Episode 175

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When I talk with agency owners, there’s one topic that often comes up in conversation. They say, “I wish my employees would think and act more like owners!” And my question back is, “why would they – they aren’t owners.”

Think about it. As the agency owner, you run the business, and you understand clearly what’s at stake every month. You stand to win or lose something each month when you make or don’t make your adjusted gross income (AGI), and the agency’s performance has a direct impact on your success. If the agency doesn’t do well – you’re the one who does not get a paycheck. But they do.

On the flip side, when the agency does very well, you reap the benefits of that windfall. You might pay out bonuses to your team but rarely do agency owners explain where the bonus came from or what was done to earn it.

Without similar incentives to meet targets, why would the staff feel a sense of ownership that drives their thoughts and actions?

This episode of Build a Better Agency is a solocast – and on it, I walk you through the AMI bonus programs that is designed to teach your team agency math (how we make and lose money) and create incentives so that they do start thinking and acting like an owner.

Ideally, a bonus program educates your team to think like owners, helps with retaining your best people, and shares the spoils from a good year. It also eliminates the obligatory year-end bonus that is not tied to anything but the calendar. As you know, if you give away a bonus a couple years in a row – without tying it to performance metrics, it becomes an entitlement.

Walk through the actual program with me on this episode and be sure to download the PDF so it’s easier to follow along.

 

 

What You Will Learn on This Episode:

  • How to incentivize employees to think like owners
  • Why automatic raises might start to backfire
  • Why you should divide quarterly bonus funds evenly
  • How to tell your team the story of why you did or did not hit your AGI target
  • How to be reasonably generous and not ridiculously generous with bonus programs
  • How to adjust AGI goals based on what happened in the previous quarter
  • Why a bonus program is a good retention tool
  • How to build behavioral incentives (continuing ed, time sheets) into your bonus program
  • Why a bonus program can replace conversations about raises

The Golden Nuggets:

“When you meet to go over the quarterly AGI target and bonus program with your employees, you are teaching them to think like an owner.” – @DrewMcLellan Click To Tweet “When you tell me that you wish your employees thought like an owner, my question is why should they?” – @DrewMcLellan Click To Tweet “There's not a single person in your shop that doesn't impact AGI, whether they're client-facing or not.” – @DrewMcLellan Click To Tweet

Drew McLellan is the CEO at Agency Management Institute. He has also owned and operated his own agency since 1995 and is still actively running the agency today. Drew’s unique vantage point as being both an agency owner and working with 250+ small- to mid-size agencies throughout the year gives him a unique perspective on running an agency today.

AMI works with agency owners by:

  • Leading agency owner peer groups
  • Offering workshops for owners and their leadership teams
  • Offering AE Bootcamps
  • Conducting individual agency owner coaching
  • Doing on-site consulting
  • Offering online courses in agency new business and account service

Because he works with those 250+ agencies every year — Drew has the unique opportunity to see the patterns and the habits (both good and bad) that happen over and over again. He has also written two books and been featured in The New York Times, Forbes, Entrepreneur Magazine, and Fortune Small Business. The Wall Street Journal called his blog “One of 10 blogs every entrepreneur should read.”

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Ways to contact Drew McLellan:

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Speaker 1: Are you tired of feeling like the lonely lighthouse keeper as you run your agency? Welcome to The Agency Management Institute community, where you’ll learn how to grow and scale your business, attract and retain the best talent, make more money and keep more of what you make. The Build a Better Agency Podcast is now in our third year of sharing insights on how small to mid-sized agencies survive and thrive in today’s market. Bringing his 25 plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

 

Drew McLellan: Hey there everybody, Drew McLellan here, from The Agency Management Institute. Welcome back to another episode of Build a Better Agency. If you have never listened before, thanks for jumping in, and if you are a regular listener, thanks for coming back. I’m always grateful that you give us your time.

 

  This week’s episode is a solocast. For you veterans out there, you know that means I don’t have a guest with me, I just want to talk to you about something that I think is important for you to be thinking about. Next week, I’ll be back with another guest who will shake things up for us and teach us what they know. But this week, it’s just you and me.

 

  Before we get started, I wanted a couple of things. Number one, last month’s solocast, I invited people to go leave a review at iTunes, or Stitcher, or wherever it is that you get your podcasts from and that I was going to give away a prize to a randomly selected reviewer. We’ve done that, and we have contacted that person by email. I want to do it again, it worked out great.

