Today, more and more organizations are changing the way they view and pay their employees. The move is away from the traditional “cost-of-doing-business” concept. Successful businesses are developing creative programs to guide employees to focus on improving business performance and rewarding them for their contributions. Unfortunately, many businesses and employees are still not ready to make the change.
The “human factor” has always been paramount for the insurance industry. In today’s business environment, clearly the long-term winners will be companies that provide a flexible and challenging work environment, along with employee recognition and rewards. Organizations have to be willing to share their successes. If employees are asked to share the risks, then they have to share the rewards.
What do employees really want?
In our work as consultants we often discuss what owners and employees think are the key motivating factors. Most business owners initially think money is the key issue. However, many employees state that they are looking for challenges, recognition, and empowerment.
Despite the current softness in the economy and the rise in the unemployment rate, the shortage of skilled insurance workers is still restraining growth for many agencies. Given this environment, what can a firm do to retain and attract the best and brightest employees, while challenging them to achieve the business’ goals?
First, recognize that money, by itself, will not do it. High performing employees are searching for something more than just a high salary. The typical employee compensation plan should include a total package of rewards, recognition and environment. Some of the elements are “satisfiers” that allow a firm to attract and retain employees such as benefits, flex-time and training. Other elements of compensation are “motivators” such as bonuses, incentives, challenge, and opportunity. A well-designed plan will have long term and short-term compensation components.
The key to attracting and retaining the best people to the firm is the use of a “total compensation” approach. It is also a critical component in improving employee performance. A firm that takes the time to carefully customize a “total compensation” package will transform individual employees into high performing, and committed employees.
There are three basic ingredients to the total compensation package that every agency must have:
1. Challenging work
The old system of directing and monitoring every task that an employee performs is out. Employees with multiple skills and authority are in. For example, a major retailer has a one-paragraph employee handbook that states: “Rule #1: Use your judgment in all situations. There will be no additional rules.” To truly perform at this level requires enormous trust in the employees. However, if a business is able to perform at this level it will reach incredible heights.
Provide additional opportunities for learning and skill development to spice work up. Encourage the staff to take classes to get licensed and for courses to earn the necessary CEUs. But, an expansion of training could provide more flexibility through a higher skilled workforce. Send the employees to Dale Carnegie, Microsoft software training, business skills seminars, team building sessions or a sales class (such as Dynamics of Sales sponsored by CIC).
2. Work environment
Today’s workforce is looking for flexibility on the job and balance in their life. Management needs to evaluate ways to realistically provide this sought after flexibility in work. For example, tradition has it that the employees’ work in an office with established work hours. Could the firm allow for variations, such as 4-day workweeks, working at home two days a week or job sharing? Flexible work hours are becoming a common tool to attract and retain good employees.
3. Recognition and rewards
Non-cash recognition awards are a very effective way to reinforce the agency’s values. They can be a low-cost, high-impact element of the total compensation package. For example, employees who provide outstanding or innovative customer service receive special awards. One way is for employees to be nominated by customers or their peers.
Management needs to think about the types of awards that make sense for employees. Here are some examples:
• Provide a day off with pay
• Provide tickets to sports, music or cultural events
• Take out an advertisement in the local newspaper thanking your employees for their contributions
• Provide a donation in an employee’s name to the charity of his or her choice
• Pay for tutoring for the winner’s child
• Have the winner’s car detailed during work
• Pay for the winner’s house to be cleaned
• Pay for an evening out for the winner and their spouse – dinner and babysitting
Once the basic ingredients are established, the firm can then look into advanced tools to attract and retain employees. The following are some of the approaches that owners should also consider:
4. Profit sharing
Although money is not always king, it still has a lot of clout. Firms that establish a bonus plan based on the business profitability will have employees that strive to increase sales and cut expenses. Profit sharing can be based on the profitability of the overall business or by profit centers such as commercial lines versus personal lines versus life and health. The pool of bonus money can then be distributed to the staff based on management’s discretion.
A variation of profit sharing is to reduce the employees’ base compensation while providing quarterly bonuses based on a department’s performance. A plan that tracks employee performance will then allow them to see a direct correlation between their effort and their compensation.
5/6. Phantom stock and stock appreciation rights
Stock appreciation rights (SARs) and phantom stock are both specialized deferred compensation techniques designed to provide an employee with the economic benefits of stock ownership without the employee actually owning any company stock. When an owner cannot or will not change the existing ownership structure, SARs and phantom stock are often used, to provide an employee with some sort of incentive compensation based on the actual business performance.
