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Agency'Management'Institute'Bonus'Structure'
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When!an!agency!shows!a!profit,!one!of!the!first!inclinations!of!the!agency!owner!is!to!
pay!a!bonus!to!the!staff.!!I!applaud!that!instinct.!!But!I!don’t!think!you!should!do!it!
simply!because!you!have!a!little!extra!money.!!I!believe!you!should!have!a!bonus!
program!that!serves!your!agency!every!single!day,!whether!you!pay!out!any!money!
or!not.!!!
!
The!goal!of!your!bonus!program!should!be:!
!
§ Reward!your!team!for!their!hard!work!
§ Share!the!spoils!of!the!agency’s!success!
§ Align!every!employee!with!the!goals!of!the!agency!so!you!are!all!pulling!in!the!
same!direction!
§ Teach!your!employees!how!to!help!you!achieve!the!agency’s!financial!goals!
every!single!day!
§ Keep!your!employees!focused!on!and!motivated!by!the!agency’s!goals!every!
single!day!
!
I!think!there!are!several!elements!of!a!successful!bonus!program:!
!
§ They!should!not!be!an!end!of!the!year!thing.!!They!should!influence!the!
employees!to!behave!in!ways!that!serve!the!agency!year!round!
§ It!need!to!be!simple!and!explained!over!and!over!(every!month/quarter)!!
§ It!should!be!used!to!teach!employees!to!think!like!agency!owners!(focused!on!
the!same!metrics!you!do)!
§ It!should!be!based!on!one!or!two!metrics!that!accurately!measure!the!
financial!health!of!the!agency!!
§ The!metrics!should!be!measured/achieved!or!not!every!month!
§ The!metrics!should!be!set!in!a!way!that!your!team!hits!the!goal!more!often!
than!misses!(should!be!a!stretch!but!a!reasonable!stretch…ideally!they’d!hit!
the!metrics!at!least!7!or!8!months!of!the!year)!
§ Bonuses!should!be!paid!quarterly!(with!most!of!the!$!accumulate!for!a!end!of!
year!payout)!to!keep!everyone!motivated/focused!
§ The!owners!should!hold!an!all!agency!meeting!every!month!to!report!on!
financials/success!on!bonus!program!for!the!month/YTD!
!
At!AMI,!we!have!a!specific!bonus!program!that!we!teach!in!our!workshops,!owner!
peer!networks!etc.!!It’s!based!on!AGI!and!if!you!want!–!you!can!add!a!profit!margin!
percentage!factor!as!well.!
!
The!big!number!in!our!opinion!in!terms!of!an!agency’s!health!is!AGI!(Adjusted!gross!
income).!AGI!is!the!only!money!you!actually!get!to!spend!—!so!that’s!the!only!money!!
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that!matters!to!you.!!You!should!set!a!monthly!AGI!goal!and!that!should!be!the!first!
number!your!team!has!to!reach!to!be!eligible!for!any!bonus!money!to!be!paid!
out/banked!for!a!year!end!pay!out.!
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Here'are'the'nuts'and'bolts'of'the'AMI'bonus'program.'
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First,!you!need!to!set!a!monthly!AGI!target.!!!Review!the!last!twelve!months’!
financials.!!Look!at!your!gross!billings!and!sub t ract!your!cost!of!goods!(all!hard!costs!
including!any!freelance!or!contractor!fees)!
What’s!left!after!you!subtract!the!COGS!from!the!gross!billings!is!your!AGI.!!Your!AGI!
is!the!money!you!actually!get!to!spend!and!in!a!typical!agency,!it’s!spent!on!three!
things.!
Salaries:!All!W2!income!including!owners,!all!costs!related!to!having!a!person!on!
staff!--!any!and!all!benefits,!payroll!taxes,!perks,!etc.)!
Overhead:!!Everything!from!rent,!supplies,!travel,!entertainment,!insurances,!etc.!
Profit:!!What’s!left!over!and!usually!gets!spent!on!taxes,!re-investing!in!the!agency,!
owner!distributions/dividends!and!employee!bonuses!
