A key factor to the success of an agency is the way producers are compensated. If the compensation is too high, the agency will lose money. If the compensation is too low, then the agency will lose the producer. The interesting point is that there is no single solution. Each agency needs to blend the right ingredients for an effective compensation plan to attract and retain good producers.
Producers should delegate
A critical question when designing a compensation plan is, “Who is doing the work?” Are the producers performing the majority of the firm’s servicing activities on their accounts? Are the technical service reps and support personnel competent enough so that producers can delegate?
The agency needs a clear definition of the role of a Customer Service Representative (CSR) compared to the producer. A true CSR should handle most of the following activities on an existing account: client telephone calls; client and company request mail; claims reporting; driving the renewal information gathering process; and marketing and placement activities, unless a central marketing department exists.
In small towns, and even in large city agencies, some producers try to handle it all because they believe it is necessary. That is a belief that is not true except if the producer makes it true. Most customers can be trained to work with the CSR for typical service issues. It would be wise if the service staff exclusively handled all small accounts.
Producers need to be involved in some servicing activities on large accounts, but to what degree? Once again, it depends on the technical capabilities of the service and support staff in the firm. It can also depend on how well the producers’ clients are trained to deal with CSRs and assistants on these items.
Producers often create service work for themselves because they are not confident in the CSR’s or assistant’s capabilities; and/or they do not know how to delegate this work.
The producer’s ego is sometimes the problem, e.g., “My customers expect me to be involved,” or “No one can handle my clients as well as I can.” Clients want good, timely service. A good service staff can satisfy that need if producers want them to and if the CSRs are properly trained to provide that service.
Competent staff that handles the servicing activities can allow producers time to sell new accounts. New business makes the firm grow. Don’t let a producer’s ego or lack of delegation skills prevent the firm from growing.
What can you afford to pay?
Besides being based on the job performed, producer compensation also depends on: What the local competition is paying; the average size of accounts available to be written in the area; where the firm is located (metropolitan, urban or rural area); and what the firm can afford to pay.
Today, an average firm that is properly managing expenses and providing producer employee benefits while paying some business development expenses, cannot afford to pay more than an average commercial lines commission of 30 percent for renewals. This is true if owners want to realize a 15 percent to 20 percent pre-tax profit, prior to excess compensation (bonuses) to owners. This also assumes that about 20 percent is spent on support staff for these producers. In some firms, the amount is less and in most regional and national brokerage offices producers are paid much less than 30 percent. More than likely, they are paid in the 20 percent to 25 percent range.
Note the term “average commission.” Some firms today have decided to invest a portion of their profit in new business. This investment is their acquisition cost and these owners want to grow their firms to survive and become one of the best. Paying more commission for new business rewards good producers for producing new accounts for the firm.
The average renewal commission paid by well-run, high-valued firms is 25 percent to 35 percent. This range depends on whether the employer pays for certain expenses resulting from the producer’s employment and activities. These expenses include employee benefits such as health insurance, payroll taxes and retirement plans, as well as business development expenses, including travel and entertainment, auto or club dues.
The affordable commission rate is also dependent upon whether there are good technical service reps to take on responsibilities delegated to them. Is there a central marketing/placement department to support producers’ new business efforts?
The expenses for employee benefits and business development expenses typically account for approximately five additional points of commission. Accordingly, the affordable commission rate should be based not only on who does the work, but also on whether benefits and perks are paid, and if good service and marketing support is also available.
There is a trend today to pay producers less commission for “small” commercial accounts. Small is usually defined as those accounts that are Business Owner Package policies or small monoline accounts. However, the definition of “small” also depends on the firm’s book of business makeup and what is available to be written in the area. Usually, this represents accounts generating $500 to $2,000 in commission or less.
Firms are beginning to delegate their “small” accounts to CSRs to sell and service. The accounts should also be put on direct bill to avoid collection problems. If a small commercial department (or CSR) exists in the firm, then producers should not be paid a first year finder’s fee or commission for “small” accounts, if the leads are turned over to the small accounts CSRs to handle from the start.
The trend in compensation arrangements for producers of personal lines accounts is similar to that for small commercial accounts. Pay commercial producers (not personal lines producers) little or no commission on personal lines business if the CSRs are doing the work. Some firms today are not paying first year or renewal personal lines commissions to commercial producers at all.
Compensation for producers for at least the VIP personal lines package policies may be warranted to encourage commercial producers to refer the leads on these good-sized accounts to the Personal Lines Department CSRs. These packages usually generate adequate commissions to have room to pay commissions to producers the first year the account is written.
The types of accounts available to be written in the local area may also warrant paying commercial producers commissions for personal lines business. Once again, keep in mind who is doing the work when designing the firm’s compensation plan.
The method of paying producers should not make a difference in determining what is fair. Salaries or draws against commission should be considered only as a convenience for producers, since the timing of renewals can produce some lean months.
If salaries are paid (versus paying commissions to producers as accounts are written), then the salaries need to be based on the renewal commission paid (25 percent to 35 percent) for the existing book handled the previous year as of year-end. This calculation should take into account attrition that should be expected of probably 5 percent to 15 percent.
Throughout the year (e.g., monthly or quarterly), salaried producers should be bonused for new business. Often, owners also follow this strategy for setting a salary, especially the more astute firms today. Owners should also be paid for their management duties.
Some producers and CSRs are compensated for new accounts written on a “net new” basis, that is, “net” of lost accounts. This encourages producers and CSRs to work on account retention. This concept has great merit, as it is difficult to change producer salaries mid-year.
Compensation is not the only motivator for producers. Different producers are motivated by different things.
Find out what motivates the firm’s producers. It may be time off, the ability to telecommute once or twice a week, etc. Older producers are often concerned with their need for a pension or profit sharing plan as part of their benefits package. They need to be building something for their future retirement, since they often do not own stock in the firm that they can sell at a later date. Often vesting in their book of business, or a good profit sharing, pension plan or 401(k) plan are very important to them.
Compensation for owners and producers is never an easy issue to address. As a major expense in the firm, it cannot be ignored and left to, “well, this is what we have always paid.” Financial problems can be and often are the result of this attitude.
Grandfathering the existing compensation plan for a period of time (or indefinitely) for accounts already on the books is one way to introduce a new compensation plan, to avoid an immediate impact on producer incomes. The new plan can apply to new accounts written as of a certain date. This gives producers a chance to write new business to make up for the reductions in commissions that will be paid in the future.
Take a look at who is doing the work in the firm and how that relates to the existing producer compensation plan. Then, determine what the firm can afford to pay, taking into account the expenses as well as benefits and perks paid to producers. The issues discussed in this article should help in the design of an equitable, effective and profitable compensation plan for the agency.
Bill Schoeffler and Catherine Oak are partners in the international consulting firm, Oak & Associates, which provides financial and management consulting for independent insurance agents and brokers. They can be reached at (707) 936-6565, by e-mail at firstname.lastname@example.org, or visit www.oakandassociates.com.
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