Rising staff costs hit ad agency bottom lines

Spiralling staff costs are hitting profits at advertising agencies, while their media agency counterparts continue to operate in an environment of higher profit margins and more stable employment costs.

Employment costs at ad agencies rose to an average of £58,540 per head, according to Marketing Monitor - a survey by the accountancy company Willott Kingston Smith based on Companies House data. This was an increase from £54,596 when the report was last published in autumn 2005.

This rise in staff costs contributed to a decline in profit margins at ad agencies from 10.7 per cent to 10.4 per cent across the same period.

However, productivity improved by 5 per cent at ad agencies, owing to a 3 per cent decline in staff numbers.

In contrast, the average employment costs per head at media agencies were relatively static at £38,824, a rise of less than £100.

Media agencies' profit margins increased by 0.5 per cent to 15.4 per cent, the highest in any of the marketing sectors analysed.

Staff costs at media agencies represented 55 per cent of gross income, compared with 57.3 per cent at advertising agencies.

Overall revenues were down at direct marketing and sales promotion companies.

The report concluded: "The clear trend across all sectors is that agencies need to find ways to cover the higher rates of pay the market is demanding from clients who are intent on driving down cost."

The report added that advertising agencies needed to find more creative ways of rewarding their staff "without necessarily throwing cash at the problem".