Avoiding the Half-Million Dollar Mistake

By | December 1, 2003

Hiring the wrong producer is what I call a $500,000 mistake. In fact, in analyzing the fallout from hiring the wrong producer, the mistake can often be greater than one-half million dollars. Believe me, I’ve been there. In looking back, because that thought was always in the back of our minds, Bolton & Company spent an inordinate amount of time and resources to determine if a particular producer will be successful or not.

Do the math. Assume an agency hires a producer who turns out to be ineffective. And assume the costs of that producer, including all benefits, are $80,000 per year in the form of a draw, advance or salary. Ordinarily, you would like to see a producer build a book of new business equal to their draw by the end of the first year. This, of course, will depend upon the experience and age of the individual salesperson. But for the sake of discussion, let’s assume we hire a producer with 10 years experience. And let’s compare a successful producer to a producer with mediocre results.

And assuming a typical mediocre producer yields results of $40,000 in commissions the first year, $100,000 in commissions the second year, $140,000 the third year and $200,000 in the fourth year, that producer was paid $320,000 in salary and brought in $480,000 in premium volume. That means the producer is $160,000 ahead.

On the other hand, a successful producer will produce his income at about the end of the first year and double that during the second year. So we assume the successful producer brought in $80,000 in premium volume the first year, $160,000 the second year, $300,000 the third year and $450,000 the fourth year. The successful producer’s premium volume is $990,000 compared to $480,000 for the mediocre producer. Simplistically, that example runs out to be a difference of one-half million dollars. But it doesn’t end there. If the producer is $500,000 ahead of the mediocre producer, the agency value is ahead by $600,000 to $700,000. After all, aren’t we really investing in our retirement by adding value to the agency?

The problem with most agencies is the mediocre producer is profitable, or so they think. As a result, the producer is kept on staff. The failure in that thinking is the lack of progress the agency is making. If this is a key producer, or if the agency has more than one mediocre producer, then the agency operates as a mediocre agency, at best. In the long run, the value of that agency has suffered not only in terms of profit, but attractiveness to potential buyers of the agency. And the loss as a result of a mediocre producer in terms of agency value has now gone into the millions. Almost more importantly, the carriers … an agency’s most critical asset, view the agency as mediocre. As an agency, we want our insurance companies to view us in the most positive light. Less than successful agencies do not receive the service and consideration of the top flight, progressive agencies.

Over the years, I have also found producers reach a plateau—a comfort level. Mediocre producers reach a much lower comfort level than successful producers because they lack the strong drive, imagination or initiative it takes to actually become successful. Successful producers are driven by whatever means, but mostly a quest for success and wealth and their comfort level will ultimately be significantly higher. It has been my experience mediocre producers reach a level of approximately $300,000 to $400,000 in commissions and level off. If they lose an account, it is replaced. But the mediocre producer rarely grows much beyond their level of satisfaction or comfort level unless their personal circumstances change.

In contrast, the successful producer will reach levels of $800,000 and above—often in the million-dollar range. Not only does that producer’s drive add a great deal of success to the agency, but it adds competition for other producers and employees within the agency to grow to a higher success level. And don’t overlook the value added to the agency in terms of sales price and sales appeal.

The biggest problem facing most agencies is the ability to locate and hire top producers. Another problem is managing them. Some producers can wreak havoc in your agency. Many agencies end up hiring individuals not qualified to be in production because of the dire shortage of quality producers. Perhaps they simply lack the personality or drive to get the job done. Others hire the “loose cannon” or “wild horse” that can destroy an agency culture. Hiring a quality producer begins in the agent’s office. Are they able to support a hard charging successful producer? And can they handle the idiosyncrasies and demands of such an individual? Many of the most successful producers are “A” personalities. They are driven, and because of that, they are drivers. They want it now, and they want it their way. Many hard charging producers alienate the office staff who often do not feel the urgency or need to operate at such a high energy level.

