Episode 175:

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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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 end of the year. But for the quarterly portions, we’re dividing this equally because everyone contributes to the success of the agency, and everyone plays a key role that we were able to hit these numbers.

 

  Now, the important thing around this bonus program is every month, when you announce whether or not you hit the bonus, you actually are walking them back through, here’s what AGI is, here’s how it works, and you are identifying examples of why you did or did not hit AGI. What you want to do in that meeting is you want to teach your employees to think like an owner.

 

  You’re going to identify, you’re going to say, you know what, one of the reasons why we hit AGI this month and we’re having this pizza party is because [inaudible] was able to get a client to close a job that’s been open for three months and we were able to wrap that job up. Or because Ron, he built a really great estimate that put profit into the estimate and we were able to realize that profit. Or because Karen crunched some numbers and realized that we were paying too much for long term disability, and she bid it out, and she was able to save us some money. Or because so and so got three bids from printers, and then built in profit on top of that the lowest bid, and was able to save the client and us some money, which put more money on the bottom line.

 

  The point of this is, every month, when you pull them together to give them the state of the agency, and here’s how we did on the bonus program, it’s your opportunity to educate them, and to show them how people successfully helped you get to where you got. If you didn’t hit the AGI, it’s okay to say, “You know what, we have 10 jobs in our traffic system that have been open for more than three months, if we could have closed three of those jobs, we would have hit the bonus this month.” Or, we had a huge expense for this thing, and you know what, we didn’t really price that out very well, and we didn’t really do our due diligence in terms of where can we save some money?

 

  This is your opportunity to educate, and to coach them on how to behave like an owner. Then you give out the $3,042 at the end of the quarter. That’s that. That’s the first quarter. With that, that seems like a really great time to take a brief pause, and then we will get right back to the show.

 

  I want to take just a quick second and remind you that if you head over to the agencymanagementinstitute.com website, one of the things you’ll find there, in our effort to support agency owners is some on demand training. We know that many of you want to attend our live workshops, but for some reason, that doesn’t work out, maybe you’re outside of the US, or maybe you have little kids and it’s tough to travel, or it may just be that our calendar and your calendar do not align.

 

  What we’ve done is we now have three courses that we either regularly or occasionally offer as a live workshop, and now we’ve got them in an on-demand training version. You can now find Biz Dev workshop, our agency new business blueprint course, you can also find our AE boot camp, and our most recent addition is the money matters workshop. All of those are available. If you head over to the website and you go under training, you will see on-demand training under that tab, and you can check out all three of those courses.

 

  Obviously, those are courses that you can take at your leisure, and you can get through the whole thing in a weekend, which I don’t recommend, or you can space it out over time, you can do it individually, you can do it with your leadership team. Whatever serves your agency best, we just want to make sure that they are there and available for you. All right, let’s get back to the episode.

 

  Now, let’s look at how the second quarter might play out. In month four, you miss your AGI goal, and you make $2,000 in profit. In month five, you have a big client who walks on you, and you actually lose $2,500. In month six, you hit your AGI goal and you have $20,000 in profits. What’s in the bonus pool for that quarter? Well, it’s only $17,500, because remember, in month four, you missed your AGI goal. Even though you made some money, it doesn’t go in the bonus pool, it just stays in your regular checking account.

 

  In one five, you lost $2,500. So, we have to subtract that from the bonus pool. We have to subtract month five, the $2,500 from month six, which is the $20,000 to get us to $17,500, okay? Now, I’ve got the $17,500 for second quarter, and I do the same thing, I divide it into four buckets, that means I’ve got $4,375 that goes into the tax bucket, same amount of money goes into the owner bonus bucket, same amount of money goes into the reinvestment bucket.

 

  Again, remember those three buckets you control. If you’re managing your taxes well, which is a different conversation, and you want to take a bonus and you know odds are you’re not going to reinvest over $40,000 or $30,000 into the agency, unless all of a sudden you need a bunch of computers or something like that. That’s money that you can control and do with as you want in running the agency. In the grand scheme of things, we’re not really being ridiculously generous, but we’re being reasonably generous with your staff. Then, in the employee bonus bucket, we still have $4,375. Same thing, at the end of the quarter, just like you’ve done at every month’s meeting, you celebrate the people who helped to get you there. You acknowledge some of the behaviors that either saved you money or made extra money and put money on the bottom line, either way, and then you dole out the money.

