With labor costs usually accounting for the largest share of agency expenses, it is no surprise that owners are particularly sensitive to any indication that salaries might be creeping up.
Recent conversations that Chip and Gini have had with agency leaders suggest that both prospective hires and current employees are asking for much higher salaries than many owners feel comfortable paying.
In this episode, Chip and Gini talk about why salary expectations are on the rise and what agencies can — and should — do about it.
Often the problem is that agencies have held their own rates steady even as salaries have increased, effectively reducing the firm’s profits. Paying more without charging more is a recipe for disaster.
Beyond that, agency owners need to understand the realities of the current labor market and ensure that their expectations are reasonable and not based on their own recollections of what they might have earned in similar roles 10 or 20 years ago.
- Chip Griffin: “The fundamental problem is that most agencies have not kept pace with their own fees as their expenses have gone up over the years.”
- Gini Dietrich: “Agency owners say, well, it’s just my time. It doesn’t really matter. No, it does matter. It 100 percent matters.”
- Chip Griffin: “Be really clear about what you’re expecting to pay because it’ll help you with compliance in states that require it, but it will also help you to attract the right people so that you’re not bringing in someone who thinks that the job is much more than it is.”
- Gini Dietrich: “Don’t guess instead of doing the hard work of figuring out what it actually costs.”
- The right way to do agency nonprofit discounts and pro bono work
- An honest conversation about agency owner compensation
- Calculating your agency’s labor costs correctly
The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.
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: Gini you know, I just want so much more money. You need to pay me so much more to keep participating in this show.
Gini Dietrich: More than zero. Okay.
Chip Griffin: I want to triple my salary.
Gini Dietrich: Alright, let’s do it. I can triple your salary. Done.
Chip Griffin: Yeah. Well, probably not the best example, but I keep getting asked by agency owners about what the, the salary market looks like in small agencies and usually it comes along with I keep getting asked by prospective hires or current employees to pay them way more than I think I ought to be paying them or that I’m prepared to pay them and is it just me or is this really what’s going on?
Gini Dietrich: It is not just you. That is really what’s going on. And I would say since 2020 we’ve seen a huge shift. Part of that was because the labor market was hot, right? And it was an employee’s market versus an employer’s market. That has since cooled a bit, but this is the first time in my agency’s life that I’ve paid junior level people, pretty close to six figures.
We’ve got like 90 to 110 is what we’re paying junior level employees. And people will say to me all the time oh, well, you’re in Chicago. That makes sense. And the fact of the matter is I’m in Chicago, but most of my team is not. And so it really has nothing to do with where people are located and more to do with what the market is, is, is willing to pay.
Chip Griffin: So now that you’ve given everybody a heart attack by sharing.
Gini Dietrich: It’s a lot, it’s a lot of money.
Chip Griffin: So define if you would, what you mean by a junior level employee, how much experience would these folks typically have?
Gini Dietrich: Three years, maybe five, you know, if they have five years of experience, they’re going to be on the, they’re going to be six figures.
They’re going to be on the 110 to 15, maybe even 120 level, which it’s a lot of money. I was, I didn’t make six figures in my career until I had more than five years of experience, right? So it, I think, I think that that’s one of the challenging things as agency owners is, and I, I think we’ve talked about this before, like my first job, I was paid $18,000 a year.
So for me to say, oh my gosh, I have to pay someone a hundred thousand dollars more than that is insane. But we have all of these things that have affected it, right? We’ve had a hot employees market. We’ve had inflation. We’ve had a pandemic. There’s all these things that have happened in the past few years that contribute to those things.
And hopefully you’re doing your job on the, the retainer or fee side and keeping up with those things as well, so that you can afford to pay people what they’re asking for.
Chip Griffin: Well, I think that’s, that’s what the fundamental problem is. I think that most agencies have not kept pace with their own fees as their expenses have gone up over the years.
And, and a lot of agencies, they do pricing based on, well, this is what, you know, we charged in my last agency or this is what we’ve been charging typically for this. Sure. And so they’re, they certainly haven’t adjusted since 2020. But they probably weren’t even adjusting prior to that. And so if you’re continuing to charge 5 or 10 thousand a month, which is the same as what you charged 5 or 10 years ago, your profit margin is inevitably going to be much smaller because even without these, you know, larger increases that we’ve seen since 2020.
