar must count and incentives are critical to keeping top talent, we were amazed by the industry's antiquated approach to incentive pay," said Philip Palazzo, Jr., founder and president of PALAZZO. "By neglecting to allocate bonuses in a manner that serves both employee and corporate needs, companies are ignoring a powerful lever to achieve their ultimate goal – financial success. Companies that properly align bonuses with corporate goals are not only more profitable, but also more transparent, with better employee morale."

Key learnings from the study reveal that agencies need to:

-- Create Formula-Based Bonus Plans that Link Individual Actions to Company Performance

In 2009, despite a historically poor year for marketing and advertising as a whole, more than 92 percent of respondents gave bonuses to employees at all job levels. Most respondents (72%) base their bonus allocations on a general assessment of many factors and not a predetermined list of precise criteria. However, the 28 percent of executives who reported using a specific formula to determine bonuses rated their incentive plans as a better tool to meet company and drive company profits – by more than 20 percent. The survey respondents whose management used formula-based plans also described themselves as 'industry outperformers' in terms of financial performance relative to their peers.

-- Set Aside a Bonus Pool that Drives Performance

The assumed industry standard for bonus pool allocation of profit before tax (PBT) is 20 percent, but the study reveals a surprisingly different reality at today's agencies. Nearly 30 percent of respondents allocate less than 10 percent of their PBT to incentive programs and only 19 percent allocate the industry standard or more to bonuses. While the overwhelming majority (92 percent) of respondents assessed their bonuses as being fair to employees, far fewer reported that bonuses drive company success (66%), drive behavior to meet company's needs (66%) and drive profits (57%).

-- Raise Bonus Distribution at the EVP and SVP Levels

A wide range of bonus distributions were uncovered by this study. As expected, C-Level bonuses skew high (30% of salary) and non-officer bonuses skew low (10% or less of salary), but EVP and SVP bonuses were relatively low with 53 percent of EVPs receiving bonuses equal to or less than 20 percent of their income. Top executives should be the ones bringing the greatest value to companies, therefore have the greatest opportunity vis-a-vis bonuses. Incentive compensation for senior management should be a lever to achieve specific goals.

"To improve the impact of bonuses on overall performance, management should abandon its seat-of-the-pants approach in favor of a formula-based plan that offers employees the possibility of a meaningful bonus in exchange for desired behaviors," said Palazzo.

In addition, digital and interactive companies have the most to gain from implementing formula-based, action driven programs early on in the development of the company. These agency programs perform 62 points below the norm when compared to other sectors. Most digital agencies are in early growth stages, so results-driven strategy can have great impact by driving profits faster.

PALAZZO partnered with leading research firm Russell Research to conduct a web-based survey of more than 100 agencies within advertising, media, specialty agencies, PR design firm, interactive and experiential shops. Of the respondents, 82 percent are C-Suite executives holding Chairman, CEO, President, CFO or COO titles. The study took place in December 2009 and will be conducted annually.

Visit www.palazzonyc.com to access the complete study.

About PALAZZO Advisory | Acquisition

PALAZZO is among the nation's leading financial advisory firms, working with a wide range of marketing services, interactive, information, and new media companies. The company draws on founder Phil Palazzo's unrivaled depth of industry knowledge, combined with extensive merger and acquisition related experience, to create value and wealth for owners and stakeholders. Known for the quality of its counsel, the skill of its negotiations, and the commitment of its people to outstanding client service, PALAZZO advises a host of leading independent marketing services and interactive companies. For more information, visit www.palazzonyc.com.

SOURCE PALAZZO