Revenues and profitability largely determine the total compensation levels for insurance agency owners, executives and producers, according to the new Business Management Group (BMG) 2002 Owner, Executive & Producer Compensation Survey.
The survey found the level of compensation for producers is directly related to agency size and individual production. The smallest agencies, with $2 million or less in revenue, average $47,170 total compensation per producer, while the largest agencies, with revenues of $10 million or higher, average $116,487 per producer. Nationally, the average total compensation was $40,000 for new, inexperienced producers and $71,547 for seasoned producers.
In terms of owner compensation, the survey indicates that owning in a profitable firm and having the ability to dispense excess profits as bonuses cause owners to place more importance on profitability than on growth. While the size of the book of business and percentage of ownership in the agency are the most important factors in determining owner salaries, agency profits and percentage of ownership are the key factors in determining owner bonuses. In general these bonuses are more a result of available profit dollars than planned results or specific management contributions.
Management responsibility and the size of their book of business are the most important factors in determining executive salaries. More than half the agencies indicate that 50 percent of executives’ bonuses were calculated according to the individual’s management responsibilities, achievement of goals and agency profits. Individual production and agency growth were other key factors impacting executives’ bonus calculations.
“More agencies said they are implementing performance-based incentives for managers than in past years,” Suzy Hammett, a vice president with BMG, said. “This shows a trend towards increased focus on accountability for executives. We recommend to our clients that management compensation be tied to growth, profit and measurable objectives.”
Commission remains the most commonly used method of producer compensation. Survey results indicate commissions paid to producers for new business for medium to large commercial accounts did not exceed 45 percent, and renewal commissions did not exceed 36 percent. Commissions were slightly higher for employee benefits – up to 48 percent for new business and 40 percent for renewals. The study found agencies paying up to 41 percent for new personal lines and small commercial business and 35 percent for renewals, which is similar to past findings. The increased emphasis on profitable growth is reflected throughout the survey. The study found that in general, owners and producers are paid a higher percentage on new business and a lower percentage on renewals.
In the largest agencies ($10 million or over), producer commissions were four percent to 12 percent less than those in mid-size and smaller agencies. The difference is likely due to the fact that larger agencies tend to provide additional resources such as sales centers, central marketing and account executives that increase the cost of acquiring and keeping business, but also increase each producer’s productivity so overall compensation is higher at these agencies.
A continuing trend reflected in the survey is the focus on larger accounts. Forty percent of agencies reported requiring mid-market commercial producers to give up small accounts. But agencies aren’t giving up on small businesses. Instead, the study found, more agencies are establishing small business units to handle sales and service for these accounts to reduce operating expenses and enable producers to focus on larger accounts.
The amount and kind of benefits and perks offered by the agency are important components of a producer’s total compensation package. Fifty-three percent of the survey group provides reimbursement for travel and entertainment expenses, and 36 percent of the respondents pay a monthly auto allowance averaging $375 per month. One-quarter of respondents offered owners and executives some type of long-term incentive, and 27 percent offered producers equity in their book.
Said Hammett, “We find that it is important that producers be rewarded with some form of ownership to attract and retain top talent.”
The success of agencies increasingly depends upon strong productivity ratios and compensation is often structured to reflect this.
The study found that on average, 43 percent of agencies pay commissions to customer service representatives (CSRs) for writing new business, up from 36 percent in 1998. CSR sales commission percentages averaged 25 percent for agencies with revenues under $2 million and 15 percent for agencies with revenues over $5 million.
The study indicates that 19 percent of the agencies surveyed have sales managers, and of that group, 13 percent provide their managers with incentives. Of the agencies that provide incentives for sales managers, over 50 percent do so based on percentage of commission, with the average being 5.8 percent. Forty percent of the agencies that provide incentives for sales managers used discretionary bonuses.
BMG, a subsidiary of The Hartford, is a management consulting firm specializing in insurance agencies and brokers.