I think most agency owners focus on the wrong parts of their own compensation. There’s so much more that you could be taking home….
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Hey everybody, Drew McLellan here from Agency Management Institute, this week coming to you again from Denver, Colorado, just getting ready to head out of town and head to San Francisco. So one of the conversations I had this week on-site with some agency owners was we’re talking about agency owner compensation. And there are four ways that you can make money from your agency, and I think most of you focus on the wrong one. So let me tell you what the four are and let me explain to you why I think we focus on the wrong one. So the four ways that an agency owner takes money out of their business is, number one, here in the US, W2 income. So our paycheck, right? Number two, we take dividends, our distributions from the business. So our W2 income, typically, is representative of pay for our day job, what do we do inside the agency all day. The dividends or distributions are the reward we get for taking the risk of owning the business. And for some people, they take that out monthly with their paycheck. Other people take it out quarterly. Some folks only take it out at the end of the year. So those are the first two. The third one is you should have a bonus program inside of your agency and, obviously, there should be an owner component in that bonus program, which is different than the dividends that you take out. And then the fourth one are pass-throughs. So these are the expenses that you can run through the business, like your car and some travel, electronic equipment, things that you would normally buy, your phone, cell phone coverage, normally you would buy on your own out of after-tax dollars that because you own the joint, you can buy with pre-tax dollars that run through the business. Quite honestly, a lot of you focus a lot of your time and attention and worry about your W2 income. So, again, in the US, that’s what we call it; where if you’re from another country, whatever, I’m talking about your paycheck, the check that you get just like every other employee gets from your agency. And that’s actually the compensation, of the four versions of compensation, that’s actually the compensation you have the least amount of control over and you have a bit in a way at thanks to the taxman. So I believe you should be spending time building out your entire compensation model. How much money am I going to take in my paycheck? How am I going to handle distributions? And how am I going to handle distributions in a way that I don’t wait until there’s a certain amount of profit in the business but I build it into the budget of how I run the business so I’m always getting a dividend, again, whether that’s monthly or quarterly? And then the third and fourth are, you know, the bonus, obviously, is going to be very dictated, at least in my opinion. It’s going to be very dictated by the agency’s performance. So are we hitting our AGI goals? Are we hitting our profitability goals? If so, money goes into a bucket, a bonus pool, if you will, and an owner should be part of that pool. And then the pass-throughs, you have so much control over the pass-throughs. And a lot of agency owners don’t take full advantage of the pass-throughs that you legally and legitimately can run through your business. And when you think about it, when you’re using pre-tax dollars to pay for things, right off the bat, you’re probably saving, depending on your tax bracket, anywhere from 15% or 20% to 35%. So that’s a huge win for you. So not only do you get to run the expense through, but you also get compensated in some ways by mitigating the tax on those after-tax purchases. So as you’re thinking about your compensation, don’t think about just your paycheck. Think about all of the ways that you can make money from the agency and make sure you’re building a model that takes advantage of each of those four elements so that you maximize the ROI of taking the risk of owning the business. All right? Hopefully that was helpful. I’ll see you next week.