Ideally,!your!AGI!is!being!spent!in!these!ratios:!55%!salary,!25%!overhead!and!20%!
profit.!!To!see!if!your!current!AGI!is!aligned!with!those!ratios!and!to!set!your!AGI!
goal!--!take!the!monthly!total!of!your!loaded!salary!costs!(all!salaries,!all!costs!
related!to!having!a!person!on!staff!--!any!and!all!benefits,!payroll!taxes,!perks,!etc.)!
For!this!example,!let's!say!that!is!your!monthly!loaded!salaries!cost!is!$55,000.!
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$55,000!is!55%!of!100,000.!You'd!have!to!make!an!AGI!of!that!amount!to!justify!the!
$55,000!salary!spend.!
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Which!means!you!should!have!a!monthly!overhead!nut!of!about!$25,000!and!a!
monthly!profit!of!$20,000.!
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Your!monthly!AGI!goal!should!be!that!number!or!a!little!over!the!$100,000.!But!you!
want!to!make!it!attainable.!You!want!them!to!hit!it!more!often!than!they!miss!it.!
Let's!say!you!set!it!at!$110,000K!a!month.!Or!you!could!choose!to!just!make!it!$100K!
if!that’s!a!stretch!for!you!today,!given!your!client!load!and!anticipated!work.!
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(Note!--!if!you!tend!to!run!closer!to!60%!for!your!payroll!costs...adjust!accordingly.!
The!55/25/20!is!a!guideline,!not!an!absolute.)!But!use!your!actual!salary!number!to!
calculate!how!much!AGI!you!need!to!earn!to!stay!in!balance.!
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The!keys!to!this!working!are:!
§ Set!a!monthly!AGI!goal!every!quarter!(revise!it!every!quarter!as!things!
change!in!the!agency).!!
§ Make!the!goal!very!public.!Share!it!in!every!staff!meeting.!Keep!people!
updated!on!the!monthly!progress!(‘it’s!March!15
th
!and!we’re!only!at!65%!of!
our!goal…get!those!jobs!closed!and!let’s!watch!scope!creep.”)!
§ Teach!and!re-teach!your!team!how!they!can!each!influence!AGI!by!working!to!
estimates,!managing!overhead!expenses,!etc.!
§ Celebrate!individuals!who!helped!you!achieve!the!goal!every!month!by!
managing!projects!well,!by!upselling,!by!holding!down!overhead!etc.!
This!does!require!that!you!share!at!least!the!AGI!goal!and!actual!AGI!for!the!month.!!
So!there’s!a!certain!amount!of!transparency!required!here.!!Quite!honestly!–!those!of!
you!who!are!worried!about!your!staff!knowing!how!much!the!agency!(and!you)!
make!–!are!crazy!if!you!think!they’re!not!already!making!assumptions!about!that.!!!
And!their!assumptions!are!much!more!generous!to!you!than!reality!is.!!Trust!me!on!
that.!
You!can!start!this!any!time!of!year!but!most!people!kick!it!off!in!January!so!it!aligns!
with!your!fiscal!year.!
Basically,!when!your!team!hits!the!AGI!goal!for!the!month,!there!is!a!reward!in!it!for!
them.!!Even!if!your!ratios!are!off!and!you!overspend!in!overhead!or!the!profit!%!isn’t!
20%!--!you!still!pay!out!on!the!profits!you!made,!as!long!as!you!hit!the!AGI!goal.!
The!rewards!play!out!this!way:!
Every!month!that!your!team!hits!the!AGI!goal!--!they!get!a!small!reward!(bring!in!
pizza!for!lunch!or!everyone!gets!a!$25!gift!card,!etc.)!or!you!can!what!I!do!--!$100!
bill.!!If!they!hit!it!the!2nd!month,!you!up!the!ante!a!little.!You!could!double!the!$100.!
No!actual!bonus!money!is!paid!out!until!the!end!of!each!quarter.!!At!that!time!--!you!
would!pay!out!a!portion!of!the!profits!and!save!the!rest!for!the!end!of!the!year!
bonus.!
