Independent Agent Sub Producer Commission Structure

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St.CaptiveGuy
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Re: Independent Agent Sub Producer Commission Structure

Post by St.CaptiveGuy »

Here's a good formula to help each agency owner answer this question for their own shop. I heard this from a John Jacques seminar some time back, but it's still a great tool for answering this question:

Keep in mind your targeted profit: most of us would agree that we want a 20% profit margin, pre-tax, before bonus to owner(s). That number may seem high, but go back 3-5 years, add dollar amount of contingent commissions and interest income together, get an average. The industry average traditionally was 10% of revenues, so 10 points of 20% targeted profit are from contingents and interest, but for straight commission income alone, we’re looking for minimum 10% profit margin on commissions.

So then, if for every dollar of commission a broker brings in, you want to 10 cents profit (before contingents and interest), that leaves only 90 cents available for all agency expenses.

How much of that can YOU spend on producer commissions? First subtract out your other mandatory expenses:

a. Add up your Business Development Expenses – advertising, postage, phones, subscriptions, education, travel, entertainment (average agency spends 9 ½% of commissions here): _______

b. Then add up your non-personnel Operating Expenses (rent, legal, accounting, office insurance, E&O coverage, computers, depreciation); add it up and take that as a percentage out of your gross commissions; (average agency is about 16%): ________

c. Finally, add up your Staff Costs: all non-producer staff, all employee benefit costs (group ins., payroll taxes, retirement plan contributions) = 37% if running pretty good. Your answer might be split up as follows:

i. Take 5% of your gross commissions as the cost for executive management compensation for the owner(s). Note: this is not the portion you will pay the owner as a producer on their own book, this is for their running/managing the agency.
ii. Staff – 22%,
iii. 9% benefits
iv. 5% for management.
v. Adds up to somewhere between 37 and 42%

d. Do the math: From 90% of commission dollar available for expenses, deduct Business Development Expenses, Operating Expenses, and Staff Costs. From what is left you can pay your producers commissions. The industry average is 25 – 30%: these are all the dollars available.

What do your own numbers tell you? If you want to pay more, then you will have to short your expenses somewhere else. The math doesn’t lie.

This is a great exercise to become familiar with your own margins and how they compare with industry averages. It also makes it clearer that the more you pay a producer, the less you can spend on supporting them.

I'm curious what combination makes a producer more successful in your shop? If you're paying them more, what sales or support tools do they have to pay for themselves? If paying them less, what services/support are you providing for them that are working?
Rainmaker
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Re: Independent Agent Sub Producer Commission Structure

Post by Rainmaker »

Great question and great posts. I especially like StCaptiveGuy's because it encourages you to examine the metrics of your organization and build from there. I also like the comments about uniformity, keeping it simple, etc. or you'll have either mutiny on your hands or will not be able to scale your operation.

I would encourage the following:

1) know your metrics. People chop these up into a ton of categories and then tend to mix too many things into one bucket after doing so. Break everything out - it's easier to build different comp plans this way.

2) create more than one comp plan based on the situation. One size does not fit all. Have a comp plan for:
a) developmental producers - (newbies, first 3 years)
b) journeyman (I actually hate that term), those in the middle of their careers, book is mature, they are producing, growing their books, know what to do, light touch on your part as it relates to your time
c) veterans or sunset produces - have a nice book, want to do their own thing, just looking to hang there hat somewhere, maybe working part time, virtually zero effort/time on your part, probably just milking the book, is static or dropping slightly as biz drops off over time and they're not actively selling or replacing at the same rate

As you can see from my extreme oversimplification of producer categories, each one has separate and unique characteristics, requiring different levels of capital deployment on your part (the newbie), different amounts of training/time/guidance required on your part, different risk associated, different time required by the support staff, etc. So without going too much into detail, my message is develop comp plans that allow for the differences in these types (or whatever types you perceive there to be, and/or the types you want in your shop) and then reconcile your metrics from there, add your desired margin, and build your plan(s).

Now you can scale because you have a standard comp arrangement(s) and can apply uniformly to everyone that fits into that category. Also easier to communicate to recruiters with a standard comp plan package - they love that.

I've seen some guys attract a lot of sunset producers by adding a 5 year payout of half their commissions to their spouse/estate if they die. Actually I saw a $500,000 commission shop in texas do this and within a year and half they were over $7M of revenues! So you can add little tricks like that might help, or book equity for journeyman class producers is effective too.

There's a lot more to this - will the plans be structured to incent the most highly desired business you want from your producers? by size? by profitability? by 'stickiness' ie retention qualities of a given line of coverage, by ability to cross sell within the organization?

Lot's to it.

Hope this helps.
David E. Estrada
Founder & Managing Director
Rainmaker Advisory LLC
Portland, Oregon
www.rainmakeradvisory.com
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