From top level managers to office and support staff — every person in an agency has a role to play in helping the agency win in the sales game.
When one person fails, the whole agency suffers. And when an agency suffers, so does employee compensation. Or at least it should, say the experts.
Producer compensation in particular suffers when sales are down, but the compensation of everyone in an agency should be affected when sales don’t happen, says Al Diamond, president of the Cherry Hill, N.J.-based Agency Consulting Group, an independent agency valuation and consulting firm serving firms nationwide.
“Employees need to realize that if an agency is going backward, for whatever reason — lost business, soft rates, no growth — it’s very difficult to give more money [to salaries] because you are literally taking it out of whatever profit is left, if there is any,” Diamond says.
Diamond says he witnesses the vast majority of agencies — 95 percent by his estimate — continuing to give salary increases based solely on the longevity of the employee, with average raises ranging from 2 percent to 3 percent. Traditional compensation models that reward employees based on years of service is a horrible way of rewarding good employees, he says, because “agencies end up rewarding mediocre employees, right along with the good ones.”
Agency compensation should be sensitive to the growth and profitability of the agency. That’s why Diamond advocates incentive-based compensation for all employees, not just producers. “We are spending a lot of time doing incentive compensation programs for agencies to get them out of the process of giving raises based on longevity,” he says.
Justin Berry, vice president, sales management for MarshBerry, a national consulting services organization for independent agencies and brokerages, hears a lot of talk about incentive-based compensation for employees outside of sales. But, he agrees, it’s mostly just talk. “I wouldn’t say it’s the norm,” Berry says. “It’s the norm for a conversation but not all agency owners have gone to incentive-based compensation yet.”
Agency compensation models have to move in that direction, according to Berry.
“It has to go to where they (owners) can have control over certain metrics. It’s not the entire salary or base, but we’d like to see a standardized renewal expectation of at least 90 percent for someone in the account executive role. If they are not meeting that level then there will be negative consequences that apply. If they are above that threshold they stay static on their salary. If they exceed the standards of using that 90 percent they are getting some type of bonus,” Berry says. The bonus could be a cash reward or other incentive such as increased vacation time.
Brian Burke, chairman of B.H. Burke & Co. Inc., a Westbrook, Conn.-based organization that advises individuals and firms on the sale, purchase and management of independent insurance agencies, says many of the agencies he works with understand the need to improve the compensation system. He says the recession and the challenging insurance market of recent years convinced a number of agency owners to finally change their agency compensation playbook, especially as it deals with sales.
“Most agencies know that there’s some improvement to be made on the sales compensation line,” Burke says. “So this period of a few years spurred a number of them to finally do what they know they should be doing there.”
One of the biggest changes he’s seen to producer compensation has been the elimination of renewal commissions on small accounts. This compensation play is nothing new, Burke adds. But tough times brought more buy-in from latecomers in the industry.
“Almost all agencies are realizing that you really can’t afford to pay the service staff and the producer on small accounts,” he says.
The transition has been slow — it’s been happening for decades —and it has been hard psychologically for many agency owners and producers. “But when you have tough times and you have the opportunity to say, ‘hey we have to tighten our belts here,’ it tends to be a time when changes are stepped up,” Burke says.
For Chris Burand, founder and owner of Burand & Associates LLC based in Pueblo, Colo., the issue is alignment.
“It pays to be pound wise and penny foolish when it comes to compensation,” says Burand. “A good compensation plan is a plan that aligns the agency’s interest and the producer’s interests. This means the producer is only paid for sales that increase the agency’s value and income.”
Salaries Up Overall
There is some good news in the area of agency compensation: In the past year, agents’ pay has rebounded, growing about 2 to 4 percent on average. As a result, salaries for everyone else in agencies have been on the up as well.
According to Insurance Journal’s annual Agency Salary Survey 2013, average salary adjustments for 2012 came in a full percentage point higher for all three employment sectors:
- Agency owners, principals and management reported salary increases of 2.8 percent in 2012, compared to a 1.1 percent increase in 2011.
- Producers/sales reported average increases of 2.9 percent in 2012, compared to a 1.6 percent increase in 2011.
- Agency support staff reported a 2.2 percent increase in salary in 2012, compared to a 1.1 percent increase in 2011.