The!profit!should!be!divided!in!four!equal!parts:!
• Taxes!!
• Bonus!for!owners!!
• Bonus!for!employees!!
• Re-investment!in!the!agency!
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Quarter'One'Example:'
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Month!1!—!you!have!a!profit!of!$22,500!(overhead!was!light!that!month)!
Month!2!—!you!miss!the!goal!and!you!only!have!a!profit!of!$5,000!(which!you!do!not!
include!in!the!bonus!pool!because!you!did!not!hit!the!AGI!goal)!
Month!3!—!you!have!a!profit!of!$17,500!because!your!overhead!was!a!little!high!that!
month!
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You!have!a!bonus!pool!of!40,000.!Divide!that!by!4.!Put!$10K!away!for!taxes.!Put!
$10K!away!for!the!owner/s.!Put!$10K!away!for!new!computers!or!whatever!you!
need.!So!you!have!$10K!for!your!quarterly!bonus.!Put!two!thirds!of!it!away!for!the!
year-end!bonus.!You!now!have!$3,333!to!divide!among!your!staff!this!quarter.!I!
recommend!you!divide!it!equally!among!your!entire!team!for!the!quarterly!payouts!
and!then!add!a!discretionary!element!for!the!year-end!pay!out!(I!elaborate!later!in!
this!document.)!
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Note:&When&I&say&you&put&the&money&aside&(in&the&case&of&taxes,&agency&owner&bonus,&
2/3&of&the&employee&portion&and&reinvestment)&—&I&mean&you&really&do&bank&it&
somewhere.&Don’t&keep&it&in&your&regular&checking&account&or&you’ll&end&up&spending&it&
and&not&having&it&for&taxes,&owner&bonuses&or&employee&bonuses.&This&is&a&promise&you&
are&making&to&everyone,&so&you&have&to&be&sure&you&can&honor&it.&
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Quarter'Two'Example:'
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Month!4!—!you!miss!the!goal!and!only!have!$2,000!profit!(don’t!include!in!the!bonus!
pool)!
Month!5!—!you!have!a!client!walk!and!you!miss!the!goal!by!a!lot.!You!actua l ly!have!a!
loss!of!$2,500!by!the!time!you!pay!salaries!and!overhead!
Month!6!—!you!regain!ground!and!have!an!awesome!month!—!you!end!up!with!a!
profit!of!$32,500.!
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You!have!a!bonus!pool!of!$30,000!(32.5K!minus!the!$2500!you!lost!in!month!5).!You!
put!away!$7500!for!taxes.!Put!away!$7500!for!owners.!Put!away!$7500!for!
reinvesting!in!the!agency!and!you!have!$7500!for!staff!bonuses!—!put!away!two!
thirds!for!year-end!and!you!have!$2,500!to!divide!among!the!employees.!
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Quarter'Three'Example:'
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Month!7!—!you!rock!it!and!make!$25,000!in!profits!
Month!8!—!clients!cut!way!back!on!projects!and!you!miss!the!goal.!You!have!a!loss!of!
$5,000!
Month!9!—!you!re-gain!some!ground!and!have!a!profit!of!$5K!but....!but!you!fell!
short!of!your!AGI!goal.!So!you!do!not!pay!a!bonus!on!this.!Everyone!is!only!eligible!
for!bonuses!on!the!months!you!make!your!AGI!goal.!!
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You!have!a!bonus!pool!of!$20,000!(25K!minus!the!$5000!you!lost!in!month!8).!You!
put!away!$5000!for!taxes.!Put!away!$5000!for!owners.!Put!away!$5000!for!
reinvesting!in!the!agency!and!you!have!$5000! for! staff!bonuses!—!put!away!two!
thirds!for!year-end!and!you!have!$1,667!to!divide!among!the!employees.!
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Quarter'Four'Example:'
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Month!10!—!it’s!a!good!month!and!you!hit!the!goal.!Your!profit!is!$18,500!
Month!11!—!clients!really!crank!it!up!—!profits!of!$22,000!
