Agency Compensation: A General Guideline With Common Sense

Personnel expenses remain the largest expense for any independent insurance agency today. Typically, personnel expenses account for about 50 percent to 70 percent of revenue. Therefore, smart agency owners should think through the agency’s compensation issues ahead of time. It is a good idea to have a plan in place to handle new positions and areas of shortage as they arise.

The First Basic Rule

There are some basic rules that need to be factored into all compensation decisions. First, your compensation plans should be based on who is doing the work. For example, some business owners get into a situation where they keep unproductive employees, who get a raise each year because everyone gets one. After a few years, that unproductive employee is making way more than he or she should. The goal is to reward based on individual efforts versus treating all employees the same.

Pay for Improvements

A second rule to consider is to not give salary raises, but instead pay productivity bonuses. This approach makes even more sense in today’s weak economy. Keep everyone’s salary as the baseline and offer incentives or a bonus if employees take on additional work, increase sales or otherwise improve productivity.

Offer an incentive plan for CSRs for their new business efforts, especially cross-selling existing accounts, such as a commission on new accounts, first year only (10 percent to 20 percent range), or a flat dollar amount per policy written on new business (i.e., personal lines, $15 to $25, or $50 for a package policy; and commercial lines, $25 to $100 per policy depending on size). New business incentives for the CSR should be out of the producer’s portion. Then at renewal, the producer gets their entire share.

Consider a compensation plan where CSRs’ salaries are based on a percentage of the work they handle, versus a salary. CSRs then may be willing to accept more work and be more efficient, if their efforts are directly rewarded. Generally, this concept does not match up with many CSRs, but it might be worth finding the CSR personality that finds this approach appealing.

Redefine the Role

It is all too common that there are excellent CSRs capable of doing everything and mediocre producers that are overcompensated for their sales effort. A great approach is to create the account executive (AE) position that fits well with both types of people. It is a producer role without the need for new sales.

The account executive position can be a promotion for CSR/account managers. The role is to be the producer on the account and not be a new business door opener. It is also a more accurate description of those producers who maybe good with existing accounts, but poor with new sales. AEs keep the business on the books for the owners or key producers who generate the new business (the “hunters”), and then those producers will have more free time to write more new business!

The compensation for the AE role can either be a fixed dollar amount or a percentage of the book handled. They should receive a certain amount of CSR support, which would vary based on the size of the book they handle, the complexity of the accounts and the type of accounts that they handle.

Owner Compensation

When there is more than one owner, the owner compensation plan is the long-term pathway to the relationship between the owners. In most cases, what does not work is equal compensation. At some point, resentment will occur from one owner toward another. It is human nature.

We go back to the first basic rule: compensation plans should be based on who is doing the work. This only works if the sales-oriented owner (the “hunter”) respects the administrative work performed by the owner with very little new sales (the “farmer”).

Credit needs to be rewarded to keeping the operation going.

We recommend a three-part approach:

• First, pay the owner for a role as a producer. For example, 40 percent commission for new business and 30 percent for renewal.
• Second, set aside a management fee and allocate the funds based on the management effort performed by each owner.
• Third, create a profit-sharing plan for the owners based on equity, new business, existing business and management participation.

Owner compensation is infectious. If the owners aren’t happy, it is very difficult for other employees to be happy.

Summary

If even some of these suggestions or basic rules are followed, employees will be happier and more motivated to help the agency grow and to be profitable.

Topics Talent