An honest conversation about agency owner compensation

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Chip Griffin: Hello and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin.

Gini Dietrich: And I’m Gini Dietrich.

Chip Griffin: And Gini, I want to talk about our compensation today, because I think, I think it’s about time we started paying ourselves.

Gini Dietrich: I agree. Boom. Do it.

Chip Griffin: Right after this.

So today we’re gonna talk about owner compensation at agencies because this is something that I think a lot of owners struggle with getting correct for all sorts of reasons. First of all, I think they don’t think about it correctly and, and how they should be compensating themselves. They don’t think about all of the tools that they have to compensate themselves, and they don’t use the right numbers for compensation.

So I, yes. We can explore this from a lot of different angles, but I think fundamentally, if you’re going to be running a successful agency, you need to be taking the kind of compensation that makes you happy to be doing it. But you also need to be taking the compensation that fairly represents the work that you’re doing, right, so that you know whether the business is performing well or not.

Because too often I go into an agency and I look at their books and they tell me, oh yeah, we’ve got a 40% profit margin. We’re just killing it. And then I find out they’re not paying themselves.

Gini Dietrich: They’re not paying themselves. I’m like, So you don’t actually have a 40% profit margin.

Chip Griffin: Correct. And so that, I mean, and, and so then when it comes time for them to think about exiting the business in some fashion, that makes it more complicated because anyone who would potentially buy the business, for example, is going to come up with a salary for them and say, this is what you should have been paying yourself.

Yep. And your profit margin’s not 40%, it’s now 15% or whatever it is.

Gini Dietrich: Yep. Yep. Yeah, I totally agree with that. And I think one of the other things that, especially as I was starting my business that I struggled with, and sometimes I still struggle with this a little bit, because I definitely pay myself enough.

But the end of the year stuff. So you’re get like, and it’s technically not even the end of the year. It’s usually March, April, but you’re getting ready to pay your taxes and go, go through all that, and it’s the money that’s left over. What do you do with that? You’ve already paid taxes on it. What’s left?

What do you invest back into the business? What can you take as the owner? Like all of that stuff that nobody really teaches you and you typically don’t have somebody to say okay, here’s, we’re gonna plan for this. You’re gonna make your quarterly tax payments and when whatever’s left over, after you’ve done everything, you can take that home.

Chip Griffin: Yeah. And, and I think part of it is you have to have this mindset that you’re being paid for two things as an agency owner. You’re being paid for the risk that you’re taking. Yes. As an entrepreneur. And that’s the profits of the business. And so you get paid a dividend or whatever you want to call it for that.

But then you also need to be compensated for the actual work that you’re doing, whether that’s the work of managing the business, servicing clients, doing business development, all those kinds of things. So you need to, to, to really be thinking about the fact that you have two income streams coming from the business.

And if you’re not thinking about those two and thinking about them differently, that’s where a lot of the problems arise.

Gini Dietrich: Yeah. And I think it’s really important. That’s really great advice. And I also think it’s really important to have somebody who’s a professional help you plan that out. So that, you know, in the early days of my, my business, the accountant would call, you know, on April 14th and say, you owe $150,000.

And I’d be like, I what? Right. I don’t have $150,000. So it took some time from my perspective to say, okay, you have to help me actually plan this out. I can’t write a $150,000 check tomorrow ever. Never. Right? So help me plan this out. So I think, you know, to your point, Taking a salary that pays you for the job that you’re doing, and then understanding what profit you can take out of the business after you’ve paid your taxes and everything.

That will be your, your draw, your distribution, or your bonus.

Chip Griffin: Right. And, and, and I think it is important to talk with a professional both so that you can plan so you, you don’t get stuck with a tax bill that that is a surprise, but also because you wanna make sure that you’re, you’re doing things from a tax advantaged standpoint as much as possible, but still looking at it in fundamental business terms. So for example, your tax accountant may tell you to do certain things to minimize your tax burden, but that’s not necessarily what you should be looking at as far as what your total compensation is, right? So your, your, your tax accountant may tell you don’t pay yourself as a W2 because the way your business is structured, the state you’re in, whatever, it may not be advantageous to do so.

If that’s the case, you still need to on paper know that a portion of this is the compensation for your work, and a portion of it is, is the actual profits from the business that you’re taking. So don’t get confused here by tax accounting versus business accounting. You need to focus primarily on the business accounting portion.

Let your tax accountant help you lawfully evade taxes as best as possible. Yes. Lawfully.

