The New Normal in Producer Compensation

When it comes to producer compensation, there really is no norm. Rather, the norm is that producer compensation varies tremendously depending on demographics, geography, laws, experience, competition, the economy and age – and whatever agency owners think works best.

Some agencies follow the tradition of offering a draw against commission for all their new producers, while others are tweaking their approaches because they find that draws are not effective in drawing young recruits into insurance.

“While compensation is important and the deal is important, it also fluctuates wildly,” says Bruce Crankshaw, chief sales officer of Cedar City, Utah-based Leavitt Group. “California is completely different than Atlanta. There are all kinds of state laws that affect opportunities to construct something from a compensation perspective.”

Demographics are not the only criteria Crankshaw and Leavitt Group, an Insurance Journal Top 100 Agency, use when evaluating producer compensation. Current realities, including the soft market and the economic recession, also affect producer compensation for this independent agency, which has approximately 400 producers in 115 locations nationwide.

“Competition in the market to attract good people is challenging,” Crankshaw said.

He believes that what producers are looking for today is different than what they looked for yesterday. That’s one reason Leavitt Group began revising its new producer compensation models last year.

New, high-quality producers want more than the traditional producer compensation formulas today, he said. So his agency began developing a compensation package that would help it attract some of the best new producers through its the doors.

“We recognized the traditional way a producer would come on board … they were immediately put on a draw against commission. They would build up a draw deficit over time, maybe three to four years. They would pay down their draw and switch to a pure commission base pay,” Crankshaw said.

But a draw doesn’t cut it with some of the new generation. They expect a salary.

“That (a draw) is so unappealing to the current generation coming into insurance,” he said. “In certain markets – and it’s not exclusive to every market – we have found that you flat out have to offer a salary and realize that it is going to take them some time to produce. You cannot hold a draw over their head.”

Significant Change

The move away from a draw against commission model for new producers has been a significant change for the Leavitt Group, Crankshaw said.

His agency started planning at the beginning of 2011 to move from a draw to a salary model. The new plan was implemented in the fourth quarter of 2011. All new producers are financially managed by the firm’s Producer Compensation Management System, which sets production and pay expectations for the first four years of employment.

“A compensation package upfront is critical to someone that has been a good sales person in another industry, or to someone that’s been out of college a few years and has been successful,” he said. “They say: ‘I don’t want to owe something. If I have two opportunities, and one is going to pay me $40,000 (in a draw) but I’m going to have to pay that back … that doesn’t sound appealing.’

“I think many large agencies in large metro areas that are competitive with fresh, vibrant, new producers, have moved into that kind of compensation mechanism,” Crankshaw said.

But not every large agency seems to think a change is necessary. For Woodbury, N.Y.-headquartered Sterling and Sterling Inc., another IJ Top 100 Agency, producer compensation has not veered from traditional methods.

“I can’t speak for other companies, however, in our case, we have been pretty consistent over time,” said Mark Landisman, chief financial officer of Sterling and Sterling.

New producers, Landisman says, are compensated through a guaranteed draw, which enables the new producer to build a book.

“I mean, you can call it a salary for all intents and purposes,” he said. However, “once they achieve a certain level, then they’re moved from the guaranteed draw/salary to a strict commissions plan.” It’s the same type of compensation structure that a more experienced producer would receive, Landisman said.

The guaranteed draw is essential for a new producer entering the insurance business since it can take some time to build a book of business. “For our purposes, a guaranteed draw is in effect a salary and does not contemplate a repayment,” Landisman said.

For example, if a new producer starts at a $50,000 annual draw/commission and it takes the producer 12 to 18 months to develop a book of business large enough to support that level of compensation, the producer could have been paid $75,000 against an earned commission of half that by the time the book has grown enough to support that level of compensation.

“That being the case, they would in effect be $30,000 to $40,000 in the hole – a very demoralizing place to be,” Landisman explained. “Therefore the guaranteed draw is in effect an investment the company makes in the producer since repayment is not expected.”

However, this arrangement is only made for a producer who joins Sterling and Sterling without a book of business and the newcomer’s progress is monitored very closely due to the nature of this arrangement, he said.

“You’re taking a gamble on them to say that this person’s going to make it, and I’m willing to go with them for a certain period of time to allow them to gain size or gain the size they need to maintain a lifestyle,” Landisman said.

Producers Who Produce

Both Landisman and Crankshaw agree that the real challenge is getting a producer to produce over the long term.

“The issue that all agencies face out there is how to motivate producers that have achieved a size book or a scale in their book that supports their own individual lifestyle,” Landisman said.

Just how do agencies motivate producers to continue producing? For Sterling and Sterling’s team of mostly experienced producers, about 25 in all, the issue is a non-issue.

“We’ve had a very stable workforce here. We have producers that have been with the company for as much as 40-plus years,” Landisman said.

For Sterling and Sterling, money remains the driver in producer production.

“People who are really producers, they have a sense of competitiveness. They’re looking to slay the dragon. They want to be out there, they want to be able to come back saying, ‘Hey, look what I did. I just landed this huge piece of business.'”

Landisman said his agency has examined other compensation models aimed at getting producers to keep producing.

“I know there’ve been various permutations out there as to what people have done, and we’ve looked at certain things in terms of renewal commissions,” he said. “Do you increase renewal commissions for those who produce very well, or maybe (provide) a benchmark in your bookings, or do you reduce renewal commissions on those that don’t (produce well)?” he said.

But Sterling and Sterling has not gone in that direction. “We instead look to help the producers individually manage their pipelines,” said Landisman. “And we have upper management work directly with the producers on a one-on-one basis on their pipelines to understand where they’re at, and what they could be doing to enhance them.”

Upper management support is available for all the producers going after new business. “And that goes right up to the top, up to David Sterling,” the firm’s top leader, he said.

Landisman’s agency continues to pay a standard producer compensation of 40 percent commission on new business and 20 percent on renewals. “As long as I’ve been with the company, that’s been our structure. We have not changed it based on anything that’s gone on in the marketplace.”

It seems to be working just fine.

“Our growth is being generated by our production of new business and managing people’s pipelines and work flows,” Landisman said. “And we’ve had tremendous success in terms of increasing our sales on a year-on-year basis, where many agencies have gone backwards.”

The Leavitt Group’s Crankshaw agrees that what producers want most today aside from compensation is support from agency leaders to help them grow their book.

“They are looking for an environment that is supportive of their ability to grow their book of business to the next level,” Crankshaw said. “You have to provide the resources behind the scenes to let them go from a half-million dollar book to a million dollar book to a multi-million book.”

The same is true at the Leavitt Group – new business is often paid at a higher commission percentage than renewal commissions. But Crankshaw says commission splits vary and can range widely in the industry.

“A general commission structure could be 50 percent new, 25 percent renewal. Sometimes an agency may provide additional support for its producers including claims management and loss control. In these circumstances an agency may lower the new and renewal commissions paid to producers to offset the cost of services to clients.

Compensation, while it’s a critical part, is not everything, Crankshaw says.

“It’s very important for producers to see opportunities where they have resources within the agency to free them up to provide resources to clients to sell more efficiently and effectively.”