It’s still going up over time. I mean, I look back at, at my first agency salary, which was 22,000 back in, I guess, 1993 or something like that. And in the last, and so I punched that into, you know, the government calculator that, you know, can, will convert, you know, 1993 dollars to current dollars. And basically it comes out to be about 45,000 today.
Okay. And, and so. You know, when I have an owner who comes to me and says, Oh, you know, these, these entry level people are asking for 45 or 50,000. I just don’t understand it. They’re just coming straight out of college. I’m like, yeah, you know, it turns out that’s, that’s about 30 years ago also. So it’s not, it’s not crazy what they’re asking.
They’re just asking to be at the same place that most of us were, whether we started in 1993, 2003 or whatever. And so, you know, we need to, to remember that we often think about salaries in terms of what our salaries were at that point in our own career. That’s right. And we forget that that’s 10, 20, 30 years ago.
Gini Dietrich: Unfortunately, yes.
Chip Griffin: You know, with experience comes age or I don’t know, something like that, you know. But so, so you do need to have that reality check, but you do also need to understand that salaries aren’t about what you feel you can pay. Salaries about what the market commands. And that’s right. You know, when I have someone come to me and say, you know, well, you know, what should I be paying for this position?
I would say we can start with a number, but it’s going to depend. What are you getting for that? If someone comes in and you like them and they won’t work for that, and you keep having that experience, well, then your number is not high enough. And it doesn’t matter whether I tell you that seven other agencies have been able to pay the right candidate that price or not.
You can’t in your case for whatever reason. And so you have to listen to the market. And if all you’re finding for qualified people, are people coming in at salaries higher than what you expect. You either need to expect something different, change your expectation, change your model, or you need to change your pricing so that you can afford the right kind of talent to get the job done.
Gini Dietrich: Or maybe all of the above, right? Maybe you may have to, yeah, yeah, yeah. I think that, yeah, I think you’re right. I think that’s one of the biggest challenges. And, and certainly I’ve, I’ve had this experience as well where you’re just not pricing correctly. And you do, you do it based on either a set number of hours, estimated number of hours you think it’s going to take, or you do it based on what you did at a previous agency.
Or, you know, you, you sort of just guess instead of doing the actual hard work of figuring out, and it is hard work of figuring out what it actually costs. And when you do that, not only are you getting paid appropriately and making a profit and all those kinds of things, but you have the confidence to be able to say to a client or a prospect when they say, do we have any wiggle room or you know, we don’t. Like that’s what it costs.
Just like going into the store a refrigerator costs between this and this. You can get something with, you know, smart control and everything that you want and it’s going to cost 10 grand or you can get you know something that you just open the refrigerator. I’m using that as an example for you. I’ll just open the refrigerator and have your food in there, right?
And that’s all that there is to it. And that’s 200 dollars. So what does the client want? The prospect want? Do they want the basic refrigerator or do they want the really high end refrigerator? They can’t have the high end refrigerator for 200 dollars. So you have to do the work to figure out how much things cost, really, truly cost. What your profit margin is on top of that. And then you’ll be able to scale your business so that you can pay employees what the market is commanding.
Chip Griffin: And that’s why I preach over and over again, the need for project budgets. You really need to understand if I’m telling someone I can do work for five or 10,000, you need to understand what the component costs are, how many hours each employee, what do those employees cost.
And if you do that, you can then make it really easy for yourself to go in there and say, okay, well, you know, I can’t hire someone at 50,000 for this role. I have to pay 70,000. What’s that going to do to my numbers? Will I still be in a happy profit margin or do I need to figure out how to re scope the work or raise the fee in order to get my profit to where it needs to be?
But too often I see owners just, you know, working with round numbers in their head based on what their own personal experience may have been in the past and not doing that as you say, hard work of figuring out, you know, what the real costs are. And part of that is sitting there and saying, Okay, you know, how much can I pay this person?
It’s not based on what I feel like is the right number. It’s because I’ve crunched the numbers. And they’re going to spend 20 percent of their time on this account, 30 percent on this account. And you, you add it up and you figure out, Okay, if I split up their salary across those projects, does it work?