Gini Dietrich: Lawfully, lawfully. Yes. Lawfully, yes. But yes, I agree with that. And I think it’s really important also for you to have a W2 and, and be paying yourself something. How you do that is up to you. It could be a, it could be that you’re, you’re paying into 401k and you’re paying into taxes and you’re doing all that, and you’re not actually taking a quote unquote paycheck, like you’re not getting money into your bank account.

Because then if something were to happen and you have to take short or long-term disability, you have proof that you’ve been paying yourself, and now you’ll get 60% of that or whatever the disability policy is, you’ll get that. You’ll get a percentage of that W2 that you’ve been paying yourself versus just taking a distribution where that’s not counted in your short or long-term disability.

Chip Griffin: Yeah. And, and you know, one of the things you need to be thinking about as you are thinking about how much compensation you’re taking, you think about how you’re taking it. Yes. And some of these benefits could be in the form of insurance policies. Yep. Right. It is not uncommon for agency owners, for example, to have the business own a life insurance policy on them.

Depending on your own health and age and all that kinda stuff, that could be a very valuable benefit to you and to your family if the business is able to pay for it as opposed to you paying for it personally. Mm-hmm. So that’s something that you should be considering and it is part of that total package of compensation.

Disability is absolutely another one of those. And because you’re a business owner, you need to make sure that the policy is covering you appropriately because there are, there are different ways of, of treating disability insurance where in some cases you may need that w2. In some cases you may have a policy that that has a set amount regardless. There’s a lot of different approaches that you can take, but you need to make sure that you have something tailored to your situation. So in addition to talking to a tax accountant or a financial planner, you need to talk to someone who understands insurance benefits for entrepreneurs. Yes.

It helps you to get those correct. And things like health insurance are another thing that you should look at potentially as part of your compensation from the business because you can, as a business owner potentially, although it’s a lot more complicated in the US than it used to be, but you potentially can structure things so that you have some pretty good health insurance benefits for yourself and that is valuable.

And, and, and something that you shouldn’t overlook.

Gini Dietrich: And the other thing I would add to that is 401k. You know, if it’s an IRA or Absolutely. Yeah. If it’s a traditional 401k, like we were going through the tax process this year and my accountant called and said, Hey, you can actually put another 25K into 401K

And I was like, do it right now. Like it’s, it’s tax free. Yes, do that. Because now I’m investing in my future as well. And not, and then that’s another $25,000 I don’t have to pay taxes on. So yes, please do that. So there are lots of ways that, to your point, that you can compensate yourself. You know, it, I, I, I am of the, the mind that I like to have the money in my account for sure.

But there are ways you can do this to protect yourself and the business. So that you are covered from all angles, from an insurance perspective, a salary perspective, a bonus perspective, a 401K perspective, you’re covering yourself. To be able to run the business effectively and when you go to sell or leave the business, eventually there is something there that potential buyers could go, oh, okay, so the CEO was making X amount, that’s an actual appropriate amount, and they were doing this, this, and this.

That’s appropriate. And they can look at the business overall and the health of the business based on that versus based on, I was just taking money out if there was anything left at the end of the month.

Chip Griffin: Right. Which, which unfortunately is how a lot of small agencies get run. It really is just, it’s how I did it, sort of, it’s sort of checkbook accounting.

Oh, there’s money in the bank. Yep. I’ll sweep it into my pocket. Yep. And the problem with that is, you know, not just, if you’re thinking about selling somewhere down the road, and, and I know a lot of owners will say, well, you know, I’m not thinking about selling or, it’s so far away it doesn’t matter. It, it’s more about how it helps you to run the business today.

And so if, if you’re not paying yourself a fixed amount each month as a, you know, whether that says a W2 or just a fixed check that comes outta your account, however you do it, then you’re not necessarily operating your business in such a way that you can meet that obligation and it, it then is distorting what you think your profits are.

And so if you’re only taking, if you’re only sweeping money off the table, which are effectively profits, you are contributing your time for free to the business. Yep. And, and then that’s where the owner gets into trouble where they say, well, you know, I, I really wanna hire someone to do this so I can, you know, focus more on business development, or I can get myself out of these daily calls or whatever, but I can’t figure out how to do it cause I don’t have the money.

You don’t because you didn’t price it effectively because you never compensated yourself for your actual work. You only ever took profits and so you turned into a volunteer for your own business, which is nuts.

Gini Dietrich: Yeah. And this goes to a, a different conversation, I think, but to your point, we, I have many clients who will say, oh, that doesn’t really matter.

I can, I’ll do that work for that client because I don’t bill my time.

