Employee Economics

Ad agencies are about as labor intensive as businesses can be. As much as 60 cents of every fee or commission dollar that comes into an agency flows back out through the payroll department. When business picks up, agencies are compelled to hire just to get the work out the door; when the business tide ebbs, so does the staff count.

That’s why staffing levels are valuable indicators of a shop’s financial health. Adweek’s Report Card grades in the “financial” category include an analysis of revenue per employee—as a general rule, the higher that ratio, the more profitable the agency. More broadly, employment data from the Bureau of Labor Statistics provide a good (though lagging) picture of the ad industry’s health.

The graph below shows that the industry suffered a mild contraction in the early 1990s and then saw an amazingly rapid expansion from April 1994 to July 2000. There was a subsequent freefall, which is now over. The collective employee count climbed month-over-month for seven of the past 12 months, and the latest data shows that February advanced over January. The problem is that we haven’t seen a year-over-year improvement since April 2001, and the total employment figure of 164,00 is far below its dot-com peak of 207,400.

The recent slump was the longest in modern times. Because of the prolonged retrenching, agencies are now short on employees with three to five years’ experience. These journeymen are vital. Those agencies that are getting very busy very fast—20 percent of the shops rated in the Report Cards posted revenue gains of 20 percent or more last year, and the recovery was barely beginning—must pick up those folks wherever and however they can. That’s done by paying up.

Paying up for superstars is as common in advertising as it is in baseball—but bidding for midlevel employees isn’t, and that could have far-reaching effects. If the journeyman level merits a 20 percent bump, that will have a ripple effect, raising salaries up and down the line.

Downward pressure on revenue (from consultants and procurement officers working over the compensation side of agency/client relationships), combined with upward pressure from costs will squeeze profits, which may start happening in about a year. (Right now, after three years of layoffs and hiring freezes, the industry is operating very economically. In the near term, profit margins will widen as revenues rise, which all indicators say is happening.) It’s a lot like standing at the rail watching a torpedo come in. There’s not a lot to be done.

Some (but not many) agencies used the recent slump as a cover for upgrading staff. Plenty of good senior adfolk were out on the street, victims of successive waves of downsizing. Agencies might have tried to keep the best of them, but that can require a major rejiggering of staff, which can have its own negative effects. As a result, there was (and still is) a lot of talent with 10-plus years of experience floating around, getting increasingly desperate for work.

Even when top management sees the opportunity to upgrade, the plan can be thwarted in the execution. Most hiring decisions are made by department heads, many of whom have survived several rounds of cutbacks. There they are, interviewing someone who’s as good as (maybe better than) they are, and willing to work for a fraction of their salary. Consciously or not, managers have to realize they may be bringing on board their own replacements should there be another round of cuts.