Producer commissions

[JAM]

How much or what type of commission splits are you guys paying your producers? First year and renewals. I wanted to see what the norm in the industry is.

[mattbalt]

We pay our producers 60% of new business commission and 50% renewal. They do all qouting and submitting of business. Staff deals with billing and service issues.

[Insurance101]

Industry standard is 40% new and 30% renewal. There are many variations of the commission split including bonus commission based on growth, but this is average. Anyone paying producers 50% on renewal will eventually realize they are either losing money or breaking even as a best case scenario if in fact the servicing is done by others in the office (account execs/csr's). If you add up your total agency operating expenses and divide it by your revenues, you will probably come to a percentage of around 40-45%. That includes "normalizing" compensation for the owner(s) so if the owner is only taking a "nominal" salary you need to "normalize" it to what an agency owners salary should be before doing your calculation. Based on the 40-45% expense ratio, that means for every $100 of revenue, it costs $45 to run the operation. Therefore if you now go and pay your producers 60% new and 50% renewal, you can see how it can quickly become an unprofitable venture. 40-45% to expenses and 50-60% to a producer doesnt add up to profit. Of course contingencies (profit sharing) can help out, but you can't rely on that to turn a profit.

[JAM]

What if they produce and service their own account? More like a sub- producer.

[FFA]

What if they produce and service their own account? More like a sub- producer.

50/50.

[Rainmaker]

Okie dokie - so here will be a somewhat controversial post on this issue but nevertheless represent my best faith attempt to answer this very important question.

First the distribution channel must be identified, i.e., 1) global, 2) national, 3) regional, 4) agency, 5) sole proprietorship.

Second, the fundamental truth is that more business on a yearly basis can be written by an individual producer as you move upstream, or, as it is often called, 'upmarket' which is where the larger firms live and breath.

Third, to pay for overhead, general expenses, selling expenses, client management expenses, etc., etc., etc., the larger firms naturally pay LESS of a percentage of comp compared to revenues generated by a producer - but since the cases are larger NET income to producers generating that business tends to be significant.

FOR EXAMPLE a producer at a sole proprietorship or agency generating $50,000 of new business commissions per year being comped at 50% or 60% will make less on that platform vs at a global where they can generate $325,000+ of new business commissions (because of the platform and the market's propensity to do business with that platform for larger revenue accounts) at 15%-22%

Here are the average comp plans by stratum within retail insurance broking's channels:

1) Globals: 15%-22% of total book - incentive comp on new business as much as 40% - no equity
2) Nationals: typically 40% new/25% renewal - no equity
3) Regionals: typically 40% new/30% or 25% renewal + equity within 5 years
4) Agencies: 50% new/35%-40% renewal + immediate equity first year ramping to owning half the book within 5 years
5) Sole-proprietorships: 60% new/50% renewal - equity + you get to date the owners daughter

My advice:

1)look for the 'ripples' in the value proposition of the different models to maximize your take home
2) as you move 'upstream' make every effort to obtain equity, or, absent of that issue, a 'buy out' clause so if you leave you can buy your book back from the house, or negotiate with your future employer the purchase of the book (often you can make some $ on the arbitrage) so that it's portable
3) for smaller firms (regionals, agencies, sole-proprietorships) negotiate IMMEDIATE vesting of a percentage of your book (most tend to max out at owning 50% of your book after 5 years
4) keep in mind your 'happiness' level as it relates to writing business - if you need to write 4-6 big cases per year you need to be at the houses or perhaps a super regional. If you are okay with 10-15 cases a year mid-market, then you're a good fit for the nationals and regionals. If you are okay with 18-25 cases per year, mostly mainstreet and some smaller mid-market then a sole proprietorship or agency will suit you fine.

We've developed a producer cash flow analysis, which allows producers to plug in new business production, attrition, renwewal comp, general expense, client management expense as a function of serviceable revenue, equity allocation, etc., and generates an EBITDA percentage to demonstrate a producer's contribution to margin to their employer in order to enter into equity discussions with their employer on an informed basis using basic economic principles and the dynamics unique to the insurance profession and industry. If you would like to obtain this template/model feel free to contact me and I'll be happy to send it.

All the best and good luck.

Cheers

[kcharette]

Are you guys talking about commercial or personal lines? What lines of business? Or does it not matter?