Breaking Down Agency Employee Compensation

Sei-Wook Kim (00:04.78) On today's episode, we talk about the different aspects of an agency's employee compensation. We break down how to design salaries, bonuses, and long-term incentives in a clear, intentional way. Peter Kang (00:18.32) All right, so we know comp is a very important factor when it comes to employee recruitment as well as retention. But of course, it's also not the only factor. Before we dive into it, we should make it clear that when it comes to having an agency that has a good amount of talent density and is able to keep these really talented folks, other factors matter quite a bit. Some of those things are culture, manager strength — basically, how good is your manager — the type of work, is it challenging, exciting work? And then the other side is what's the trajectory of the company? Because people want to be in a winning situation. They don't want to be on a sinking ship. It helps if you have a rocket ship and everyone wants to be along for the ride. So we say all these things because comp isn't the end-all be-all. You're not going to solve a lot of retention or attract really great people just because of comp. But at the same time, comp is super important because it is dollars that you're really committing, investing in employees. We like to think that the more intentional you are, the less issues you're going to have in the long run and you're going to be smarter about how you handle this. So we got the various components or aspects that we're going to cover today. We'll just dive in — let's start with the first one. You want to take it off? Sei-Wook Kim (01:46.242) Yeah, the first aspect of comp, which might be self-explanatory, is base salary. Thinking about what is the consistent amount that people are expected to be paid on a regular basis, typically every two weeks or bi-weekly. The base salary is the most important thing to nail right off the bat. Peter Kang (02:12.915) Yeah, and within base salary there's a lot of things to consider. First of all, as an agency, you really have to think about your ability to pay a competitive salary rate. A lot of times some people go off of reports out there on what is the acceptable salary range for certain types of roles. So a project manager should make X to X dollars in these kinds of markets, or a designer should make XYZ, or a developer should make XYZ. And then there's other aspects to that, especially where you're hiring these people — the geography of where these folks are and how that impacts the salary that you decide to pay. Anything else on that front? Because sometimes you're going to be priced out of certain types of talent just because you don't have the resources. Sei-Wook Kim (03:10.774) Yeah, a lot of this comes down to what is your business model, how are you pricing your work, and what margin do you have — and working backwards to say, what are the salaries that you as a business can afford? And then from there, how can you represent that in different ways? Maybe for certain roles or certain levels you can afford to pay more, factoring in things like utilization and how much you expect someone to be billable. And then that's where you can play, in a remote environment — can you find team members in different areas for certain roles to help balance out the different salaries that you're paying across the company? Peter Kang (03:56.442) Yeah, and this is why it's almost futile — or at least not the most helpful — to ask other agency owners, "hey, what do you pay for these roles?" It might be good as a range or signal on what the market is paying. But we've seen this over the years where you can get really talented folks in different areas, whether it's different parts of the US or internationally, for maybe a salary range that's akin to what an entry-level person might make on the coast of the US. On the flip side, we might be paying a really hefty sum for somebody based in New York City, but their experience level or the quality might be lacking. It just goes to show there's no consistent, figured-out level of base salary. There's a bit of price discovery that you've got to do. Sei-Wook Kim (05:04.748) Yeah. Once you go through that exercise and determine what you can afford as a business, one exercise that we do is generally set salary bands. This aspect has varied a bit as geography has obviously impacted things, but just understanding what your business can afford for a given role and mapping that out loosely — not as something that needs to be published to the team and shared, but more from a business owner standpoint, knowing what you expect all the way through. Peter Kang (05:35.825) Yeah, the salary band — you've got to grow into it, because you can't just start with empty salary bands and try to fill it that way. The more organic way we've experienced it is once you hire a cluster of folks, so you have more than two or three employees, maybe you get to 10, 15, 20, 30 employees, you start to have different levels as well. There's junior level, mid-level, senior, maybe a director level, maybe VP level, whatever it might be. Within that, depending on the department, you start to go, okay, juniors are in this salary band, directors are in this salary band. That gives you some ranges to understand. And then that also ties into the career growth promotion path. Talk on that. Sei-Wook Kim (06:34.37) Yeah, along with that is really having an outlined method for looking at compensation reviews. On a regular basis, having a way that people know that if it's once a year, we're going to have a conversation about comp, and it's based on certain criteria. From the company's perspective, having a structured way to look at it — typically we might do a 0 to 5% raise. But if people want or desire more than that range, having a path saying, all right, in order to jump 10%, 20% from where you are now, maybe there's a career path and certain roles that you need to grow into over time to get there. Peter Kang (07:22.128) Yeah, and a lot of that — this is a