The 2013 Agency Salary Survey revealed even more positive trends in total income, which includes profit sharing, bonuses, and other income:
- Agency owners/principals/managers reported a 4.5 percent bump in total income for 2012 compared to a 3.9 percent increase in 2011.
- Producers/sales said their total income increased by 5.5 percent in 2012, compared to a 3.3 percent increase in 2011.
- Support staff reported a 2.3 percent increase in total income compared to a 2.2 increase in 2011.
While compensation in agencies appears to be on the rise, the increases are modest in most regions across the country.
According to Burke, following the financial crisis of 2008, the prevailing message of insurance agencies to their employees was that times were uncertain — and so was compensation.
“For a couple of years many people had no increase at all,” Burke says.
But things have gotten better. “People are a little less worried that we are going to go over the edge of the cliff,” he says.
Even though the economy is not roaring back, the property/casualty industry is experiencing a modest lift in income thanks to a gradual hard market in commercial lines.
“So salary increases are not only hoped for and expected, but also affordable,” says Burke. “There’s nothing dramatic happening but for agencies that are reasonably well-run and have enough new business production to grow a little” agency compensation is looking better.
Burand is also seeing salaries rise in the agencies he works with but he sees the increased pay coming more out of need rather than agency profits. “Staff salary increases are minimal but increasing out of necessity,” Burand says. “Agency owners are recognizing that after several years of little to no increases, their staff need raises.”
According to the IJ survey, 25.5 percent of agency owners/management/principals increased the overall compensation paid by their agencies in 2012, and 38.7 percent plan to increase compensation in 2013.
Jo-Ann Gastin, senior vice president for human resources at Lockton, says many agencies, including Lockton, took steps during the recession and soft market to work smarter, opening up monies to increase compensation.
“We’ve all taken steps to right-size,” she said. “That always impacts the bottom line and releases money for increased salaries. I think we’ll be seeing more of that in the future.”
The Right Staffing
Agencies are not only paying out more in compensation, but many agencies are also paying more employees. Agencies have either stabilized or are growing their staffs; not many are downsizing.
According to IJ’s Agency Salary Survey, 36.3 percent of respondents reported increases in staff size in 2012. Just 15.5 percent of respondents reported decreasing staff, while nearly half (48.3 percent) reported staff size stayed the same in 2012 compared to 2011.
More than half of all agencies responding said they believe their agency’s staff size will remain the same in 2013 as 2012, but some 42.7 percent believe their agencies will increase staff size this year. Just 3.9 percent anticipate staff size will decrease in 2013.
According to research conducted by his Agency Consulting Group (ACG), most agencies will remain stable or shrink in staff size in the coming year, Diamond says.
“One of things we measure in our composite group on a regular basis is the number of employees and the revenue per employee,” he says.
The latest set of numbers revealed by ACG’s composite group show that agencies under $1 million in revenue averaged 6.56 employees in 2011, while in 2012 that number posted at 6.33.
The ACG survey also found that agencies between $1 million and $2 million averaged 16.8 employees; in 2012 it was 16.6. Agencies between $2 million and $3 million averaged 24 employees and they stayed stable at 24 employees.
And the largest agencies, those with more than $3 million in revenue, averaged 65.3 employees in 2011 and 64.3 employees in 2012.
In Diamond’s view, agencies are finally using automation appropriately to generate more revenue per employees. In addition to increasing efficiency through automation, those agencies with incentive compensation plans in place are able to provide raises to employees, he says. “And you do that by not adding employees. You do that by growing with the employee base that you already have,” he adds.
Burke agrees. He hasn’t seen increases in staff but he has seen many agencies doing a better job using technology to be more efficient, sometimes changing agency management systems to help.
“Revenue per employee is the whole deal,” he says. “Agencies have to find ways to operate more productively so there’s quite a lot of effort going on in the better agencies to learn how to be more efficient.”
In Berry’s view, agency staffing has never really decreased, even in the worst years of the recession. “Usually small businesses don’t react as quickly to the market. They hang in there a little longer before making changes,” he says.
He has seen agencies move out lower performers in recent years. “It’s been a good opportunity for that decision,” Berry says. Now, as times for agencies improve, he sees agencies hiring again. “Hiring is increasing right now. It’s the right time to hire. But it’s always the right time to hire the right person.”