 

  Those reviews are critical to us, in terms of being found by other folks. Here’s the deal, if you leave a review in any one of those places, you need to send me an email. Sometimes, it’s hard for me to figure out who owns the review based on your iTunes name, or whatever name that you’re using on the review site. So, ping me with an email and tell me that you left a review, and where you left it, and then we will do a random drawing at the end of February, and we will give away access to one of our online courses. That’s a value, depending on the course, from anywhere from about $1,200 to I think $2,500, I don’t remember the pricing exactly. But ballpark, that’s what the value is. A fine prize for taking three minutes to leave a review.

 

  I’m super grateful when you do that. A, it helps other people find us. But B, I also appreciate what you have to say, I listen to what you have to say. I want to learn how to make this podcast as valuable as possibly for you. Thanks for doing that, in advance, if you’re going to do it for February. If you did it in January, thank you very much.

 

  If you’re listening to this live, if you’re listening to this in February of 2018, we have some great workshops coming up that you can register for. We’ve got the Best Management Practices of Agency Owners in March, and we’ve got some AE boot camps coming up in September. We’ve got a special workshop that we’re going to be announcing in June, that we have never done before, that I think is going to be awesome. The problem is, we decided to do it kind of late. When I was looking for hotels, I had to book a hotel that only had capacity for 50 people.

 

  It’s a workshop all about how to create a strategic framework, and how to teach that to your employees, so that everyone can be more strategic. We’re going to look at it through the lens of when you’re pitching new business, but I think it’s equally applicable to your current clients. I’m telling you, it’s amazing. Two days all about strategy, how to use it, when to use it, how to develop the framework. Then, we’re going to practice on the framework so that you get good at it before we go. But, I only have 50 slots, so if that’s something that interests you for yourself or your team, make sure that you head over to the website soon and check that out.

 

  Have that taken care of. The other thing I wanted to tell you about, is I wanted to remind you that at the end of 2018, we added a new way for you to become a member of AMI. It used to be that you had to join one of our peer groups, either our live peer groups, our agency owner peer groups, or you could join one of our virtual agency owner peer groups. But now, we’ve got these associate memberships where you get some benefits, you get some discounts on some of the things we do like the workshops. You get some content that we only make available for members. But the big one is we’ve cracked the code on group health insurance, taking advantage of all of the lives of all of the agencies that are inside our membership pool, and we’re saving people a ton of money.

 

  I have an agency of 10 people, that we’re saving them over $1,000 a month on their health insurance. Highly recommend checking that out. You can do that on the website, too. That’s all I have for announcements today, thanks for sticking with me on that.

 

  Today, what I want to talk about is I want to talk about getting your employees to behave like owners. When I hang out with a bunch of agency owners, one of the things that inevitably I hear is, “Oh, I wish my employees would think like I do. I wish that they would think like an owner, they would make decisions for the agency and for clients, like they owned the joint.” My comment back to them is always, “Why would they do that? What incentive is there for them to do that?”

 

  The reality is, we think like owners because we are owners, and we have direct consequence and reward from things going well or preventing things from going badly. We endure or enjoy those consequences. Of course, we act like owners. Not only are we owners, but there are reasons or incentives built in for us to behave that way.

 

  If you want your employees to act like they own the joint, and you want them to care about things like AGI, and how billable they are, and all of those sorts of things, how much they write off, all the challenges that we have that really impact the bottom line, you have to give them an incentive for that.

 

  The other thing that I want to talk about is salaries. Some of you are super fortunate, in that you have a lot of longevity among your staff. But, if you got in the habit of giving them a 5% or a 10% raise every year, guess what? That’s now an entitlement, they expect that raise. At a certain point in time, somebody caps out, somebody has stopped developing new skills and is not bringing brand new things to the agency anymore, but you have to keep paying a higher price for that same thing.

 

  It’s a little like say, I bought a banana at the grocery store yesterday for 50 cents, and tomorrow when I go to the grocery store it’s going to be $1.50. Then, next week then I go it’s going to be $2.50. At a certain point in time, the banana’s not worth it anymore.

