The Age Old Question-How much to split

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ishootfriendlies
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The Age Old Question-How much to split

Post by ishootfriendlies »

I am negotiating with a producer who has been with me for some time. This is a little different than anything else I have seen on these boards. Here is the setup:

1. He is a commission only PL agent. He started on salary plus commission for 4 years, now he is just commission. It has been 8 years total, and his gross commission this year will be approx $55,000.

2. I split with him 70/30 new and renewal, that is, he keeps 70% new and renewal.

3. The only thing he pays is $40/mo for his E&O. No other fees. I provide staff, office space, phones, computers, etc.

4. A CSR does billing, changes, ID cards, certs, etc. He does any coverage specific questions as well as renewal reviews.

5. He does not own his book. This is what sets this query apart from many others. While he gets a (very) generous commission, all of his business goes into my book, and if he leaves he cannot take it with him.

6. He does a good job and is very reliable. He has never done anything shady, and when he screws up he comes to me and admits it before I find out. He has never tried to broker business through another agency or hide any commissions from me. That is worth a lot to me.

It is time to renegotiate. I think I would like to give him some ownership, but also reduce his take on the renewals. 70/70 is just too generous. I am thinking I will reduce him to 70/50 (new/renewal), but give him an ownership stake in his book equal to 1 times his net earnings. If he leaves and takes his book, he pays me 1 times the gross earnings ($55k), and if he leaves and I keep the book, I pay him 1 times his net earnings ($38.5k). He will have the decision to buy the book or sell it, but he cannot sell it to an outside party.

If he leaves and takes the book, the payment is due in full at the time of departure. If he leaves and leaves the book with me I pay out the 1 times net earnings monthly over three years (approx $1070 for 36 months).

As he now has no ownership, I think just giving him the ownership in exchange for a reduced commission is pretty generous. He is getting $40-60k of value right off the bat. It also gives him the opportunity to leave some day, which is also very valuable.

What do you think? I would appreciate some input from other agency owners who have long term producers.
NYagent301
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Re: The Age Old Question-How much to split

Post by NYagent301 »

Sorry to say but $55K gross commission is way too low for 8 years on the job. I know there are differnces in pay geographically but if I read this right there is only $16,500 going to the house. I would suggest a goal setting session to bring the gross up benefiting both parties, and would not recommend ownership of a book.
ishootfriendlies
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Re: The Age Old Question-How much to split

Post by ishootfriendlies »

NYagent301 wrote:Sorry to say but $55K gross commission is way too low for 8 years on the job.
Yes, that is pretty weak. So far though, the benefits outweigh the drawbacks. He does not cost me much, and the customers he does have are very happy with him.
jimmyr1978
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Re: The Age Old Question-How much to split

Post by jimmyr1978 »

ishootfriendlies wrote:What do you think? I would appreciate some input from other agency owners who have long term producers.
I think that if a producer at our agency had $55,000 gross commission after 8 years, they would not be a producer with our agency any longer. Other than he sounds like a nice guy, why are you negotiating anything in his favor? This is a sales-driven business. He may need to consider a different profession, or you should change his position to an Account Manager if he's good with clients and trustworthy. If he wants to remain as a producer, you need to guide him with some goals, and if he does not meet them within X years, you terminate him with some sort of severance for his book.

It sounds harsh, but $55,000 Gross Commissions would be low for a 2nd or 3rd year producer.
ILguyonown
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Re: The Age Old Question-How much to split

Post by ILguyonown »

Aside from the low production, I will try to answer your question from the point of view of an agent who was at an agency not too long ago and is now an agency owner. 70% is very generous and should keep your agent happy. In general, I like your plan. Afterall, the truth is that if the clients like the agent and he left, many of them might want to leave with him. Your plan "allows" him to leave and provides for a compensation structure. I think this is ideal for both the agent and you. You should not get too full of yourself and believe you "own" the business. He should also not get too full of himself and believe that he can get a better deal elsewhere.

Paying him less on renewals encourages him to sell more and helps offset your costs. The only problem that I see is that he does not make much money and he may view even a small decrease as unfavorable. He may also not be ambitious enough to want to work any harder. Let's face it, his production is low. You are providing a lot of service for very little income.

I can honestly say that if I worked for you, I would like your plan. As an owner, I also see it as preferable to what you have now going forward. It seems that you have thought this through based on your individual situation and it is a good plan.
exclaimsguy
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Re: The Age Old Question-How much to split

Post by exclaimsguy »

I didnt see an indication of what type of area you are located in. Metro, rural, etc? Also, is this all persoanl lines or is there a potential for commercial? If any commercial and a reasonably target rich environment then I would think that $55,000 is a decent year but awful for 8. On other hand, if primaraly personal lines, in a rural environment, not neccessarily bad.

Regardless 70 on the front end is a sweet deal. We are at most 40 and many are 35 with almost all 35 on back end BUT we provide tons of markets and pretty much cradle to grave support. If the producer is not working to bring in new business they are going to not have to much to do. At the end of the day, it is what works for you. Ownership of accounts is fleeting at best so the win win is all parties understianding the big picture and sensing they are treated fairly.

I take exception to the statement regarding ownership of book. My experience for quite some time has been that producers never own their book any more. They may have some equity in an agency but book ownership is a thing of the past.
JimatJKD
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Re: The Age Old Question-How much to split

Post by JimatJKD »

As an owner of an agency that has been through this with young PL agents, I would agree that 70% is too high a percentage. You have invested in this person heavily already and so the agency deserves to make some return. I would suggest that you stair step a reduction in percentage to the agent, like -10% each year, until you hit your target, such as 50%. At the same time, you should have a growth goal that the agent must hit to earn a percentage ownership of the book as incentive, such as 10% per year for 5 years. You would both be getting something of value, have incentive for growth, and have your interests aligned on a more equitable basis.
ishootfriendlies
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Re: The Age Old Question-How much to split

Post by ishootfriendlies »

JimatJKD wrote:I would suggest that you stair step a reduction in percentage to the agent, like -10% each year, until you hit your target, such as 50%. At the same time, you should have a growth goal that the agent must hit to earn a percentage ownership of the book as incentive, such as 10% per year for 5 years.
This is good advice, thank you. I like the step down annually. That seems pretty fair.
ins-atty
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Re: The Age Old Question-How much to split

Post by ins-atty »

I don't see how you can even get to a breakeven point with 30% of the commissions. A simple way to look at it is to divide your your expenses by your gross commissions. For example, if your rent, payroll, etc. is $200,000 and your gross commissions are $500,000, your expenses would be 40%. Under that scenario, you would actually be losing money on that 70% producer.
yoyowordup
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Re: The Age Old Question-How much to split

Post by yoyowordup »

ishootfriendlies wrote:
NYagent301 wrote:Sorry to say but $55K gross commission is way too low for 8 years on the job.
Yes, that is pretty weak. So far though, the benefits outweigh the drawbacks. He does not cost me much, and the customers he does have are very happy with him.

You say he does not cost you much but your previously said "I provide staff, office space, phones, computers, etc. . . . A CSR does billing, changes, ID cards, certs, etc"

It sounds like he costs you more than you may have factored in.
gforaker
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Re: The Age Old Question-How much to split

Post by gforaker »

I'll tell you what. I will let you come into my agency and take it over. Just give me 70% of the commissions and you can run it and have the rest.
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