ALP 37: Should your agency use COLAs for employee salaries?

Things to consider if you are thinking about annual pay adjustments based on inflation.

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One of the biggest challenges that many agencies face is how to fairly compensate employees. Talent is the heart and soul of the business, so you want to ensure you’re doing everything you can to keep your performing employees around.

At the same time, you’re running a business so you need to make smart decisions that will ensure sustainable profits to keep the doors open.

Some agencies turn to COLAs (short for Cost of Living Adjustments) to try to ensure that salaries at least keep pace with inflation.

However, this approach has some drawbacks that Chip and Gini discuss in this week’s episode.

Whether you choose to use COLAs or not, you’ll get lots of useful insight from listening to the discussion.

Quotes

  • Gini: “Transparency and communication — it’s almost like that’s what we do for a living for our clients. So maybe we should do it internally as well.”
  • Gini, on non-monetary compensation: “I always do things for my team. I try to go the extra mile and give them experiences or gifts that they wouldn’t necessarily buy themselves, but that they want.”
  • Chip: “Ultimately, when it comes to compensation, the goal is to make your employees feel appreciated.”
  • Chip’s bottom line on COLAs:  “I think that that they are the easy way out and not the smart way out.”

Resources

Transcript

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

GINI: And I’m Gini Dietrich.

CHIP: And today we’re here to talk to you about soda. Oh – COLA, COLA. Sorry, you know, I sometimes I get confused… pop, whatever we want to call it. No, we’re here to talk about COLA.

GINI: I am curious what do you call it? Soda or pop?

CHIP: Soda.

GINI: Oh, see it was pop for me growing up, it’s a very regional thing, I think.

CHIP: Yeah, and some people call it coke even when it’s not coke.

GINI: Yeah, Atlanta definitely calls it coke.

CHIP: Which is why Coca Cola actually sends people around restaurants ordering cokes to see if they actually get Pepsi because in order to enforce their trademark, they have to send letters if they’re not, if they’re not calling it correctly within the restaurant.

GINI: That’s crazy.

CHIP: So that’s, that’s why when you go to a lot of restaurants, you’ll say, you know, can I have a coke? And someone says we have Pepsi. Yep. Partly, it’s to keep you happy. But partly, it’s to keep the trademark people happy.

GINI: That’s crazy.

CHIP: Yeah. I always thought that’d be a weird job to have just traveling around and ordering…

GINI: Asking for a coke.

CHIP: A coke. Yeah. But hey, you know, I guess everybody’s got to make a living somehow.

GINI: That is true. And that’s not a bad way to make a living I don’t think.

CHIP: No. And and, you know, look, making a living is what this episode is all about. Because the COLA we’re talking about here is actually cost of living adjustments. So those are the kinds of things that a lot of people in large companies tend to get, agencies, we threw the question out to the Spin Sucks community, or you did, Gini, to try to find out what people are doing with COLAs. And what did we find?

GINI: It was a pretty good mix. I also am not sure that everybody was totally honest. Um, because we got a lot of, “at my old company …at the old firm… at when I worked for such and such,” we got a lot of that, but we didn’t really get responses in terms of what people are doing inside their agencies, which I found interesting.

CHIP: It is, and I did you know, any number of reasons for that. One is possibly because folks are just reluctant to disclose that for whatever reason,

GINI: And could be that they’re not giving them. Which I mean, as a small company, a small business, it’s hard to do that every year.

CHIP: It is and you know, philosophically there are some folks myself included, who are not necessarily fans of, of COLAs. I, you know, I’m personally of the mindset that you review, salary and compensation overall, and, you know, a part of that mix is inflation and what that does to things, but part of it is trying to be competitive with the marketplace and looking at the value of the individual employee. But certainly, you know, COLAs are very popular, I think in some of the larger agencies that I’m familiar with, as sort of a -not necessarily the, the the final say in what your salary adjustment might be, but sort of as a as a baseline that you may work from, as as you move forward from year to year.

GINI: Yeah, it seems to be that that’s sort of the general consensus, no matter if it was agency, the agencies that people own now or the previous employers, but it was pretty much a, they’re given out as part of the annual review process, which is independent of performance. So there was a lot of that, and it’s certainly dependent on – was dependent on region or area of the country, just like soda and pop is. I know that one person worked for a very large company like a Fortune 10 at one point. And he said, they would survey businesses in the area to determine what was being paid for the same or similar jobs in their field to make sure that the rate that they were paying was competitive. So if they thought that their pay to their employers was below the averages they got raises that brought them up to a little above the average, but not necessarily a cost of living raise.

