In the realm of business payroll management, it’s crucial to maintain a payroll ratio of around 55%. However, we often come across marketing agencies with a payroll ratio as low as 45% or 50%, sounding an alarm for potential operational issues. This situation indicates a risk of either underpaying key personnel, putting the agency at risk of losing valuable staff, or operating with inadequate staffing levels.
In the competitive landscape, especially in the US or North America, sustaining an adjusted gross income (AGI) allocation of less than 55% to your team poses significant challenges. While managing expenses is a valid concern, striving to keep payroll below 55% may inadvertently strain your team. It could signify a shortage of personnel or, more concerning, an underpayment issue.
Despite improvements in the job market for employers, the reality remains that highly skilled employees are in demand and susceptible to recruitment efforts from headhunters, other agencies, and even clients. To foster a thriving marketing agency, maintaining an appropriate payroll ratio is not just about managing costs but also about ensuring the well-being and satisfaction of your team, which is crucial in retaining top talent amid the constant recruitment pressures.
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00:03Hey, everybody, Drew McLellan here from Agency Management Institute this week, coming to you from the east shore or the east coast of South Africa. So we are very near the Indian Ocean, and Danyel and I are wrapping up our honeymoon at this beautiful lodge. If you've you can't see behind me, there's a lake, Lake Lucia, where hippos live, and then this path right behind me. The hippos walk up at night to graze, and there are monkeys in the trees and water buck all through the woods. So it's a beautiful, lovely place. But right now, what I want to do is I want to answer this question that was asked during the BaABA Summit that I couldn't get to because, of course, I was waylaid by a kidney stone. So the question is, what is the lowest payroll ratio we should aim to achieve? 00:55What percentage of AGI? So first, let's define AGI. AGI is adjusted gross income, or it's your gross billings, everything you bill a client minus your cost of goods. And then we get our AGI. And AGI is the money we actually get to spend on running the business. So that's our money. So that's going to cover people, it's going to cover overhead, and hopefully there's some leftover for profit. So the rule of thumb, the golden rule, if you will, is 552-5205. AGI should be spent on people, and that's loaded salaries. So that's salaries and benefits. And many agencies are struggling to hit 55%. Right now, salaries have gone up. The cost of benefits have gone up. And so for a while during COVID and after COVID, were paying a premium for people because there were fewer and fewer people in the market. 01:49And so that's really tilted our payroll scale. But I will say that every once in a while we see an agency whose 55% is 45% or 50%. That's always a warning sign to us that the agency is operating. Either they're underpaying their people, and so they're at risk of losing a lot of key staff, or they're understaffed. It's really tough in today's market, at least in the US. Or North America, really tough to have less than 55% of your AGI go to your people. So if you're noticing, so one of your goals shouldn't be to keep it lower than 55%. I know that's sort of counterintuitive that. Of course you'd want to sort of manage your expenses. But the truth is, if your payroll is below 55%, you're probably really taxing your team. 02:42You're probably short a person or two, and or you are also underpaying your team. And right now, although the job market has certainly gotten better for us as employers, the truth of the matter is our good employees could go get a job tomorrow, and in fact, many of them are being poached every day by headhunters and other agencies and even clients. So you want to really watch that 55% and stay as close to it, but not below it as possible. Many agencies are actually having to exceed the 55%, so they're going up to maybe 60%, and then what they're doing is they're stealing 5% from the overhead. So with more hybrid work and other overhead expenses being able to be held in check, sometimes you can borrow from Peter to pay Paul, literally, sometimes if you have an employee named Paul. 03:31But where I don't want you to steal it from is profit. So, again, 55 25 20 dangerous sign if your payroll is below 55. If you need for it to be above 55, steal from over Brad nonprofit. Okay? All right. I'll see you next week.