Burand says that too many agencies make the mistake of waiting to hire staff until sales increase so much that the workload is not bearable.
“The best time to hire is when the workload is high but manageable, so that the staff still have time to help train the new people,” Burand says. “The smartest agency managers know that hiring staff earlier rather than later can make all the difference in whether an agency achieves quality organic growth.”
The Right Compensation Plan
The insurance industry is well- positioned to attract top salespeople for a number of reasons.
Producers want to be rewarded for their success with an open opportunity to earn more money, according to Berry. They want to know they are in control of their income.
They also want a re-occurring revenue stream that most organizations or industries don’t offer, Berry added. That’s a perk that the insurance business delivers over other sales industries.
“They get paid 90 cents on every dollar every year plus that high retention percentage of that re-occurring revenue,” Berry says. “They only have to sell that product one time and get paid on it 90 percent of the time for the rest of their lives.”
Lockton’s Gastin says that’s one aspect that draws top-notch sales professionals from outside of the insurance world into the business.
“We have a unique model and our financial model does lend itself well to the entrepreneur because it’s their own business,” she says. “It’s a very different financial model than you would see in other companies.”
The independent agency producer model has no compensation restrictions, and no geographic restrictions. “Producers are literally in their own business and can go anywhere that they want and make as much money as they want,” says Gastin, who believes that’s a good recruiting tool for the industry.
Diamond says what producers want in compensation may depend on where they are at in their career.
“The producers that are young and inexperienced are looking for the highest dollar amount coming out of the agency,” he says. “But the producers who know the business and understand that it is the net money that counts and not gross money are saying, ‘We can trade off percentage commission if I can get other things paid for that I would have to pay for myself.’ They are looking for the net dollar.”
Burke says what producers want most is a fair split of commissions. “And it’s all over the place as to what the perception of fair is,” he says.
They also want “good support” in terms of having proposals prepared on time, good service, and good carrier relationships.
Then producers who are moving through their 30s and early 40s realize that they not only have to get income, they have to “build some equity in something,” Burke says. That means some type of post-career benefits, usually in the form of deferred compensation. “So if they if they die, or are disabled or retire they, or their beneficiaries, get paid a percentage of their commissions for a few years. It’s usually in the form of deferred comp in addition to the cash compensation,” Burke says.
Some agencies embrace that idea and some fight it. “It’s something you want your producers to have. Why fight it? And it’s a very good recruiting tool,” Burke adds.
Diamond agrees that retirement benefits, whether a pension plan, a deferred compensation plan, or shadow stock, are a good idea for both the producer and the agency.
“The reason it benefits the agency is that the more they have tied up in those plans the more likely it is that those producers will stay until retirement as opposed to jumping ship. The reason it’s good for the producer is that he has the same benefit as if he owned an equity position in the agency or in his book,” he says.
This kind of benefit is important to offer key agency players who, Diamond says, are the “most valuable players” in an agency.
When it comes to the right compensation plan for service staff, good wages are important.
“What is important for agency owners is to determine whether they need quality staff,” Burand says. “Quality staff are far more productive than average staff but the agency must pay approximately 10 percent more for this quality. These agency owners believe 10 percent more is a great investment. Agency owners that focus less on productivity feel differently.”
Dave Coons is senior vice president of The Jacobson Group says the insurance industry as a whole is witnessing a push to incentivize. “While base salaries are remaining relatively flat, insurance organizations are crafting enticing bonus plans and benefit offerings. To cater to a diverse and mobile workforce, flexibility in scheduling and geographic location is becoming commonplace. Work-from-home and other telecommuting options are opening up the talent pool,” he says. “Competitive compensation will always be a selling point for candidates and greater incentives will attract stronger talent.”
Berry says it’s important for agency owners to understand that they “get what they pay for” when it comes to top employees.
“It’s a tough bite to put out money for a good producer,” he says, but in the end it’s worth it to the success of the agency.
Insurance Journal’s Agency Salary Survey collected 1,386 responses from independent insurance agencies and brokerages nationwide via an online survey. Demotech Inc., Insurance Journal’s official research partner, assisted with analysis of this year’s survey results. For the full 2013 Agency Salary Survey report, see the Feb. 25, 2013, issue of Insurance Journal Magazine. For more information, contact firstname.lastname@example.org.