What Do The New Overtime Rules Mean for an Agency’s Bottom Line?

Over the past few weeks, I’ve explored the ways I think new overtime rules will affect professional services firms here and here. But these articles looked at the sorts of larger trends or cultural shifts the new regulations might cause. When it comes down to it, what will these rules really do to an agency’s bottom line?

To model it out, I create a hypothetical 100 person agency and used salary data from the PR week to estimate compensation at each level.  The amounts are fairly similar for advertising and media agencies as well.  I estimated the number of people at each level based on reported positions at the largest agencies on Glassdoor.com, and confirmed them with proprietary data and my own experience. I then used data from the Holmes Report to estimate that our hypothetical agency has revenue of $18 million, and standard benchmarks to assume that the total cost of employing someone is 40% more than their salary, and that 30% of a firm’s revenue goes towards overhead. In the end, our hypothetical firm had a baseline profit margin about 14.5% – right in line with industry averages.

Then I created a “treatment” scenario to compare the baseline. I raised salaries for Account Coordinators to a level compliant with the new regulations, and then brought account executive salaries up to the midpoint between the new account coordinator salaries and senior account executive salaries (otherwise the bottom two levels would end up paid the same thing). The end result was that in our hypothetical agency, merely raising salaries at these two levels reduced profit by nearly 20%, almost $500,000. This was equivalent to a 2.5 percentage-point hit to margin.

Of course, raising salaries isn’t the only way to handle this shift. For instance, for the same investment the firm could hire up to 40% more Account Coordinators, limit work hours to 40 per week (which is probably better for work life balance), and spread the work around to a larger group. They could also recognize that work is highly cyclical, and while there may be ten 60-hour weeks every year, the rest of the time things were pretty normal. If they just paid overtime during the busy periods, they’d improve profit 10% over straight salary increases while still compensating people fairly for the time they work. Which of these scenarios is the right one will depend on a whole host of questions unique to your firm, which is why it’s so important to do the right analysis before making a change.

Any other time a firm made a decision that equated to investing 20% of their profits, they’d think through all of their options. What is the right way to accommodate this regulation for our clients, our people, and our firm? But even more, they would take a hard look about what that investment meant for the business. What are the implications to our staffing model? Our culture? Our career paths? How does this fit into our entire compensation strategy? How do we communicate it to our people in the right way? Most importantly how will this affect the work we do for our clients?

These questions are especially challenging for small and mid-sized agencies, whose lean talent management functions are already strapped dealing with day-to-day demands like recruiting, learning, or payroll. The December 1st deadline for implementing the new rule is less than six months away, which gives firms and agencies only a small window to think through these questions and deploy their answers in the best way possible.