CHIP: Right. And I think making sure that you have competitive salaries, whether you do a formal study, like his old company did, or whether you’re doing something more informal, I think it’s really important. Because as an agency, you rely upon your talent. And the way that you tend to keep the best talent is making sure that you’re offering a competitive package. Now, I also say that you have to look at total compensation. So it’s not just salary, it’s, it’s everything else that goes into the mix, particularly these days where you can have such variation in some of the benefits that the different agencies are giving out. So in order to compare apples to apples, you really need to look at the whole suite of benefits that you’re providing. Because, you know, let’s say that, you know, you’re offering a higher salary, but you only pay 30% of healthcare, versus someone who may pay a lower salary, but pays 100%, those that can make a material difference, much more so today than 10 or 20 years ago. So it’s really important to look at the total compensation package when you’re comparing to other agencies.

GINI: And you know, I mean, this, this may be an employer’s perspective. But I also think that things like flexibility to be able to pick your kids up from school or, you know, taking a two hour break in the middle of the day to work out so that you’re not competing with everybody else at the gym. Like there are lots of things that we offer from a flexibility standpoint, but other agencies don’t offer or other companies don’t offer that I think goes into that overall compensation as well.

CHIP: Absolutely, that that non cash compensation, particularly in the era of virtual or semi virtual businesses is is particularly valuable. And you do need to factor it into the mix. Obviously, it’s a little bit more challenging, you know, the pure dollars and cents type calculations. But, but it’s still an important consideration. I think the other consideration you have to look at is, you have to be a little bit careful when it comes to COLAs because if you’re not careful, and it’s really not tuned to what the real changes are, you can end up creating a situation where you’re dramatically overpaying someone just because of senior tenure with your firm, and you know, because if you’re, if you’re doing 3% a year, that doesn’t sound like much. And in fact, as someone pointed out in the comments, it’s not that much on a year over year basis. But if you start compounding that, you know, right, it, you know, over the course of 5, 7, 10 years, all of a sudden, that can really add up. And so if that person is not contributing additional value as they move forward, and one would presume that in general, they will. So I’m not trying to, you know, disparage employees here, but there are some who, you know, remain relatively static in the the skill sets, in the value they’re contributing, they may still be providing value at that original level. But if you start compounding those costs of living adjustments, all of a sudden, you may be in a situation where you’re overpaying for what you’re getting, and particularly compared to what the competitive marketplace is. And so that’s something that you just need to be careful about. Anytime you put in some sort of an automated compensation increase.

GINI: So then how do you recommend, let’s say, when I worked at Fleischmann, we had groups of people that were very, very, very, very, very good at their job, but had no desire to move up. So how do you compensate those people? When they’re, you know, like, they’re super good at Media Relations, or they’re really good at technical writing or whatever happens to be and that’s their job, they have no desire to move up the corporate ladder? How do you compensate those people? So they don’t end up being overly compensated? But you still want them there, because they are significant to the agency’s growth.

CHIP: Right. Well, I think you know, part of that comes down to as an agency owner or executive, depending on the size of your firm, you need to look at the total value they’re creating, and what it would cost to replace them. And so even if they’re being overcompensated, for what they do, the total cost to replace them, may actually present a favorable comparison. So let’s take a look at this. If you’re, if you’ve got an employee who’s being paid, let’s say 20% more than what you could hire someone new in for. So you sit there and initially you say, Okay, well, this is, you know, I’m, quote unquote, wasting money. But at the same time, you have to say, Okay, if I brought in someone at that lower price point, how long would it take them to get up to speed in that role, and with the way I do things at my agency, so there’s, there’s real value to that. And so you need to calculate in the cost of all of that training, the the last productivity in that window, where they’re ramping up, how long it takes to ramp up and what that means for your business. So there’s a lot of other things that go into the mix. So you shouldn’t immediately say, look, this person is making 20% more than what my numbers say this role should pay, it’s really, you know, what are they contributing? And what would it cost to replace that individual.

GINI: And there’s also, you know, the softer things too, like cultural fit. And, you know, to your point, knowing, knowing how the agency is run, and knowing how your processes work, and all that, too, there’s that soft piece of it as well,

CHIP: Sure, because I mean, the other thing is there, because they’ve been around a long time and they know your system, their productivity in that role may actually be higher. So, you know, they may be able to pitch 10 stories a week, whereas someone new coming in, can only do six or seven. So, you know, there are there are certain benefits to that as well. So you have to really make sure that you’re comparing apples to apples, and not just doing a title comparison, particularly these days, where there’s lots of title inflation at agencies. You know, a managing director in one agency is basically a partner and in another it’s some mid level functionary. So, you know, title comparisons are not necessarily the the best thing to do these days.

GINI: Oh, yeah. And I mean, to that point, there have been plenty of people I’ve hired who have negotiated titles for, you know, for less compensation, just because it’s important to them to get that title on the resume. So, you know, I’m always willing to do that, too. So that’s a really good point, you can’t really compare that.

