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Ad Industry Bonus Best Practice: Use Formula-Based Approach

Marketing and advertising companies that used a pre-determined list of criteria when awarding bonuses - instead of just a general assessment of ad-hoc factors - tended to post higher profits. So says a new study by Palazzo Advisory | Acquisition.

That any ad firm last year gave out bonuses would seem a surprise - however, according to the survey, 92% did. The survey also found, though, that the vast majority of these companies were not strategic in their decision-making. Some 72% said they based their bonus decision-making on general factors and not a pre-determined list of criteria. Of the 28% that did use such a list, they said their incentive plans were a better tool to meet company and drive company profits – by more than 20%.

"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.

Bigger Allocations Needed

Another problem is that firms are not setting aside large enough allocations to bonuses, the study found. The assumed industry standard for bonus pool allocation of profit before tax (PBT) is 20% , but the study reveals a surprisingly different reality at today’s agencies. Nearly 30% of respondents allocate less than 10 percent of their PBT to incentive programs and only 19% allocate the industry standard or more to bonuses.

Wide Range

The study also found a wide range of bonus distributions with C-Level bonuses skewing high (30% of salary) and non-officer bonuses skew low (10% or less of salary). EVP and SVP bonuses were relatively low with 53% of EVPs receiving bonuses equal to or less than 20% of their income.

The study also suggested that 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.


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