Chip Griffin: Yeah. Oh, I, I hear that one all the time. It’s so painful.

Gini Dietrich: What do you mean you don’t bill your time? If you worked for an agency, would you bill your time?Yes. If you worked for a corporation, would you get a paycheck? Yes.

Chip Griffin: Okay, but, but here’s the problem.

And here, here’s where I think it comes from. Okay? It comes from the fact that most small agencies evolved from someone being a freelancer. And when, when you’re a freelancer and you are a hundred percent of the labor of the business, and you don’t really have other expenses other than your own time, it is difficult to imagine, okay, I’m being paid for you know, for the time I’m spending as a freelancer and I’m getting some kind of profit on top of that. And so there, it does get blurry. The problem is as soon as you hire your first contractor or your first employee, you need to completely break out of that, right? And unfortunately, most owners don’t because most owners, when they’re adding that additional resource, it’s because they’re drinking out of a fire hose and they don’t take time to pause and think about how they’re setting it up.

And, and so then just inertia carries them forward. And I, I mean, inertia is one of the most dangerous things for any business, but particularly for agencies, you need to be really intentional about the decisions that you’re making if you want to be successful.

Gini Dietrich: Yeah, and just because you own the business does not, not mean you should be giving your time away for free. Ever.

No, do not do that. Because that you, you said it, you’re now a volunteer for your business. You’re not, clients aren’t paying for your time or your expertise, which is why they hired you. You are not getting paid for your time and expertise. So now how are you making your mortgage and your car payment and kids’ tuition?

Like all of the stuff, you can’t do that if you’re giving your time away for free.

Chip Griffin: Right. And owners will argue with me, well, you know, I, I’m not volunteering because I’m taking a big fat amount of checks, checks home each year. Well, you are, but that’s purely off of profits. Imagine if you were actually paying yourself for your time, how much more you’d be taking home.

I. Imagine how much flexibility you would have to do different things in the business and invest in some of the things that would help you to scale up and, and relieve some of the burden that you have. If you’re not actually paying yourself for the work that you’re doing, you will never, ever be able to do that, and you will constantly underprice your services, which is, you know, a huge problem because if you underprice your services, you have a team typically that is unhappy because you’re asking them to do more in order to balance the books on their backs.

Gini Dietrich: And. I mean, that is the perfect example because when, when I have this conversation with clients, they say, well, I can’t really pay myself because then I can’t afford to have so and so and so and so, and I’m like, that’s because you’re not priced correctly. Stop doing your $2,500 a month minimum.

That gets you like two hours of people’s time. That’s a slight exaggeration, but like, and actually price it correctly. How much does it cost you to have this person on board? What is the cost of running the business? What kind of profit margin do you want? That’s how you price. Now, you can afford to pay yourself and have your employees or contractors paid as well.

Chip Griffin: Yeah. I, I really wish more owners would take that to heart. I really wish they would understand that you need to price based on what your actual expenses are. And, and too often they get so wound up in, well, my competitor is charging this, or I heard that the client had paid this to an agency before.

Yeah. Or this is what my old agency used to charge. Yeah. None of those things matter.

Gini Dietrich:

Or my favorite, the client will never pay that. Oh, okay. How do you know?

Chip Griffin: Right. Well, yeah. The negotiating with yourself is just, is unbelievable In, in the agency space. Even large agencies do this to some degree where they will just start negotiating with themselves before they even have a conversation with the client about numbers.

Stop. Stop. Yeah. And, and you’ve gotta figure out what your costs are and a key portion of that cost for any small agency. In fact, the most expensive cost on an hourly basis should be your time. And, and when you’re thinking about how you calculate your compensation, first and foremost, you need to make sure that your compensation for the work you’re doing, not the profit piece, just the work you’re doing needs to be substantially more than your highest paid employee.

Yes. Substantially more. Yes. If you feel like if, if you are paying anyone who works for you more than you are making, or it’s even a close call, there’s something wrong. That’s not what you should be doing. No. And when the business hits a, a bump in the road, you lose a client or something like that, your first thought should not be, well, I’ll cut my own salary.

I’ll, I’ll pause my own pay. You need to say, my resources are not aligned correctly and I probably need to let someone go. Yes. Painful. But, but subsidizing them by cutting your own pay is very shortsighted. Ah, and, and, and it may get you through the next few months, but it just, it’s, first of all, it’s gonna make you miserable and it makes you miserable to be successful as an owner, yes, you have to be happy.