Yep. If not, then you need to change another variable of some sort, but you need to be thinking about those things because otherwise you’re just, you know, grabbing numbers out of the sky. And whether you feel offended about the number that you’re being asked to pay or not doesn’t matter. It matters what the books tell you is a smart decision.
Gini Dietrich: And I would say the other mistake I see agency owners make a lot is they say, okay, well I’m going to pay this person 70,000 and we’re going to spread it across these three clients. Got it. Well, that’s not going to allow me to do this, this, and this. So as the agency owner, I’ll just eat the time. It happens all the time.
And, and, and I actually have people say to me, well, it’s just my time. I, it doesn’t really matter. No, it does matter. It 100 percent matters.
Chip Griffin: It’s the most expensive resource that you have.
Gini Dietrich: It is, yes, you should not absolutely not be giving your time away for free to make up for hiring somebody, anybody for what the market commands ever. You should not be doing that.
Chip Griffin: I’m glad you mentioned the owner’s role in this too, because part of the problem and part of the reason why owners see salaries as so painful is because they don’t pay themselves enough. And so if you’re not paying yourself six figures, you’re going to have a really difficult time convincing yourself to pay someone with three to five years of experience six figures.
Yes. You need to solve that first. But again, that’s usually because the hard work was not done to figure out what the actual costs are. And if you’re doing a lot of servicing on client accounts, the cost is much higher or should be much higher. And if you’re not reflecting that, that’s a problem. But it also allows you as you’re, as you’re hiring to think about, okay, if I’m able to take myself as the owner off, even if I have to pay someone 70,000 or 80,000, that should be a net positive on that project if I’m taking time away from me because I should be being paid more than that.
Right. While there may be a short term cash flow issue you need to address, the long term profitability of those kinds of accounts will improve if you’re able to take yourself out of the equation from a day to day service basis.
Gini Dietrich: Yeah. And, you know, I mean. I think that agency owners in general are creative individuals and right-brained individuals, so asking them to do this kind of left brain work is a lot. But have a spreadsheet, and in the spreadsheet you have the, the human’s name, what you’re paying them plus their, their benefits.
You know, we, we use 20% to just cover benefits, everything from paid time off and all that we use, we just use around 20% and figure out what that total cost of the employee is. 401k health benefits, all that kind of stuff. What is the total cost? That is the bare minimum of what a client should pay for. Bare minimum.
So if you have a 70,000 a year employee and you’re charging a client 50,000 a year, you’re in the hole 20 grand. Right. So you have to figure out what that is. And not only you’re in the hole by 20 grand, but you’re not, you don’t have the profitability tied into that. So you have to figure out what that is.
So let’s just say for argument’s sake, you want to have 20%. And you’re paying somebody 70 grand, you have to add another 14 grand on top of that, right? So now you’re at 84. You start to calculate it based on those kinds of things to figure out where you need to be. And that’s your bare minimum. Bare minimum.
Chip Griffin: Right, yeah, and you need to add another 20 percent for overhead. I mean, really the simplest is just to take whatever the total cost of that employee is and double it. Yep, double it. If your labor costs are half of your revenue, then you’ll probably be in an okay place. As an agency. You know, any want to improve that if you can, but that’s, that’s where you really need to be.
And so, you know, I, I want people to be careful about thinking, you know, if I’m, if I’m at 70 with an employee that I can just charge a client 70, theoretically it is the bare minimum. So you’re not just hemorrhaging cash, but, but really you have to be thinking double because you have to have profits in there.
You have to have the fact that there are other people involved in that project that you’re probably not thinking about beyond that employee. There are the overhead expenses of just keeping the lights on and paying you and other managers for your supervisory services and, and, and business development and all that kind of stuff.
So you really, you need to be thinking about those kinds of things when you’re calculating your fees so that you make sure that you were charging an amount that yes, it’s fair to the client, but it’s also fair to you. Because I, I see so many owners who are thinking about price in terms of, well, what will a client pay?
What will they see value in?
Gini Dietrich: Oh, it drives me crazy.
Chip Griffin: Yes. I mean, that matters, but it also matters what has value for you and what’s going to put the right amount of money in your own pocket. Because there’s no reason, look, agencies shouldn’t have loss leaders, right? This is not, we are not a grocery store where we have the end cap items and we don’t care if we lose money because they’ll just go through the aisles and buy a whole bunch of other stuff along the way.