 

  Again, I’m going to divide it into thirds, which leaves me out of my $4,375, it leaves me $1,458 to divide amongst my employees. By the way, what’s beautiful about this program is you learn very quickly that it’s not the dollar amount, it’s the achievement. Your employees who divided up $3,000 in my scenario, after the first quarter are only dividing up half of that, $1,500 in the second quarter, but they will be equally proud of themselves and equally excited that they’re doing this.

 

  Now, what you’re teaching them is, when the agency does well, we all benefit. When we’re struggling, when a client walks, that’s a price we all have to pay. By the way, people always ask me when I teach this live, I don’t want my employees to know this, because they’re going to freak out if we lose money. Well, guess what they already know when you’re not doing well, they can tell because, A, your tense, B, you’re cutting back on things. Other clues are explaining to them that there’s trouble.

 

  This is a way to talk to them about it, to actually educate them about it, and for them to understand that in the agencies, the finances sometimes go like this, unless you’re a retainer agency, every month is not smooth and every month is not the same. You want them to understand that, so that A, they don’t come and ask you for things that are ridiculous when times are tight. But B, it also begins to help them know how the agency is doing and how they can change that, which is critical.

 

  All right, let’s look at third quarter. In the third quarter, month seven, you hit your AGI goal, and you make $25,000 in profits. In month eight, a client cuts back and you actually lose $5,000, and in month nine, you miss your AGI goal, but you make $5,000. Again, month’s seven’s money, $25,000 in profit, because I hit my goal, that’s going in the bonus pool. Month eight, we actually lost money, so that’s coming out of the bonus pool. I had $25,000 from month seven, I have to subtract month eight’s $5,000, now I’m at $20,000. In month nine, even though we made a little bit of money, we made $5,000 we missed the AGI goal. So, that does not go in the bonus pool.

 

  For this quarter, I have $20,000. Again, I’m going to divide it into the four buckets. Quarter of it, so $5,000 is going to go for taxes $5,000 for owner bonus $5,000 for reinvestment in the agency, and then you have $5,000 for the employee bonus. I divide that $5,000 by a three, two thirds of it goes into the special account that I’m going to use to dole out the money at the end of the year to my employees, and now I have $1,667 to divide amongst my employees.

 

  That’s how the third quarter goes. Those are all exactly the same. You set quarterly AGI goals. By the way, I should have said this before, in March, you’re setting an AGI goal for April, May and June and announcing. Then in June, you’re setting an AGI goal for July, August and September and announcing it. Every quarter, you’re changing your AGI goal, based on what’s happened in the last quarter. You cannot set an AGI goal. You do it for your annual planning, you’re going to set an AGI goal for the year. But the reality is, clients come, clients go, employees comm, employees go, other things happen. You have to set this quarterly to take into account whatever has happened in the last 90 days.

 

  Now, we’re done with the first three quarters, and those all happen exactly the same. You’re holding your monthly meeting. Typically, you guys close your month out about the 15th of the following month. First quarter is typically closed by April 15th. That’s about when you should schedule the meeting that reports on the quarterly progress.

 

  February 15th, you’re talking about January, March 15th, you’re talking about February. You just keep doing that. Every month, you’re coming together, you’re talking to your team, you’re walking them through the finances, you’re celebrating the people and the activity that put more money on the bottom line, you also are talking through the activity, probably not the people, where the bottom line was impacted in a negative way. Whether you hit AGI or not, I would still talk about that kind of stuff so that they understand the consequences.

 

  For example, we had a big job for client XYZ and we didn’t do a good job of estimating it. As a result, we had to write off $9,000. Guys, if we had done a better estimate and the client had signed off on that estimate, we’d have another $9,000 in the profit pool, because we had to just write that off. We spent all that time, we invested our asset, our time, but we don’t get paid for that. That is not reflected in our financials, it’s reflected in the fact that we had to work late, we had to hustle to get it done, and the client’s happy, so that’s great. But the money’s not here.

 

  Again, let’s review how we do estimates. You can use these meetings as a teaching opportunity. We’ve done that every quarter. You’ve now had nine meetings, you have now had a couple of pizza parties, you’ve given out some gift cards, you’ve given out some cash. Now, we’re going into the fourth quarter. By the way, this is a great time for me to tell you, when you are setting your AGI goal, your goal is that you want your team to hit it more often than they miss it.