topic for another day, but basically with this career growth promotion path discussion, it's also figuring out: does this person want to be on an individual contributor path of continuing to be more skilled and better experienced at the work, or is there a manager path where they can be put in charge of other people and grow their own team and direct reports? Those are different conversations that have an impact on what the salary ultimately becomes. Okay, so a lot on base salary — shall we move on to the next one? Sei-Wook Kim (08:13.582) Yeah, so the next aspect is benefits. Benefits — especially in the US — health insurance is a really big bucket where it can cost a company a significant amount of money, but people also weigh it significantly because it's an important part of their costs. Thinking through how you're contributing to a health insurance plan: in some instances we've seen companies just contribute a fixed amount so that employees can go out and get their own plans. In other instances, companies sponsor their own plans and can cover a percentage amount or a fixed amount. All of this is an important layer, especially when people are comparing different offers they have from other companies. Peter Kang (09:06.23) Yeah, and just like with base salaries, if you're a smaller agency and you're trying to get things going financially, you have to be pretty conservative here. We all want to provide great benefits to employees — that's something we all inherently want to do. But you also have to weigh that against the reality that health insurance has been on a trend of rising costs year over year. The more you promise — let's say covering 100% or a significant chunk of someone's health insurance, and sometimes you might even offer to cover their families, significant others, children — those things can really add up and could put the business in a tough spot, especially if you can't support that financially. There's a lot to weigh. Part of it is you can end up creating a situation where people self-select because of that. If health insurance is a huge factor, it will automatically filter out those who will choose another company if that company has a much more robust health insurance plan. Or sometimes you might be in a situation where an employee's spouse works at a much larger corporation and can put the whole family on that plan, which has worked out well for us in certain situations where we actually don't have to cover healthcare costs for that individual. It's something to think about because this is a huge cost — it's something we think a lot about during our M&A process as well. You want to be comparable with the plans, but you also want to set it up so that you're not on the hook for a huge expense. Sei-Wook Kim (11:13.996) Yeah, it's definitely looking at the all-in cost — it's not just the salary, but the benefits can be a big factor. And then another one is retirement contributions. 401k contributions and matching from a company's perspective, beyond just offering the benefit itself. That could potentially add up a lot if you've committed to contributing a significant portion of an employee's salary. Peter Kang (11:45.07) Yeah, exactly. And a lot of this — you have to think about the presentation of it, because a lot of these combos of base salary and benefits come at the offer stage. You have to think about the comp package holistically, because salary and benefits combined is a comp package. Sometimes you can have a higher salary with leaner benefits, or a lower salary with higher benefits, and you just have to think about what's more attractive for the type of people you're trying to hire and also what makes sense for the business in the long run. Sei-Wook Kim (12:25.704) Cool. And then one other thing I'll put in this bucket are ancillary benefits. Typically a company might do some kind of milestone-based gift — for someone's birthday, an additional PTO day, or if they hit an anniversary milestone, there might be an additional gift or PTO or some other form of compensation that ultimately does cost the company something, whether it's dollars or PTO, which does ultimately have a cost. All of these things factor in when thinking about benefits and, to that matter, just PTO plans that you're offering to different team members — do you have a fixed plan across the board, do you have unlimited PTO? All of these are factors when people decide to accept your offer. Peter Kang (13:26.477) Yeah, definitely. And I love the milestone gifts — you can be pretty creative there. For Barrel, we call it a Barrel-versary, whenever it's the anniversary of them being hired. One of the things we do is give an Airbnb gift card — basically $100 times the number of years they've been here. So if you get to four or five, six years, you're getting a good gift card you can take your vacation next time with. Sei-Wook Kim (13:57.294) Yeah, definitely. Peter Kang (13:59.233) All right. So moving on, the next bucket is bonuses. We talk about these in two different flavors. Let's dive into the first one. Sei-Wook Kim (14:12.354) Yeah, the first one is what you may see commonly as an annual bonus or some kind of periodic bonus, where it can be tied to some kind of performance metric. Let's say the company reaches some kind of milestone, or a group or department hits some kind of KPI that you can measure. At that moment you can decide to give a bonus to the whole team, a specific individual, or a group. That's another way to incentivize behavior that's tied to performance of the company. Peter Kang (14:57.898) Yeah, going back to the time I worked in investment banking — the annual bonus was actually a huge part of that culture. You work your butt off for the whole year and then come end of the year or start of the new year, you're waiting for that bonus to hit. In that way it's a predictable part of comp — you have your base salary and your benefits, but the bonus is a huge part of it. The annual or periodic bonus is a mechanism where it's like, okay, the bonus is definitely a part of my