Incentive payments at ad agency holding company Omnicom (OMC) appear to be eating its profits, according to the the company's SEC disclosures. Omnicom's revenues increased 8 percent to $3.1 billion in Q1 2011 as its clients enjoyed the economic recovery and increased their ad budgets, but the company is failing to hold down the wages bill for all the extra work, according to its financials.
The vast majority (86 percent) of Omnicom's operating expenses are "salary and service" costs -- wages and payments to the folks who make and place ads (see page 23 of this investor slideshow). Omnicom owns ad agencies such as BBDO, DDB and TBWA, and serves clients like Apple and AT&T.
If you divide Omnicom's revenues by its salaries, you can see how much the company earns in sales for every dollar spent paying its staff. In 2008, Omnicom got $1.44 for every dollar of wages. Today, it gets just $1.30, a 10 percent decline in productivity:
(The Q1 2011 number was especially low because of a one-off restructuring charge, but even if you factor it out the trend is still down.) Omnicom CFO Randall Weisenburger told investors in February that paying staff more in bonuses was a deliberate move. Omnicom paid $100 million more in bonuses in 2010 than it did in 2009, Weisenburger said:
Frankly, if I had my preference, I'd like to see our incentive compensation increase as a percentage of revenue and increase as a percentage of our salary, basically continuously change that mix. The more that's in incentive, the more flexibility that we have.That's an odd statement to make for a man whose job it is to keep operating costs in line with profits. Salary costs are having an effect on Omnicom's gross margins, too. Here is the revenue yield for every $1 spent on total operating costs. It's also trending down:
The recession presented ad agencies with a historic opportunity to keep salary costs down as the recovery kicked in, and enjoy the margins that resulted. There are plenty of unemployed workers to choose from, so agencies ought to be able to keep their staffing costs in line. Yet Omnicom is failing the test.
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