 

  There’s nothing more demoralizing than having someone hold money out and saying, oh, sorry, we missed it again. Oh, sorry, we missed it again. I want you to be aggressive with your AGI goal, but realistic. You want them, over the course of the year to hit it at least seven or eight times, and ideally, more than that. You also do not want them to hit it 12 times. If you hit it every time, then odds are your AGI goal is too low. You want a couple of misses in there, but you probably don’t want more than three, four misses in the course of the year. Otherwise, it’s just discouraging.

 

  All right, now let’s look at the fourth quarter. The fourth quarter, month 10, we hit our AGI goal, and we make $18,500 in profits. In month 11, we hit our AGI goal, and we make $22,000 in profit, and in month 12, we miss our AGI goal, and we make $1,000 in profit. In my bonus pool, I have the profits for month 10 and 11. I don’t have to subtract 12 because we didn’t lose money. Now, I’ve got $40,500 in the bonus pool for fourth quarter. But this is where things get a little different because now we’re at the year end. Now, what we’re going to do is we’re going to say all right, first thing I have to do is I take the $40,500 and divide it into my four buckets; taxes, owner bonus, reinvestment in the agency and my employee bonus.

 

  I’ve got that. I now have to say, okay, well, now in my year payouts, if you followed along with me, you would have in the tax, owner and reinvestment bucket, you would have in each of those buckets, $28,625. You’d have almost $29,000 put away for taxes, for your bonuses, if you didn’t choose to take some out throughout the year, and in reinvesting in the agency.

 

  In the employee bonus bucket, you have $22,459, and the reason that that number is smaller is because you’ve already given out some money out of that bucket. You’ve given out the third, a third and a third, each of the quarters. Now, you’ve got this $22,000 to give out to your staff. Now, this is where you can add some discretion into who gets that money.

 

  What most agencies do is a portion of it, like 25% or 50% of it gets divided evenly. Everyone’s going to get something. Then, by the way, you’re having this conversation all the way back in January as you’re explaining the program to them, and you’re going to have the conversation again in December. Remember guys, at the end of the year, the big payout of the bonus, 50% of it gets divided out evenly to all of you, just like we did the quarterly bonuses, but the other 50% is going to be given out to staff, based on this criteria.

 

  Then you share with them, and you’ve shared with them often what the criteria is. It might be consistency in doing their timesheets. It might be have grown in skill. Any way you want your team to grow to be better, to be strong, you can identify those. This should not be a list of 20 things, this should be a list of five or six things at the most, and they have to be things that are measurable. It can’t be, it’s swell to work with. It can’t be something like that. It can’t be subjective. It has to be things that they can tell whether or not they did it. If they asked to see a score sheet, not that you’re going to actually have one, but if they have to see it, if they asked to see a score sheet, you’ll be able to show them how they ranked against that criteria.

 

  Now you know who’s getting what amount of money, there’s $22,000 that you’re going to hand out. You have a couple of choices, do I pay it out in December? Or do I wait and pay it out in January? Here’s how you decide it, you can pay it out at the end of the year. Because odds are, you may not have all the money in the bank, because you still may not be paid by your clients, especially for your December work, but depending on your accounts receivable turns, it may be that you’re still waiting for some November money. But it may be tax advantageous to you, to borrow from one of the other buckets to fund the employee pool, so that you can pay out that money, so that you’re not paying tax on it at the end of the year, if you’re on a fiscal calendar year.

 

  You can pay it out at the end, if you’re confident that all of the AR will be covered, it’s to your tax advantage, and you didn’t use all the money in the other buckets, so you can float it for a little bit. Or what you can do is you can pay out a third in December, just like you’ve done the other quarters, and then pay out the rest later in the year, once you’ve been made whole by clients who are paying your bills.

 

  People always say, okay, what happens if we have a great first half of the year, and we tank the second half of the year? I don’t want to give everybody a big bonus check if we lost a bunch of money second half of the year, you can rob from any of the other accounts, except for the employee portion. Whatever you have contributed into that employee portion, you need to pay out at the end of the year. You cannot take that back. Someone always says, “Well, what if that means if my choices pay out the bonus, or use it for salaries, so I don’t have to lay people off?” That’s a bad business decision. What that means is, you are robbing Peter to pay Paul for staff members that you should no longer have on your staff.