Month!12!—!Your!clients!go!dormant!for!the!holidays!and!you!only!make!$1,000!in!
profits.!You!clearly!didn’t!hit!AGI!goal!and!the!$1,000!is!not!part!of!the!pool.!
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You!have!a!bonus!pool!of!$40,500.!You!put!away!$10,125!for!taxes.!Put!away!
$10,125!for!owners.!Put!away!$10,125!for!reinvesting!in!the!agency!and!you!have!
$10,125!for!staff!bonuses.!
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You’re!now!at!yearend.!Hopefully,!here’s!what!you!have:!
!
$32,625!for!taxes!
$32,625!to!distribute!to!owners!
$32,625!to!re-invest!in!the!agency.!You!may!spend!some!of!this!during!the!year,!
which!is!okay.!
$25,125!for!year!end!bonuses!to!be!divided!among!your!team!because!you!already!
distributed!$7,500!
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For!the!year-end!bonus,!you!can!handle!this!in!many!ways!but!I!recommend!that!
1/3!of!the!bonus!pool!be!paid!out!equally!among!all!the!employees.!!Remember!–!
you!are!trying!to!motivate!every!one!of!them!to!care!about!your!AGI!goal.!!!
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You!must!define!the!criteria!for!how!you!will!distribute!the!other!2/3rds!if!you!are!
going!to!make!it!discretionary.!!They!need!to!understand!your!expectations!and!the!
rules!of!the!bonus!program.!!Many!agencies!opt!to!just!pay!out!equally!for!all!
portions!of!the!bonus.!!That’s!your!call.!!Just!be!clear!and!transparent.!
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Because!you!have!been!accumulating!the!bonus!money!throughout!the!year,!most!
agencies!have!the!cash!on!hand!to!pay!out!the!4
th
!quarter!bonus!at!the!end!of!the!4
th
!
quarter!–!which!is!beneficial!from!a!tax!perspective.!!But!you!can!wait!until!the!next!
month!if!you!need!to.!
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Here!are!some!key!elements!to!keep!in!mind:!
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You!bank!the!money!because!you!may!have!to!use!the!reinvestment!pool!and!your!
owners!pool!if!you!get!into!trouble!and!you!don’t!adjust!your!headcount!fast!enough.!
You!cannot!use!the!employee’s!bonus!pool!for!that.!You!made!them!a!promise...and!
you!need!to!keep!it,!even!if!the!business!falters!in!later!quarters.!
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You!also!must!subtract!a!loss!in!the!profit!column!from!the!months!you!earned!a!
profit!before!you!determine!that!quarter’s!bonus!pool.!!You!can’t!go!in!the!red!to!
honor!the!bonus!program.!!Also!–!even!if!you!make!some!money!in!a!particular!
month!but!don’t!hit!the!AGI!goal,!you!do!not!include!that!profit!in!the!pool.!
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If!your!tax!bill!is!lower!than!expected!or!higher!—!you!may!have!to!shift!dollars!
around.!But...this!gives!you!a!basic!framework.!
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An'optional'criterion'that'could'be'added:'
!
Some!agencies!also!want!to!set/achieve!a!minimum!acceptable!profit!margin!before!
they!pay!out!any!bonuses.!!So!you!could!modify!the!program!to!require!that!the!
agency!reach/exceed!the!AGI!goal!AND!a!minimum!profit!margin!of!5%!or!10%.!!!
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I!don’t!think!this!is!necessary!if!you!set!your!AGI!goal!properly.!!If!you!use!your!
actual!salary!numbers!to!determine!the!AGI!you!need!to!earn!to!keep!your!salaries!
at!the!55%!(or!whatever!you!operate!at)!and!you!adjust!it ! every!quarter!as!things!
change!–!everything!else!falls!into!place.!But!it’s!an!option.!
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Remember!–!the!goal!with!this!is!to!keep!it!simple!enough!and!top!of!mind!every!
single!day/month!so!your!team!can!all!be!motivated!to!help!you!achieve!the!
agency’s!goals.!!!
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