Insights
Agency payroll as a percentage of revenue: how to work out your own
Divide every dollar you spend on people by your gross income, not your revenue, and include your own salary. Then compare it with the ceiling your overheads and target profit leave. That ceiling, not anyone else's ratio, tells you whether your team costs too much for your fees.
Mohammad Azam, Aprecity Consultants · 6 min read
Why your payroll ratio looks better than it is
You know your team is your largest cost. You divide payroll by revenue, the answer looks fine, and the profit still never arrives.
Two things flatter the ratio. Media and other costs you pass through to clients swell your revenue. And your own salary, contractors and benefits often sit outside the payroll line.
Measure it on what you keep
Payroll ratio = total people cost / (revenue - pass-through costs)
Total people cost means salaries, payroll taxes, benefits, regular contractors and your own salary. Revenue minus pass-through costs is your gross income.
Run the numbers on an invented agency with $1,500,000 of revenue, of which $300,000 is media billed straight back to clients.
| Line | Amount | Share of gross income |
|---|---|---|
| Revenue | $1,500,000 | 125% |
| Media passed through | $300,000 | 25% |
| Gross income | $1,200,000 | 100% |
| Salaries | $620,000 | 51.7% |
| Payroll taxes and benefits | $93,000 | 7.8% |
| Contractors | $85,000 | 7.1% |
| Your salary | $120,000 | 10.0% |
| Total people cost | $918,000 | 76.5% |
| Overheads | $180,000 | 15.0% |
| Profit | $102,000 | 8.5% |
These figures describe an invented agency chosen to show the arithmetic. They are not a client result.
Salaries alone divided by revenue give 41.3%. Every people cost divided by revenue gives 61.2%. On gross income, the honest figure is 76.5%.
Find your own ceiling
Payroll ceiling = 100% - overheads share - target profit share
Your ceiling comes from your own overheads and the profit you want. Nobody else's ratio fits your rent, software and goals.
The invented agency's overheads take 15% of gross income. If it wants 20% profit, its people can cost 65% at most, or $780,000.
It spends $918,000. The $138,000 gap is the profit it wants and does not get, every year the ratio stays where it is.
Run it on your own numbers
- ( 01 )
Take the last twelve months
One month swings with bonuses and hires. A full year shows the cost you actually carry.
- ( 02 )
Take out pass-through costs
Subtract media, printing and anything else you bill on at cost. What remains is your gross income.
- ( 03 )
Total every people cost
Add salaries, payroll taxes, benefits, regular contractors and your own salary. Leave none of them in overheads.
- ( 04 )
Divide the two
That is your payroll ratio. Work out your overheads share of gross income the same way.
- ( 05 )
Set your ceiling
Subtract your overheads share and your target profit from 100%. Compare the answer with your ratio.
What to do with the answer
If you sit above your ceiling, three things close the gap: higher fees, more billable hours from the same team, or fewer people.
Higher fees work fastest. The invented agency reaches its ceiling on today's team once gross income passes $1,412,000, about 18% more fees.
Check the ratio every quarter, and before each hire. When it sits at or under your ceiling, the profit you planned starts to arrive.