 

  If your monthly activity level can’t cover the salaries of your employees, you have too many employees. So, don’t do that, you have to pay out the employee portion, it is a promise that you made, and if you don’t keep that promise, I’m telling you, you’re going to have a retention issue, you’re going to have a trust issue, and it’s just a lousy thing to do. They’ve worked hard for it, probably it’s not their fault that a client walked or whatever happened, that made the second quarter so Rocky, or the second half so rocky, so do the staff cutting that you need to do, and then reward the people who are left, all right?

 

  If people come in or out, they get hired throughout the year. You can set the rules for how that works. But if someone is there for a full quarter that you’re paying out, they should be included. Let’s say Bob joins in August, he would not get paid in the third quarter, but he would get paid in the fourth quarter. Then for the big payout, you can prorate it based on how long they’ve been at the agency. This is also a great retention tool, in terms of getting your employees to stick around till the end of the year, because they know there’s a bucket of money and you’re telling them exactly how much money is in that pool.

 

  They’re doing the math, they’re not stupid, they know that there’s a $3,000 or $5,000 check waiting for them. It’s a great way to encourage people to stick around. Then, of course, you’re going to start it all over again in January. So, they want in on that. The other beautiful thing about this is, this eliminates the discussion around raises.

 

  If someone’s doing the exact same job at the exact same quality level that they did last year, yeah, maybe you give them a cost of living increase, or maybe you bump them up a little, but you certainly shouldn’t be giving them a sizable raise. What you’re saying is, you know what, you know what [inaudible] you are a great art director, and you were a great art director the last year, so I’m going to give you a cost of living increase, or I’m going to give you a small increase, but your bonus is your raise.

 

  If the agency does well and you contribute to that, that’s how you can earn more money. You can add more skills, you can become a senior art director by doing these things. But assuming that you stay at the level you’re at, and you’re not bringing new things to the party, you’re not contributing in new ways, then the way you’re going to make more money is through the bonus program, which is a great conversation to have. Because now what you’re saying is sure, you can make more money, and I’m happy to give you a raise if you become more valuable to the agency, or one of the ways you can make more money is when we do well, we all do well. So, we share in that, all right?

 

  That’s it. It’s super simple. Again, I just walked you through the vanilla version. I didn’t say anything about hitting percentages of timesheets or anything else like that. You can add other things, like we have to hit our AGI goal for the month, and we have to have 95% compliance on the timesheets by every Friday of the month, or we have to write off less than XYZ.

 

  Whatever you’re focusing on in your agency, you can add that as a layer, but I will warn you, don’t overcomplicate this, don’t make this so cumbersome that A, they can’t ever hit it, and they can’t ever earn a bonus, or B that it’s too complicated for them to understand. What makes this program so awesome is all they have to understand is what AGI is and how they contribute to AGI. There is not an employee in your shop, from your CFO to your best account executive, or your salesperson or your creative department or your digital folks, there’s not a single person in your shop that doesn’t impact AGI when they’re client facing or not. They can save you money or make you more money, by doing something better.

 

  All throughout the year, you want to teach to that, and you want to coach to that, and you want to celebrate that. If you do this, I’m telling you, your employees will behave like owners, and it’s a beautiful thing when that happens. All right, this wraps up the episode. Thanks so much for listening. Again, please go and leave a rating at your podcast host of choice, and then ping me with an email and let me know that you did it, so that I can match up usernames with actual subscribers, and people who are listening to the podcast, and at the end of the month, we will give away access to one of our online courses.

 

  I’m super grateful that you invest the time with me every week. Thank you very much for doing that. I love your emails, I love hearing from you at conferences, that the podcast has been helpful to you. By all means, reach out, if we can be helpful, and give some thought to that health care plan. If you are paying through the nose for health insurance for your team, you might want to take a look at the group plan, because not only are we able to save people money every month, typically, but we’re expecting our renewal rates to be much lower than the ones that you and I experience as small business owners by ourselves.

 

  We’re going to save you money right away, and then hopefully, we’ll be able to save you money down the road. I am so excited that we figured this out and that we can try and save you some money. I cannot tell you, for two years, we’ve been trying to figure it out. So, I’m super excited that we did it. With that, I want to wrap up. Thanks very much, have a great week, and I will see you next week where I will be back with a guest who will help us think bigger and broader about our agencies. All right. Talk to you soon.

 

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