CHIP: And, look, the bottom line is that most agencies that are out there are of a size where you have flexibility in how you do compensation. You know, it’s only, you know, in firms of less than 100 people, you tend to have a fair bit of flexibility, you start getting over 100, and you need to have more standardization for all sorts of different reasons. But, you know, if you’re, if you’re a typical 30 or 40 person, agency, or even smaller, look, it’s worth it to look at each individual employee and figure out what kind of compensation is going to make that individual happy, make them productive, and make it a good fit within your structure. And so some of that may be non cash compensation, it may be for example, in the past, I’ve had employees back before it was popular to allow people to work from home, I allowed them to work from home one or two days a week, in exchange for not providing a cash bump, or something like that, you know, sort of making trades as far as you know, what works for them what works for the business at that particular point in time. And sometimes that salary again, I had, I had one individual who title was the most important thing to him, yet, he, at some point, he didn’t really care about the money. It was really just he wanted to have the stature of a title. And so I traded him a title basically. And and, and that’s fine. If that if that makes everybody happy that that’s great. And so that’s why I’m not a big fan, as we’ve talked about before, if any sort of formulaic compensation things, whether that’s bonus, or salary, or COLAs, or whatever, I think you really need to look at the individual circumstances, you can certainly use some formulas as rules of thumb or starting points or things like that. But you really want to make sure that you’re being fair to the employee and doing what’s right for the business at the same time.

GINI: Yeah, you can’t be giving out any sort of raise or bonus if you’re not making any money. So there’s that.

CHIP: There’s that and that that’s a whole nother challenge. And and hopefully most of the agent, you know, the reality is most agencies are making some money, they may not be as profitable as they would like to be. But there are, there are not that many agencies out there that are negative from a profit standpoint, there certainly are some but it’s in the agency business, it is more challenging to to run at a loss than it is in say, you know, a brick and mortar business or a software business or something like that where you have a lot of fixed costs. Agencies, unless you’re maintaining a lot of headcount that’s, that’s under utilized by a lot, you typically can at least break even. But, you know, nevertheless, you want to do more than break even, hopefully, and, and so to do that, you need to really be looking very carefully at at your cost structure, and your employees are your biggest cost in just about any agency out there.

GINI: Yep. And that’s also I mean, this is a different topic for a different time, of course. But that also leads to, it’s also the hardest thing to do, because it’s not like you can, the only way to reduce your costs when your major expense is employees is to let people go, and that is a whole different kit and caboodle. And it stinks too. Because now you’re a mess, you’re, you’re dealing with emotion and all that other stuff on top of it.

CHIP: Well, and you raise emotion, emotion is a huge part of the overall annual compensation review that that most employers go through anyway. And it’s it’s emotional on both sides, that, you know, if you’re, you know, if your business is struggling, you know, it is it is difficult emotionally to go to an employee and either say, look, business has been tough, and so we can’t give you what you deserve, or, or give it to them, you know, and then resenting it, right, at the same time, on the employee side, it’s very emotional, because a lot of employees view their worth in terms of what their salary is. And and they view it as a measure of whether they are performing, which is not always the case, because, you know, it really does need to be looked at in terms of the overall business, which is why I always advocate that agency leaders need to educate their staff and talent about how the business is running, you know, what are the key drivers? And how are you performing right now. But if you’re, if you’re an employee, and you’re sitting there and saying, okay, as someone said, in the comments, when you asked the question in the community, you know, a 1% raise, you might view it as thrilling. Or you might sit there and say, why did you bother?

GINI: Well, I thought that was funny, because the person said, you know, as a teacher, we would get a 1% raise, and then my husband would come home and complain that he only got a 9% raise, and it made me roll my eyes, which I think is funny, because I think it is it is about perspective. And it depends on you know, I mean, I think it’s Daniel Pink’s, I think it’s Drive is the book where he talks about, people aren’t truly motivated by money. You know, once once, the basic life is paid for – bills, mortgage, car, insurance, food, all that is covered, money is no longer a motivator. And so when you can figure out what motivates people, and of course, you know, making sure that they do – are making enough money to cover the basic necessities. But once you figure out what motivates them, it becomes easier. And it is about perspective. I mean, if you’re a teacher, and you’re getting a 1% raise every year, you’re thrilled. If you’re at Compaq, or HP or Intel, and you’re only only getting a 9% raise every year, you’re not thrilled. So I think there’s there’s perspective in that as well.