comp. Sei-Wook Kim (15:44.736) Yeah, in some industries it could be more than your base salary as an annual bonus. People start expecting it as part of their overall comp package, where they're looking at the bonus as a significant part. Then if you get it or you don't, the variability there can have a major impact on how people perceive their comp for that year. The other aspect is more of an ad hoc spot bonus. This is a discretionary amount that you're giving to a person or individual. Let's say there's truly exceptional performance that you can point to, where a team really over-delivered for a client on a specific project — the client was happy, the company made a lot of money. You could use a spot bonus as a tool to acknowledge that behavior and say, we really appreciate it, and we want to recognize you for it. Peter Kang (16:55.923) Yeah, spot bonuses are pretty effective in the sense that they don't cause the entitlement factor that the periodic bonuses can. And the recipient finds it truly delightful because it's like, cool, I've been recognized for this. When you and I talked about the potential risks, there is an aspect that it could feel arbitrary — especially if the recipient tells others they got a spot bonus, or word gets out that spot bonuses exist, and those who might feel they work very hard wonder, "where's my spot bonus?" So there's a degree of that risk. At least with a periodic annual bonus, everybody is going to get something and the amounts might vary, but there's a structure there. With spot bonuses, the discretionary nature can be its own risk. Sei-Wook Kim (17:56.194) Yeah, although we've also seen it where with Barrel they do an employee of the month election where everybody at the company votes to select an individual that really went above and beyond in the past month. It's a group selection, so it doesn't feel like one person coming down and saying, "hey, you deserve it." And that has variable ways of compensation — gift cards, extra PTO days. You can find ways to be creative about how to acknowledge that behavior. It's a spot bonus that's group-selected. Peter Kang (18:45.501) Yeah, it's a bit hybrid because you know it's happening every month, so there is a periodic structure to it. But it's spot in the sense that it's not everyone — you don't know if it's going to be you. Awesome. Okay, so moving on to the next one — we're going to talk about variable comp and commissions. This type of comp we like to think of as more specific to certain types of roles. In an agency setting, we like to tie these to sales roles and business development type roles, where it's much easier to tie individual performance to pure dollar amounts — what are the new business bookings for the year, for the quarter, whatever it might be. Obviously we could spend a whole episode on this because you can get very sophisticated on the commission structure and how you're incentivizing different types of behavior within the sales and business development efforts. But this is really about how do you design a variable comp structure that motivates people toward the behaviors you want. Maybe we should tie it into what those behaviors are that we're looking for, and also how these things should be covered. Sei-Wook Kim (20:10.67) Yeah, this is a tricky aspect where you really want to make sure you're incentivizing the right behaviors. If you incentivize a salesperson just for selling a project, they may just sell volume of projects without regard for whether it's the right type of project or whether the client is going to stick around. If you're incentivizing that initial sign, you may end up with a lot of not-high-quality projects coming through the door. Beyond that, just thinking about these types of roles — having an adequate base salary and then having the variable component be pretty significant and tied to their performance. What we've seen for these roles is you set a baseline quota: this is what we expect you to do, and from the company's perspective they need to hit that baseline in order to cover their base salary costs. But then you can show the potential. Oftentimes you show an OTE — on-target earnings — to show how much they can get if they hit certain milestones. They can earn X amount, and this is where we want them to be. You have both ends of the spectrum, the minimum and the ideal outcome, so these team members really get compensated for that performance. Peter Kang (21:38.68) Yeah, and like we mentioned, you can get very sophisticated with how you structure these. At a base level it could be a certain percentage on engagements that you're assigning, but then there could be a duration to that — is it just for the initial engagement, or is it for the next year, or in perpetuity? There are other components too, like if those clients leave earlier, is there some kind of clawback clause on the commissions as well. Another episode could probably focus on that. Mainly this is on the sales side, but variable comp and commissions could also be extended to other roles within an agency. Sei-Wook Kim (22:32.289) Yeah, and where we've seen it is account management or sometimes project management, where team members have the ability to expand accounts. But the tricky thing is that as part of an account manager's or project manager's role, their job is to service and retain a client. So when you think about compensating for upselling or expansion of accounts, you really need to think about whether that was an intentional effort and a really meaningful result of their ability to expand the account — or was it just part of the natural course of them servicing the account and the client organically growing? That's the nuance there. The other option is you could use spot bonuses as a way to say, "I recognize there's exceptional performance — you really sold this new service line that we're offering," and it's not part of a strict comp structure where you're calculating exactly what's included and what's not, but you're still compensating the behavior that you're seeing. Peter Kang (23:48.557) Yeah, that's a great point. A lot of that is just being creative, knowing that there are other ways to reward people outside of a strict commission structure. And maybe one callout on the cash flow front with variable comp: just making sure the payouts are tied to when clients actually pay, and thinking about when these payouts happen. Number one, just because someone booked an engagement, you don't want to pay commissions on day one because that money's not there yet. So tie it to when the clients pay. But also, is it right away after the client pays? That's one way. Another way might be you hold on to it and then every quarter you pay out the owed amounts for all the commissions. You want to avoid, if possible, backloading commission payouts to the end of the year so that they don't get paid at all until the whole year has passed. Just some things to weigh with variable comp. Sei-Wook Kim (25:00.982) Yeah, you want people to feel the momentum and the outcome of the results — they should be compensated on a regular basis. Otherwise you can have a huge cash flow burden at the end of the year to pay everyone out. Peter Kang (25:13.125) Yeah, exactly. All right. So this last bucket — we're labeling it upside compensation. It's not just a long-term thing, but there are aspects that are pretty immediate as well. We're going to talk specifically about profit sharing and equity in the agency. Let's first dive into profit share. Sei-Wook Kim (25:45.974) Yeah, so for profit share, broadly, it's setting aside a certain percentage of the profits from the agency and distributing it to team members. One way we've done it in the past was setting aside a certain percentage of the gross profits from an agency and then distributing based on everyone's level and tenure at the agency. We had a formula: the longer you've been here, you get a certain multiplier; your level at the agency has a certain factor. Then you could say, here's the profit share pool, and everyone gets a proportionate share based on that equation. Peter Kang (26:21.606) Yeah, and that's if you want to make profit share open to all team members — that's one possible way. Another one, and we've done this with some of our agencies as well, is making profit share only eligible for certain levels of leadership. This might just be the C-suite, just the CEO, whoever it might be — really tying it to the person with the most direct levers to impacting these things and making it a significant part of their overall compensation. Sei-Wook Kim (27:09.644) Yeah, and the goal here is really to share in the overall success with the team. But the other side of it is it requires you to be more financially transparent, because if the profit share is based on the profit, people need to understand what the profit of the company is, what the overall financials are. We went through this exercise for years of sharing on a quarterly basis how we're trending — revenue, gross profit, EBITDA, et cetera. You find that for some team members, it's a lot of numbers. Not everyone has the same level of financial literacy to understand whether it's a good thing or not, or whether they should be worried about their job. That's the downside — if you open it up too broadly without full context and understanding of what it is you're sharing, it can cause questions and concern where sometimes it's not really needed. Peter Kang (28:16.088) Yeah, and just like with any of the other compensation components we've talked about, there is administrative overhead to rolling out something like this. Profit share is a significant administrative overhead — there are the calculations, administering the plan, allocating the shares to each of the employees or whoever's involved. On top of that, setting aside the dollar amounts, and also having rules for what happens if one quarter you have a lot of profit but the next quarter you lost money. Do you then subtract some of that negative proportionally out of the profit share pool, or is that protected? There's a lot to think about there. You think it's easy and you go, yeah, just set aside X dollars and share it — it's not that simple. And then there's also the simple question of when you pay out the profit shares and who's eligible at that point. Sometimes people might quit and be gone before the profit share payouts happen. Do they get a proportional amount owed to them, or do you have some kind of rule written that they only get paid if they're still employed on that date? There are a lot of little details that we've learned just from administering these things. It's something for any agency owner to really think through — it sounds great, it could be cool to roll out, but there is an overhead element that you really have to be prepared for. Let's talk about the next one. Sei-Wook Kim (30:08.524) Yeah, so the next one is equity — real long-term upside compensation for people. This can take various forms of ownership: RSUs, options, phantom equity. There are many ways that people can accomplish giving equity or the equivalent of equity to team members. This could be something that vests over time — over four years, you vest into earning all the equity — or if the company hits certain milestones, it unlocks the equity that you have in the company. It's really a way for certain team members to have the ability to participate in a future valuation of the agency. Peter Kang (31:12.196) Yeah, so a lot of agency owners think, okay, I'm going to give equity so employees will feel like they have skin in the game — ownership mentality, they're going to think like owners because they have equity. That's an easy thought to have. But there are definitely caveats to that. Equity — I mean, we own equity in our stock portfolios, in Meta or Google or whatever. But do we have ownership mentality of those things? Not necessarily. It's an insignificant ownership percentage. What we care about is the value of the stock. So it's important to think through: is that being communicated? What are the levers for unlocking value in the equity? Really