 

  Unfortunately, if we build our compensation model around raises, and especially in a small agency where there may not be a lot of room for upward growth on your team, if they’re not adding new skills, they’re not adding new value, you have to find a different way to reward them financially that does not put you with your back against the wall, in terms of starting to pay people more than what they’re worth.

 

  That’s why I want to talk to you today about the AMI bonus program. If we are connected on LinkedIn, and if we’re not, please feel free to reach out to me there, but if we’re connected on LinkedIn you know that I am doing a series of weekly videos with little tips. Several, several weeks ago, I did one on the bonus program, but I just talked about that you should have a bonus program, I didn’t well you through it like I am going to in this episode.

 

  But, it was immensely popular and a lot of people emailed me and asked me for a document, which is in the show notes for you, that outlines exactly how to do the bonus program. It occurred to me, maybe I needed to go to a little deeper on this and spend a solocast on it.

 

  Normally I don’t say, “Boy, you’d better run to the show notes and get something,” but we’re going to be doing a little bit of math. Not calculus level math, but math. If you want to follow along with something visually in front of you, you might hit pause right now and go over to Agency Management Institute, and under the podcast section you will find the show notes for this podcast. There at the bottom, if you scroll down, you’re going to see a PDF of the AMI Bonus Program that the numbers match what I am about to walk you through. If you want to take a peek at that, that may be helpful to you. If you want, hit pause. If you’re not interested, let’s just keep going.

 

  All right, let’s talk about the bonus program. First of all, what I want to say to you is, I want you to just listen through the whole episode and stay with me. I tried to make this super simple. This is the vanilla version of a bonus program. You certainly can add other factors into it. A lot of people, one of the eligibility factors that they add into this for their agency is that time sheets have to be done, the entire agency’s time sheets have to be done at a certain percentage level, 93%, 95% before anybody gets a bonus.

 

  There’s ways to use the bonus program to also incent behavior that is critical to your agency. But basically the bonus program says this, first of all, you’ve got to be following the agency AMI’s 55-25-20. Remember, you’ve got your gross billing, minus your cost of goods, including all contractors, equals your adjusted gross income, right? Your adjusted gross income, breaks up into three things. Breaks up into your loaded salaries, your people costs. So salaries, benefits, all that sort of thing. Overhead, rent, supplies, that kind of thing. Then hopefully, there’s money leftover in the profit bucket.

 

  What we’re really talking about is what you do with the profit bucket. Here’s the general gist of what you do and how it works. First of all, you’re going to set an AGI goal, and you’re going to set an AGI goal for the quarter, and you’re going to break it up into monthly installments. Let’s say your AGI goal was $75,000 a month, right? Then you communicate that to your staff, and throughout the month, you’re saying to them, “Hey, guys, we’re almost to our AGI goal, we’re at $50,000, wrap up some jobs or some things up, we’re almost there.” You’re communicating to your team, from the very beginning.

 

  I call it a bonus program, but what it really is, is an education program. This is you teaching your employees how to think like an agency owner and how to behave like one. We’re building an incentive, not the bad kind, not the downside that we share, but you’re building incentive on the good side of how they can benefit from that.

 

  It starts by explaining to them, having a program and walking them through, here’s what AGI means, teach them that. We have your gross billings, minus our cost of goods and explain to them and show them how that works. What I would do, if I were you, is I would show them last year’s, and show them that it ebbs and flows. They also need to understand agency math to understand this bonus program. But you’re going to say, we’re going to do this new bonus program, it’s going to be awesome, and it’s all based on AGI.

 

  If we hit our AGI goal, then all of you will share a portion of whatever the profits are that month. Before you freak out, I promise you, you still control the lion’s share of the profits, because you have stuff you have to do with them. Basically, at the end of every month, you’re going to say, all right, we had profit, and we’re going to break it up into four buckets. Those four buckets are taxes, reinvesting in the agency, owner bonus, and staff bonus. Again, taxes, reinvesting in the agency, owner bonus, staff bonus.

 

  If you have debt, you should add a fifth bucket, and that should be debt repayment. You’re either going to divide the profits into four buckets, so 25% in each bucket or five buckets, and it’s 20% in each bucket. Let’s assume that your staff, you’ve told them what the AGI goal is, you’ve been talking to them throughout the month, and now they have hit their goal.