You know, you, you can have certainly accounts that are less profitable than others because, you know, maybe it’s a passion project or something like that, but you know, you don’t have a loss, you should never have an account that you don’t make money on, period.
Gini Dietrich: Never, ever, never.
Chip Griffin: With the, with the, the exception I should say of pro bono work, but that’s a whole nother analysis.
Sure, that’s a different, yeah. I have plenty of articles on to think about that. Yeah. But bottom line is you need to think about that as if you’re writing an actual check to that organization in the amount of, you know, whatever you’re losing on it. And if you’re happy with that, then fine, you know, you’ve now made a charitable contribution and that’s cool.
But would you do that for a real client, right? Because you want their logo or you feel like they’d be fun to work with. No, don’t ever lose money on those kinds of things. That just doesn’t make any sense.
Gini Dietrich: Yeah, it drives me crazy, drives me crazy. And this is so typical, it’s so typical. Everyone does it, everyone does it.
I’ve done it where you say, well, what do you, what do I think the client, even when you ask the client, what’s your budget? And they say, well, tell us what you think it’s going to cost. And you just guess. So now you’re negotiating against yourself, which makes zero sense. It makes no sense. Don’t guess, say to them, this is how much it costs.
If they, if it scares them, then you either reduce the scope of work because you want to work with them. Or you have to be confident enough to walk away because something else, I promise you will come along to replace that. So don’t negotiate against yourself. And like I said, this happens all the time where I have clients who say, well, I think that I’m just going to charge this amount because I think that’s all they’ll pay.
How do you know? You don’t know that! Don’t negotiate against yourself.
Chip Griffin: Well, and you know, as we’re thinking about the scope of the project work that we’re doing and how much we’re charging clients, we also need to think of the scope of the job description and what we’re expecting from that individual.
Because, you know, it may be that the reason why we can’t find someone at the price that we want is because we’re asking for too much. Too much. Fair. For that, right? True. You know, if you’re asking for someone with 10 years of experience to come in and work for you for 60,000, it’s probably not going to happen.
No. No matter where they’re located. No. And so you need to be… Mindful of that, and you need to think about what you’re asking for in that job description that you’re publishing. Because that is, I mean, it is a sales document, and, and so you need to think about attracting the right people, and part of that is also, I mean, a lot of states are now requiring salary transparency.
And so, you know, you may need to be disclosing the, the, the band within which a job falls. You don’t always have to do that in the job description itself, but you do need to do it at some point in the process. But I would encourage you to do it in the job description itself. Because part of the problem that a lot of folks have is, if you publish a job description that doesn’t really have a salary associated with it, because there’s so much differentiation between agencies as to how they treat a certain title, Someone will look at it and think, Oh yeah, that’s a good role for me because, you know, account executive is where I would have gone next in my last agency.
But, account executive can be anything from entry level to 5, 6, 7 years of experience or more depending on the agency. Particularly in the small agency world. So be really clear about what you’re expecting to pay. It’ll help you with the compliance if you’re in one of those states but it will also help you to attract the right people so that you’re not bringing in people who think that the job is much more than it is.
And you really just need to be clear with people about this.
Gini Dietrich: And I will tell you that I have seen more and more employees say on social media, if you don’t post your your salary, I’m not applying. Like, I might be super qualified for that job. And I think there’s a little bit like shooting yourself in the foot mentality with that.
But, like, I think that’s real. Like, don’t just make it easy on yourself. So that you, just like with prospecting clients If you say we have a minimum of 5,000 a month, you’re not going to attract the 2,500 a month clients. Same thing. If you publish your, your salary band and it’s a band, it’s a range, then you, then you’re not attracting the either overqualified or underqualified people.
Chip Griffin: Right. I mean, you still will, right? I mean, let’s be honest. Some people will just apply to every job out there, whether they’re qualified or not, whether the, you know, because I, I mean, I’ve had plenty of people who’ve come in knowing that there’s a salary band and they think they can talk me into something outside of that band because they’re so good.
And look, I mean, every so often that comes along where, where, where that opportunity does present itself, but usually not when it’s being foisted upon you by the applicant who’s just arrogantly ignoring, you know, what you what you have there. You know, if they come in and they say, Hey, would you be open to talking about a different role at a higher, I mean, you know, I would at least have the opportunity to entertain it or not. But if you come in knowing that there’s a published band and you don’t expect to accept something in that, well, shame on you.
