An annual salary increase should be tied to profitability not the calendar. We don’t recommend automatic annual salary increases. When learning how to manage payroll, we do wholeheartedly recommend is a salary plan that is fair and rewarding to all employees that inspires them to go above and beyond for the agency and its clients.
You don’t reward someone with an annual salary increase just for being on staff or holding down their position for another year. You reward them for their contributions and their added value. Unfortunately, many employees feel entitled to a salary increase every year, and are very vocal when they don’t get one. Somehow, salary has become an entitlement program. “The longer I stay, the more I should be paid.”
Sorry, I don’t buy it. My concept of a good salary/compensation plan for advertising agencies includes four basic elements:
- Profitability of the agency
- The responsibilities of the person’s job and their contributions to the profitability
- Did they get better at their craft (are they adding new value)
- How long have they been a part of the team
It boils down to rewarding the results you want.
Rewarding the Results
Profitability has to come first. You can’t increase salaries if you aren’t making a profit. The first responsibility of every employee should be to help the agency make a profit. I believe it is the agency’s responsibility to keep employees even with the cost of living, and that employees should receive a piece of the profits the agency earns. The agency made the profit because of the combined efforts of the staff.
Responsibilities vary with the position and with the person. It’s obvious that a senior art director will make more than a graphic designer. The responsibilities are different. If you promote a graphic designer to the level of art director, then the base salary should change. Every position in the agency should have a salary range. The salary should increase as responsibilities increase within a position, i.e., managing additional staff, working with larger clients, etc. But we’ve all worked in agencies when two people held the same position but contributed at very different levels. They shouldn’t make the same salary. (And the one who is under contributing should be let go but that’s another blog post.)
You also want to recognize and reward those employees who understand they need to keep sharpening the saw. In many smaller agencies — a person may retain the same title/position for several years simply because the agency is pretty flat organizationally. But that doesn’t mean they can’t improve themselves and add more value.
Longevity does matter. But you can recognize this with a benefit other than annual salary increases. Most of us already reward longevity with increased vacation time, personal days, and more. You can build in other perks (cell phones, paying more of their healthcare coverage costs, etc.) as well. Just make sure these incentives are written up in your Agency Policy Book.
What happens in an off year? Don’t give raises for any reason in a year you don’t make a profit. It’s that simple. You hire a staff and expect them to earn a profit. If they didn’t do that, why should you reward them? If you do give raises, you’re saying… “It’s okay. Making a profit isn’t necessary.” I’m guessing that’s not the message you’d like to communicate.
What happens in a great year? Give your cost of living raises and share the profits. Cost of living is running between 3% and 4% right now. You can always get the figure from your accounting firm. Give this increase on the employment anniversary date. Then, share the wealth by distribute profit sharing checks ninety days after the close of the books for the business year.*
What does rejecting an annual salary increase teach your team? That you’re going to help them provide for their families by always paying them a fair wage and, when the agency does well — they get to reap those rewards too.
When you tie bonuses to the agency’s performance, you’ll be amazed at how interested your employees become in the agency’s profitability. And that is to everyone’s benefit.
*There are lots of ways to create and structure bonus programs. This is just one example.
Learn More About Agency Money Management
If you’re looking for even more guidance on how to manage payroll, sign up for our Money Matters workshop. If you’re already an AMI member – register for our money matters workshop with your discount here.
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