A SAR is simply a grant to an employee which gives that person a right, at some specific time in the future, to receive a cash award equal to the appreciation in value of a certain number of shares of company stock. In concept, SARs are similar to stock options, but different in several points. Stock options require the employee to purchase the company’s stock at the grant price. However, SARs do not require a cash outlay from the employee. The employee only receives the appreciation in value of the stock.
Phantom stock on the other hand can be viewed as units of value, which directly correspond to an equivalent number of shares of company stock. These phantom stock units are then granted to an employee for a specific period of time. When the maturity period is reached, the employee is then compensated directly in cash, based on the value of the phantom stock. Unlike SARs, the amount of compensation with phantom stock usually includes the underlying value of the stock as well as any appreciation above the grant price. Another difference is that SARs are typically paid out when the employee chooses to exercise the SAR, while phantom stock typically has a fixed award date.
7. Deferred compensation
Deferred compensation is a method for producers to build long-term value for their efforts directly related to their books of business. We recommend using deferred compensation instead of ownership in the producer’s book of business. The plan is often phased in over time until the producer is fully vested in the plan.
The agency benefits by having a system that encourages the producers to build their books as well as remain with the firm. It must be noted that a deferred compensation plan (as well as SARs and phantom stock) creates a contingent liability for the firm, which does negatively affect agency value. However, deferred comp is also “consideration,” which helps uphold the covenant not-to-compete in a producer contract. This is another good reason to include deferred compensation as part of a producer agreement.
8. Split-dollar life policies
A split-dollar plan is a way to provide life insurance for an employee or their spouse at a reduced cost to that individual. The premium for the insurance is shared by the employee and his or her employer (thus the name “split-dollar”).
It is an effective way to retain key employees while the business is reimbursed for every dollar it advances. From the employer’s perspective, split-dollar is an inexpensive method of buying life insurance for any personal or business needs of select employees. It enhances employee loyalty by providing substantial insurance benefits. Some split dollar policies can provide funds which may be used for additional employee benefits in the future (deferred compensation, salary continuation, stock redemption, or retirement income).
From the employee’s perspective, split-dollar can help replace needed family income that would be lost at the employee’s death or help pay any estate taxes. If the employee owns the policy and collaterally assigns the policy to the employer, the employer can borrow against the cash value to the extent allowed by the collateral assignment form.
Employee Stock Ownership Plans (ESOPs) are a way for business owners to sell shares in the company or to provide an additional benefit to all qualified company employees. These plans were initially created as a win-win for business owners and employees. ESOP contributions are tax deductible as are dividends if they are paid to employees directly, on their behalf to the ESOP or applied to the loan payments of a leveraged plan. Because the ESOP is funded with pre-tax dollars, the company’s tax savings may increase even further.
The selling shareholder can also defer the capital gains on stock sold to an ESOP as long as the ESOP owns 30 percent or more of the company’s stock and the seller rolls over the sale proceeds into qualified replacement property (stocks or bonds of domestic companies). Employees pay no tax on the contributions until they are entitled to receive the stock when they leave the company or retire. At this point, the company generally buys back the stock through a buyback provision in the ESOP.
ESOPs are expensive to set up and maintain. Businesses need to be a certain size before it makes financial sense. We recommend that agency owners do their homework before seriously considering this option.
10. Stock equity
Stock ownership usually conjures up visions of importance and respect. Producers and employees feel that having the word “Owner” on their business card will improve sales and stature. Often the employees only understand the benefits of stock ownership and the drawbacks are ignored or not understood.
Agency owners are often unclear themselves whether or not they should offer stock to an employee. They usually first think about it either when a current employee is about to walk out the door and may not come back. Owners might often feel that they are forced to offer stock in order to entice a new producer to join the firm or to retain the currently employee, such as a producer with a book of business.
We recommend that owners think long and hard before offering stock to an employee. The decision whether or not to make an employee an owner needs to be based on a review of many factors. The right decision can propel the agency forward for many years to come. The wrong decision can mire the firm in unimportant muck.
A final thought
A good principle to follow is that if you want outstanding results, you need to be prepared to pay outstanding rewards. Implementation of a “total compensation” plan will motivate employees to improve not only their own performance but the performance of the firm as well.
Bill Schoeffler and Catherine Oak are partners in the international consulting firm Oak & Associates based in Northern California. The firm specializes in financial and management consulting for national and international agencies, including valuations, mergers, acquisitions, clusters, sales and marketing planning, as well as perpetuation planning. For more information, call (707) 935-6565, or email email@example.com.
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