CHIP: And I think, you know, helping your team understand how it is that you go about this process is valuable as well. So, you know, if you’re the kind of agency that that wants to rely on a COLA as the the key driver and and look at some performance on top of that, communicate that, explain that. If that’s not your philosophy, explain that too and explain, you know why that isn’t the approach that you’re taking. Because I think a lot of businesses and particularly agencies get into trouble with employees when it comes to compensation, because they’re simply not communicating effectively about it, they’re not doing enough to explain why they’ve made certain decisions, even things like you know, you know, which health insurance you’re picking and why. That’s been a topic and a lot of organizations that I’ve been involved with over the years, and even even before healthcare became sort of the big thing it is today, 30 years ago, I remember working for an employer, and there was a lot of discussion about how they had a two tiered insurance structure, depending on whether you were in management or not, and, you know, what the what the benefits were, it was a large enough organization that, you know, that, particularly at that time, that was not uncommon to have it – even today, you know, there’s still some employers that take approaches like that, but, you know, simply communicating that and why are we doing these things that, okay, this is part of the overall compensation structure when you’re a manager, so maybe your salary isn’t as high, but we, you know, we feed you a little bit more on the benefit side, if you’re in an agency, and you make a switch from one insurance carrier to another, explain why you did that, it may be it’s to help save both the employer and the employee some money, maybe it’s to improve the responsiveness or the network. So you know, there are all sorts of different things that go into it. And I think, every aspect of your compensation, if you’re, if you’re being as transparent as possible with your team about how the decisions are made, you’ll be in much better shape,

GINI: Transparency, and communicate, it’s almost like that’s what we do for a living for our clients. So maybe we should do it internally as well.

CHIP: But the cobblers kids have no shoes. Many times and agencies are amongst the worst that I’ve seen when it comes to internal communications.

GINI: That is very, very true.

CHIP: And so you know, and if you’re having these conversations, you know, you can also then get it can be a two way street, if you’re doing it effectively. So it’s, you’re communicating what your philosophy is, what your approach is, but hopefully, you’re hearing from those employees, either one on one or in group settings, about what’s important to them. Because it may be that you’re that you’re off the mark, because you just didn’t realize, okay, what what they would really like is the flexibility to work from home or what they would like is a different title structure or, you know, frankly, they’d be willing to forgo a pay increase if you brought on a new hire, so that they didn’t have to do certain kinds of work or, you know, their workload could just be a little bit more bearable. There’s a lot of different ways that you can go about doing things for your employees to so that your talent is happy that may not, you know, be straight COLA increases or salary increases, or bonuses or those sorts of things. Right.

GINI: Yeah. And I agree with that. That’s my big philosophy. And I always do things for my team. I try to go the extra mile and give them experiences or gifts that they wouldn’t necessarily buy themselves, but that they want. You know, like two years ago, we did Apple watches for everybody, because everybody kept saying, Oh, I’d really love an Apple Watch, I always try to do one piece of technology every year. And then on birthdays, and you know, anniversaries or things like that, depending on who who the person is we try to do something that’s really specific to them that they they really want but would never spend the money on themselves to get.

CHIP: And that’s that’s a great way of doing things. Because ultimately, when it comes to compensation, the goal is to make your employees feel appreciated, make them feel like…

GINI: That’s all they want. Like all of us.

CHIP: Yeah. And and, you know, so if you’re thinking creatively about it, I think you can come up with a lot better solutions than an automated COLA adjustment, which is why, sort of to come back to the original topic… I’m, I’m not a fan of them. I think that that they are the easy way out and not the smart way out.

GINI: I like it. I like it. I like it. I’m glad we asked the question because it wasn’t something that I had thought about before. So I like that I like the responses we got in the community. I like your stance on it, I think it’s a really good way to think about it. And not just giving people automatic raises just because but to do it because of performance and both independent and business performance.

CHIP: And so now it’s time for us to ask our listeners, would you give us a raise, please? Could we get paid a little bit more for this. That’s right, we don’t get paid for this right. This is we just we do this because we love doing it. We love sharing our views. Well, you can’t really stop me from sharing my views. I’m highly opinionated. And you can ask me pretty much any question I will take a stance, whether it’s a smart one or now who know?

GINI: That is true, you will. And you’ll sometimes take the other side just to play devil’s advocate.

CHIP: Oh, in fact, that’s quite a lot of fun. And to be honest with and this is probably a topic for another day. But I think that’s actually a useful skill as an agency owner to be able to take a position you disagree with and make the case because that helps improve your overall communication skills, because it makes you think about the mechanics of the argument, the logic and everything that goes into it. And so arguing something that’s against your own belief system can actually be a great way to improve your communication skills,

GINI: Almost like we’re at debate club.

CHIP: Exactly. But that will end this debate, because we’ve come to the end of another episode of the Agency Leadership Podcast. We appreciate you listening. We hope you’ll come back to us next week. But in the meantime, I’m Chip Griffin,

GINI: and I’m Gini Dietrich,

CHIP: And it depends.

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