But that’s not to say that all successful producers operate in that mode. Insurance is a technical product; it requires the sales ability delivered by a driven producer who also functions as a consultant. To the true driven salesperson, this is somewhat of an anomaly. And because of that, producers must be carefully selected based upon a number of factors that go beyond a simple interview and a test. In order to achieve success in an agency, you must have a sales staff that can provide that growth without alienating the staff and clients. To achieve that requires time, experience and solid investigation.

I have always treated the interview process with suspicion. The potential sales candidate is going to say what they think you want to hear. They will tell well-rehearsed stories of why they left their former employer, or why they failed in their last employment. It was never their fault. But the one burning issue is that “the past is a precursor of the future.” If they were unable to produce at their last employment because “the marketing department was unable to get them the coverages and prices,” or “I was burdened with too many clerical tasks…,” those are stories to view with suspicion. A good producer can produce almost anywhere. And part of being a quality producer is the ability to bring in quality accounts. Any agency worth its salt should be able to provide markets for quality accounts. The fact is, if they failed in their prior employments, that’s a good indication they’re not going to be successful with you. If they fought with their boss, chances are they will fight with you too. Your goal should be to always attract successful producers and one of the key ways to determine their success potential is to look at their past. Again, “the past is a precursor of the future.”

But for years, we have always gone far beyond the interview. And we have gone far beyond checking sources, or looking into their past.

I am an insurance man. I am not a professional interviewer. I am not a professional human resources administrator. There is no way that I, as an individual, can tell what’s in a potential employee’s mind or heart. I do know that the interview process needs to be viewed with suspicion. And I know that I have to avoid that $500,000 mistake. I also realize my sources within the industry that know our candidate may also like that candidate for reasons other than their ability to sell. Or they may just be unwilling to give a negative reference. And so what we have done for years, and quite successfully, is to have the potential candidate seen by an industrial psychologist for a full day interview. What this achieves is a better understanding of a candidate’s motivation, potential for success and their ability to fit into our culture.

I can recall many years ago interviewing a candidate who we thought was going to be an outstanding salesperson. He dressed well, made an excellent appearance and seemed to possess all of the strong attributes necessary. His test came back positive, but a little lower on the positive range than we had expected. We sent that individual to our industrial psychologist and we found out that this individual had the ability and strong drive. But that strong drive and great energy were directed, at that time in his life, to his three sons and coaching their athletic careers. According to the psychologist, he would probably spend four hours on the job and six to eight hours on the athletic field. Unacceptable.

Another individual came in with strong recommendations as a successful salesman of computer software equipment. He passed our interviews, had great outside recommendations for his sales ability, and had proven success in the past. In fact, he was so stellar that we almost didn’t send him to the industrial psychologist. Why waste the money on a sure thing? But the industrial psychologist had other thoughts, which surprised us.

His sales experience, while plentiful, were all small sales. This individual, while comfortable, felt more at ease selling at the manager level. He felt intimidated in dealing with the senior management level. And he loved to be an advisor, but the thought of dealing at higher levels had this individual frozen.

We didn’t hire either of these candidates, but two other agencies did.

The first individual failed. But the second individual, some 10 years later, has proven to be a reasonably good producer for his agency. It was a long, hard struggle that for too many years kept the agency with mediocre growth.

The moral of the story is that many producers who will be presented to you are “a sheep in wolf’s clothing.” Agency growth is predicated upon the quality of its production staff which tends to drive everything else, including a superior marketing department, high quality CSRs, and even the culture of the agency. But more importantly, it determines the value. It is your retirement that you are hiring.

William “Bill” Bolton serves as director of Bolton & Company in Pasadena, Calif. He began his career at Industrial Indemnity Company and joined Bolton & Co. in 1967. After 42 years in the industry, Bolton sold his interest in Bolton & Co. to its management and is now semi-retired. He can be reached via
e-mail at wbolton@boltonco.com.

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Insurance Journal West December 1, 2003
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