Yes, not, you know, oh, you know, not that kind of happy, but just you need to be satisfied with what you’re being compensated. And if you’re not paying yourself, you’re not gonna be satisfied or you shouldn’t be.

Gini Dietrich: No, you’re right. I, I made that mistake. I made that mistake during the Great recession. I was like, I didn’t wanna lay out, I had to lay off half my team, but I didn’t wanna have to lay off more than what I did, and so I cut my pay.

I didn’t pay myself. That was the, that year and a half was the most miserable year and a half ever. Like I, it’s shocking to me that I continue doing what I do because it was so miserable. Yep. It’s miserable. Like you can’t go to work every day and not be compensated for the work that you’re doing. You just can’t, nobody does.

Right. Your employees wouldn’t do that. Contractors wouldn’t do that. Why do we do that to ourselves?

Chip Griffin: Yeah. It, I mean, honestly, it just, it, it, it makes no sense whatsoever. And, and I, I think that it is, if you’re looking for how to take your agency to the next level. If you’re looking for how you can scale, if you’re looking for how you can improve your own satisfaction, it really comes down to, to how much you’re compensating yourself for your work, for your profits, how you’re doing it.

All of the le I mean, there, and there’s a ton of different ways that you can compensate yourself and not all of them are cash, right? I mean, part of it is the flexibility You need to factor in. If, if, if you only wanna work 30 hours a week, that’s fine. That’s part of your compensation is that you, right, you know, are, are only having to work the number of hours that you wanna work and, and so you can provide some value to that on paper. Doesn’t mean that you should work for free for your business, but I mean, it is worth something that you have flexibility like that. So if you’re looking for ideas on the different ways that you can compensate it, it’s an article that I’ve written recently. You can find it on the SAGA website and you can kind of go through and look at all of these different things and I’m, I probably overlooked a few things because it, it, it’s amazing how much flexibility that you have if you’re willing to take advantage of it, and you’re willing to talk to the professionals who can help you identify where these opportunities lie, because sometimes if you just move an expense over to the business side of the equation, you can still be completely legit and legal, but you can be providing yourself a tax benefit in the process. Yes. And so why not do that? Yes. If you can.

Gini Dietrich: Pay into your 401k as much as you possibly can.

Chip Griffin: Yeah. I mean, and I, I think most owners understand the retirement piece. They may not be doing it, but they understand that it’s there. But I think it’s all of these other pieces of the puzzle that you want to be thinking about. But fundamentally, however you figure out this package, you need to make sure that you are properly being compensated for the work that you are doing.

And I, and I think if you take nothing else away from this episode, that’s what you need to focus on, because far too often, you’re just paying yourselves out of the profits and it’s not really profits at that point. That means you’re, you are not running a profitable business in all likelihood if you are not paying yourself these two different income streams.

Gini Dietrich: I will say this directly to some of my clients, and you know who you are when you hear this. $36,000 a year is not a living wage.

Chip Griffin: I would go even further, if you’re in the United States and you’re an agency owner and you’re paying yourself less than six figures, There’s something wrong. There’s something wrong.

You almost certainly could go out and get a job somewhere else for at least that much. At least. And, and, and if you’re, if you’re not going to, to be compensated for the risk and the stress that you’re taking on, why are you doing it?

Gini Dietrich: Why are you doing it? That’s exactly right. That’s exactly, exactly right.

Why are you doing it?

Chip Griffin: And by the way, that’s your compensation. You should still be getting your 20% profits on top of that. Yes, you should. So focus on your own compensation. If, if you’re, if you’re not doing these things, it means there’s something else wrong in the business. It means that you’re not resourced correctly.

Maybe you’ve got too much staff. Maybe you’re not priced correctly, maybe not priced correct. Something else is wrong in the business if you are not able to pay yourself properly as a worker and still take home profits.

Gini Dietrich: So let’s link to that article in the show notes so that people have it, and I recommend everybody listening to this and anybody who’s not listening to this, who needs to listen to it, read that article to figure out where you can start to diversify your income as a business owner.

Chip Griffin: And God’s sakes, just start paying yourself regularly.

Please, please we’re begging you please. Meanwhile, we’ll continue doing this show without any compensation there.

Gini Dietrich: I get compensated. You don’t get compensated?

Chip Griffin: No. Well, we’re gonna have little chat after the show about that and figure out where that check is coming from.

Gini Dietrich: Thanks Jen.

Chip Griffin: On that note, I’m Chip Griffin.

Gini Dietrich: I’m Gini Dietrich

Chip Griffin: and it depends.