the most common one is a liquidity path — is the agency going to exit at some point and realize some kind of value on this equity? Sei-Wook Kim (32:37.73) Yeah, and that's probably the most common. Another method is a buyback event, where periodically — say every year or every five years — you allow people who have equity to sell their shares back to the company. You're essentially giving them the value of the business at that moment and the company buys it back, creating a moment of liquidity for them. At that time you can either fund it through the cash on your company's balance sheet, or bring on new investors to take on that equity and buy it from the current equity holders — just giving those people some optionality. Peter Kang (33:24.418) Yeah, and honestly I haven't heard of an agency do buybacks — that has not been common. But this is something interesting. And just think about how — we talked about employees being given equity through RSUs, options, or phantom equity. But instead of just awarding those kinds of equity compensation, also having maybe a path for employees to buy into the company. As an agency owner, let's say you own 100% of the agency, but maybe you sell 20% to folks that want to buy in. If there's a good story around it — hey, we're working towards an exit in the next three to five years, and I want to de-risk it a little but give you guys upside if you want to buy in — it's not that different from bringing on an investor, you're just offering that up to your own employees. Sei-Wook Kim (34:31.564) Yeah. Another option is an ESOP plan — an employee stock ownership plan — where you can set aside a portion or the entire business for employees to own a piece of the company. There are a lot of mechanics here where a trust is owning the company and the company is paying or buying that aspect of the ownership from the owner. It's a long-term path where owners can transfer their business to the employees that are in the business. Peter Kang (35:10.358) Yeah, and this has that buyback element where as employees leave the company, their stock gets bought back by the ESOP, which gives them some degree of realizing value on their equity stake. So this is the long-term piece. When and why should people do this? Or maybe — when should you not do it? We've used this incorrectly at times. We take cues from the VC-backed startup world a lot of times and get a bit misguided there. It's not the same, especially for agencies that are most likely on a different path with different capital needs. So when should you avoid using equity? Sei-Wook Kim (36:12.014) I would say where it's commonly used as a retention tool — saying, "we're going to give you equity so that will incentivize you to stick around and have ownership mentality." But like we said, without any real value or a clear path to any kind of liquidity event, it's somewhat symbolic. It doesn't necessarily translate to the result you're looking for. Peter Kang (36:43.393) Yeah, maybe it buys you time. We've been through this, and we've heard so many examples from other agency owners over the years too. You have a key employee, you're relying a lot on that person, you have fear that they might leave at some point, and so you think equity is going to keep them locked down — basically your version of golden handcuffs. But at the end of the day, is it clear what the value of that is? What is the agency's valuation now, and what could it be? Those things have to be thought through for it to make real sense. If that is the main reason to do it, it's probably the wrong way. The real right way, we think, is to align people with the forward-looking perspective on how do we get to a successful exit in a defined time frame and how do we all row together — and if we do, you guys are properly set up to reap the rewards of that effort. That's how we think about it across our agencies. Sei-Wook Kim (38:13.87) Yeah, definitely. Along those lines, along the way you may decide that with the equity there might be some distribution rights that you're giving people, so it's not all a lump sum that five or seven years down the line you'll see some meaningful value for. Along the way it means something. But yeah, you need that shared vision on what exactly this is going to be and why you're doing it in the first place. Peter Kang (38:43.892) Yep. Okay, cool. That covers all the different aspects. Like we mentioned, there are so many of these topics we could go much deeper into. Let's just wrap up with a few takeaways in terms of how we should think about employee comp at an agency overall. Sei-Wook Kim (39:06.668) Yeah, number one: keep things simple at the start. Like many things, benefits are one of those things that once you implement them or give someone a benefit, it's really hard to take things away. Once someone gets used to annual bonuses, suddenly saying "we're not doing annual bonuses anymore" is really hard. Or giving someone health insurance and then the next year pulling it back — it's really hard to take things away. Keep things simple and be realistic about what you can afford as a business. Peter Kang (39:44.958) Yeah, being conservative there, staying lean in that regard. And then we kicked this off with base salary because at the end of the day that is probably the most significant thing for all employees. Obviously when you get to more executive comp, the bonuses, variability, and the long-term equity stuff start to matter more. But for the vast majority of employees, the base salary — having a very clear comp review system of raises, thinking about salary bands and other things — that's where most agencies can benefit most. That's the 80-20 rule; that's probably where you're going to figure out most of the comp side. And then lastly, the fancy stuff — profit share, equity, all that — sounds great, but there's an administrative overhead. Just be very mindful of what you're getting into. Okay. Well, thank you for joining us on this episode. Look forward to catching you next time. Sei-Wook Kim (40:57.208) Thanks.