 

  In month one, remember, it’s a quarterly AGI goal, broken up into monthly installments. If they hit their goal. Let’s say in January, they’re 1/3 of their way into their AGI goal for the quarter. In the first month, every month that they hit the AGI goal, there is an immediate reward, but at the monthly level, it’s not always cash. In month one, it might be a gift card, a $25 gift card, a gas gift card or a grocery gift card or whatever kind of gift card you want to do, or it might be you might throw a pizza party for everyone, some agency owners hand out one $100 bills or something magic about getting $100 bill.

 

  Then if they hit the second month, you still don’t pay out any cash. If you hit the second month, then what you do is you up the ante. Maybe instead of a $25 gift card, maybe everybody gets a $50 gift card or you actually cater in lunch, so it’s a little fancier. But right now, you’re still not paying out any bonus dollars. Then, at the end of every quarter, that’s when you pay out real money. Let me walk you through this scenario. The way you set your AGI goal, by the way, should be based on that 55-25-20.

 

  What I would want you to do is I would want you to look at your total loaded salary costs, whatever that is. Let’s say it’s $100,000. For most of you, that’s probably too high of a number. Let’s say it’s $22,000. If my loaded salary costs for the month are $22,000, that’s 55% of what number? That’s the AGI you should be earning to pay out that much salary. Then you would say, okay, well, then if I do the math, and I go, okay, well, if that’s 55% then I would allow 25% for my overhead, which leaves me 20% of profit.

 

  You need to do that math. Now, for many of you, your AGI doesn’t break out that way, your salaries are higher than the 55%. So, you need to be mindful of that, because otherwise, what you’re going to end up doing is paying out a bonus on something with no money left in the pot, because all of the extra profit is actually going to your payroll.

 

  But use the 55-25-20 and adjust it how you need to, to make sure that you can get to the 10% to 20% profit at the end of every month. In the first quarter, once you figured that out, in the first quarter, you’ve announced to your team, here’s our AGI goal for the month, because this is what our quarterly AGI goal is. They’ve done whatever they’ve done their first two months, and now it’s the third month of the quarter. Now, here’s what happens.

 

  Here’s my example. Let’s say in month one, you hit your AGI goal and you have a profit of around $19,000. In month two, you hit you miss your AGI goal, but you still have a profit of about $5,000. In month three, you hit the AGI goal, and you have a profit of only $17,500, because the overhead was a little high for some reason, maybe you sent some folks to some training or something like that. In the bonus pool, you would use the profits from month one and month three. The reason why you don’t use the $5,000 for month two is they missed the AGI goal.

 

  You can still have a profitable month and not hit your goal. But that money is not eligible for the bonus pool. That’s just you do with that what you would always do with that, which is just put that aside and use it how you, the owner, choose to use it. When I add up the $19,000 and the $17,500, I have $36,500. That’s my profit pool for this first quarter.

 

  Assuming I don’t have debt, and I’m going to divide it into four buckets, then every bucket gets $9,125. My tax bucket gets that, my owner bonus gets that, and my reinvestment in the agency bucket gets that and my employee bonus gets that right. I’ve divided up that money.

 

  What you’re going to do with three fourths of that money is you’re going to put it wherever you would normally put it. You’re going to put it in your checking account, your savings account. Hopefully, you’re accruing money for taxes, you’re putting some of it there. But whatever it is, put it aside, that’s your money as an owner to do with as you normally would do it.

 

  You can give yourself a bonus, you can save it to the end of the year, you can build up your nest egg, so you have more balanced for cash flow, whatever it is. Now, you’re going to take the employees bonus though, the $9,125, and you’re going to divide it into thirds. Two thirds of it, you’re going to put in a special savings or sweep account.

 

  When I say special, what I mean is, this is money that you’re going to pay out at the end of the year. So, you’ve got to have it. Do not put it back into your main checking account or your main savings account that you can just sweep into your main checking account. Open a separate account, that is just employee bonus money, so that you don’t ever rob from that to pay something else. This is a promise that you’re making to your employees, that at the end of the year, if you’re still here, you will share in this and you cannot violate that promise.

 

  You’re going to take two thirds of it, and you’re going to put it into that special account, which means now you have $3,042 to divide amongst the employees right now at the end of the quarter. We highly recommend that you divide that money evenly. I don’t care how long someone’s been with you. I don’t care how much more someone makes than the other. I would make a big deal out of this, that you are dividing this portion, you will have discretion at the