Re: Independent Agent Sub Producer Commission Structure
Posted: Mon May 24, 2010 10:31 pm
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?
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?