But it, you know, I, I see a lot of owners who don’t want to share salary information you know, until they’ve already gotten to the offer standpoint, right? They want to, we gotta learn about them, gotta figure out how much they, they’re actually worth. You know, I don’t, I don’t, you know, I don’t want to negotiate with myself by giving a salary, you know, right up front.
Silly. You don’t want to waste your time or the applicant’s time if you guys aren’t at least in the same neighborhood on a salary conversation before the end. So, you know, I always like to get that out in the first conversation. You know, this is this role is somewhere between 50 and 70 or 70 and 90 or whatever. So that, you know, if they have an objection, hopefully they raise it at that point and we’re not wasting each other’s time.
Gini Dietrich: And to your point earlier, from a compliance perspective, there are states that are requiring that you do that. So, if you’re in New York, California, there’s a couple others, you have, you have to do it. So, understand what your law, what your state law requires as well.
Chip Griffin: Right. Absolutely. I mean, you should. It goes without saying, or maybe it doesn’t, you should always be talking with an HR consultant, employment lawyer, someone who actually knows all the rules and regulations in the areas in which you operate to make sure that you are in compliance on this and other things.
We are not lawyers, accountants, we are not none of those things for those disclaimers. The last thing I would say is, is you need to think about… you need to make sure that you’re not being penny wise and pound foolish. Right. Because one of the things I often see is owners, in order to try to protect their profit margins, they want to hire someone at a lower salary because, well, this is, this is what we can afford to get the job done.
But I would encourage you to also sit there and say, well, if you paid someone at a higher rate, that also meant that they came to you with a bit more experience. They might be able to do it at roughly the same cost because they can do things more quickly and more efficiently with less editing and, you know, feedback and training.
So it doesn’t always work out that way. You can’t just say, well, you know, an 80,000 employee is going to do it much faster than a 40,000 employee. It has to be the right 80,000 employee. But if you can find the right one, they can often be worth paying more for. You know, this is particularly true for agencies that do a lot of, you know, writing or those kinds of things.
Yep. A more seasoned writer. who can get it right on the first draft is invaluable. An entry level person that you’re paying, you know, just straight out of college, it’s probably going to take several drafts, a lot more feedback. So it’s more management time. It’s more of their time. So you may find that your actual cost to complete a project is less with the higher paid employee.
Gini Dietrich: That’s right. So do the math. Yep. I’m, I’m a fan of, of paying more because it’s less stress for me.
Chip Griffin: Right. And don’t overestimate it. You’ve got to be careful here, right? Sure. Because I’ve also seen it in, you know, they can do it in one third of the time because I’m paying them three times as much. Well, maybe, but… You all have to be realistic.
So what, what, what is one third of the time they can now do it in 30 seconds? Well, probably not. Not, right. Yeah. So,
Gini Dietrich: yeah. Yep. Make things easier on yourself.
Chip Griffin: But the bottom line is, you know, bad news for you. Salaries are going up.
Gini Dietrich: They have gone up, yep, a lot.
Chip Griffin: You’re not going to be able to, you’re not going to be able to fight it on your own.
So instead, try to figure out how to make the overall model work within the marketplace that exists today. Maybe the market will soften at some point. You know, as, as, as Gini has pointed out, certainly the, the labor market is not as strong as it was from the employee side as it was a couple of years ago, but it’s still pretty strong.
I mean, I still see agencies having a difficulty filling positions and not just because the salary expectations are out of whack, but also because they can’t find, you know, enough qualified people who are actually looking. So true. You know, it’s, and I don’t see that improving any time.
Gini Dietrich: No, I don’t either.
I don’t either.
Chip Griffin: Unless something weird happens.
Gini Dietrich: Yep, totally agree with you.
Chip Griffin: And we don’t want weird things to happen.
Gini Dietrich: No, we don’t.
Chip Griffin: So on that note, it’ll not be a weird thing for you to hear me say. This is the end of this episode of the Agency Leadership Podcast. I’m Chip Griffin.
Gini Dietrich: I’m Gini Dietrich.
Chip Griffin: And it depends.