New producer must have ‘skin in the game’ on the first day on the job

In almost every aspect of any business, the best day to do everything is the first day, especially when it comes to a new producer’s first day on the job. In order to make the most of the agency’s investment, new producers should always have a clear, defined course to follow when joining the agency. This “mapped” out course will reduce the new producer failure rate from 93 percent to 98 percent down to less than 5 percent.

Changing an agency’s new producer compensation structure and setting this person’s personal expectations involves changing the way the agency currently does business. As an agency owner, you must “buy” into the idea that this person will be part of the future of your agency and it is your job to help them. The question most often asked next is, “Help them with what?”

Funding is a big part of the equation. To fund this new person you must use house or small accounts. Before you hire any new producer, identify $200,000 in revenues, of accounts that this person will purchase from the agency. From the first day of employment, this new producer must have some “skin in the game.” If you assign a value of 2x revenues as a purchase price, then the amount this person must pay you is $400,000. A general business rule is that one must repay a loan within 10-15 years. (Many of us wish business loans were like home loans and were for 30 years.)

On day one, write a contract that states this person’s intent is to purchase this business and if this individual leaves, for any reason, then the deal is off. As an agency owner, you must always protect yourself first. Some other factors to consider are:

First, inform this new producer that they are not entitled to any of the agency’s profits until they have paid for their book of business.

Second, if they leave the agency, they are not entitled to any ownership beyond what they produce in excess of what they started out with.

Third, they can attend the agency stockholder meetings, but do not have a vote until they have paid for their book of business. If your agency isn’t set up as a corporation, then this new producer can attend the managers, directors, or partners meetings with no voice.

The next thing to do is to set a commission split for this business just like any other business, and a commission split for new production. A general rule is, 40 percent of the commission is paid to the new producer for new business and 30 percent of the commission is paid to the new producer for renewals. This commission split will apply for both the existing business and any new production. Now if we drill down into these figures, we will see the rate of success will be greater than any current new producer concept.

A couple of factors, not included in the above example, are new production growth and growth from these existing accounts. If you hire a new producer and they begin to “sell” this group of accounts, then some organic growth is naturally expected. The old adage, “Only flowers that get water … grow,” applies.

Also, as the agency owner, you are not trying to provide this new producer with a lucrative or easy lifestyle to begin their insurance career with. When you begin this business transformation, you might want to start with a smaller book of business or some other compensation split, but make no mistake, you must change the way you hire and motivate new producers. Only then will you be able to properly perpetuate your agency.

Year One:

Value of business in revenues: $200,000

Sale price of business: $400,000

Length of repayment: 15 years

First year’s income to new producer (40 percent): $80,000

Interest for the agency carrying the note: Minimal (if any)

First year’s repayment to the agency amount: $30,000 (Approx.)

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New producer’s compensation for the first year: $50,000

Year Two (and beyond):

Value of business in revenues: $200,000

Sale price of business: $400,000

Length of repayment: 15 years

Renewal income to new producer (30 percent): $60,000

Interest for the agency carrying the note: Minimal (if any)

Second year’s repayment to the agency amount: $30,000 (Approx.)

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New producer’s compensation for the remaining years: $30,000

Greg Wassberg is a partner and officer with Crockett Insurance Service in Crockett, Texas. He has spent his entire insurance career on the agency side of the business and is passionate about providing sales success advice and suggestions to young agents.

Topics Talent