Why Top Performing Agencies Focus on Compensation Expenses

By Jim Cuprisin | December 20, 2010

There are a lot of performance benchmarks to focus on to become a top performing insurance agency and to achieve high profitability. One of the areas agencies need to focus on is compensation expenses. With a struggling national economy, it’s more important than ever to focus on agency expenses to achieve the best financial results possible. Add in the effects of a soft market with reduced agency commissions and revenues, and the need for expense control is even more critical.

According to the 2010-2011 Growth and Performance Standards (GPS) study, pre-tax agency profit varies from 4.25 percent to 10.00 percent, depending on agency size. The smallest agencies in the revenue range of $500,000 and less had the lowest profit of 4.25 percent, while agencies in the largest revenue range of $3,000,001 and over had the highest profit of 10.00 percent. For comparison purposes, this profit percentage is calculated as a percentage of total revenues. If we look at the best performing “top 25 percent” of agencies for these same revenue ranges, the profit varies from 14.62 percent to 20.11 percent. By focusing on these numbers, agencies can compare themselves to the averages in their peer group, or better yet, they can strive to be like the top performing (top 25 percent) agencies and be the cream of the crop.

To be profitable, agencies need good control over their compensation expenses. Typically, compensation expenses account for over 70 percent of all agency expenses. Based on all agencies in the GPS study, the following breakdown exists for compensation expenses:

Compensation Expenses percent of Total Revenues

Executive or Owner Compensation 19.33 percent
Sales Salaries and Commissions 15.97 percent
Office or Staff Salaries 21.80 percent
Insurance – Employee Benefits 4.79 percent
Payroll Taxes 3.61 percent
Pension and Profit Sharing 1.83 percent
Total Compensation Expenses 67.32 percent

Executive or owner compensation consists of commissions, salaries, and bonuses paid to agency principals. Typically, owners are compensated in three different ways: (1) agency owners earn commission on the business they write just like other producers in the agency; (2) owners need to be compensated for the time they spend on managing the agency; and (3) agency owners should receive a return on the money they have invested in the agency; basically, a percentage of the profits. With this in mind we find that compensation per owner varies significantly based on agency size. Compensation per owner varies from $52,600 in the smallest agencies to $260,500 in the largest agencies.

Sales salaries and commissions is basically producer compensation. This is the compensation paid to non-owner producers who have less than 10 percent ownership in the agency. While the majority of producers receive all or most of their compensation from commission, some producers, especially newer producers, receive a greater compensation percentage from salaries. Average compensation per producer varies from $48,000 to $116,000, depending on agency size.

Office or staff salaries include all salaries and bonuses paid to customer service representatives, account managers, and all other support staff persons. Basically, all agency employees who are not agency owners or producers are included in the office or staff salaries category. Compensation per support staff person varies from $24,900 to $47,200, depending on agency size. Typically, salaries are higher in commercial lines than personal lines, for similar job positions.

Insurance – Employee Benefits cost just under 5 percent of total revenues, on average. This expense category includes health insurance, disability insurance, and dental insurance benefit expenses for all agency personnel. Group life insurance is often included as well for agencies that offer this benefit.

Payroll taxes equate to around 3.61 percent of total agency revenues, on average. Obviously, agencies have little or no control over this expense category; Uncle Sam determines what will be spent here.

Pension and profit sharing account for 1.83 percent of total revenues. This category includes 401(k) contributions made by the agency. Very few agencies offer pension plans; however, profit sharing and 401(k) plans are popular, especially with the larger agencies.

When you add up all the compensation expenses, they typically equate to about two-thirds of an agency’s total revenues. They are obviously the biggest expense category so controlling these expenses is paramount to achieve agency profit goals. In these difficult economic times, agencies are finding the need to give extra attention to their compensation expenses.

While agency owners want to avoid reduced profit due to overly high compensation expenses, compensation rates for agency employees must remain competitive with what other agencies are paying in the same geographic area for similar jobs. Compensation that is too low typically results in employees leaving for higher salaries and commissions elsewhere. Thus, agency owners and office managers have the challenge of paying their employees enough to retain their services, but not too much to drastically reduce profits.

Other Expenses Also Matter!

While agency owners and managers should focus on expense control and monitoring compensation expenses, controlling all other agency expenses is still important. The remaining agency expenses typically make up about 21 percent to 30 percent of agency revenues, depending on the agency size category. Shaving a few percentage points from these expenses can often mean the difference between being profitable and unprofitable. These remaining expense categories include:

  • Accounting, Legal and Professional
  • Advertising and Promotion
  • Amortization of Intangibles
  • Automation and Data Processing
  • Automobile
  • Bad Debts
  • Contributions
  • Depreciation
  • Dues and Subscriptions
  • Education
  • Equipments and Service Agreements
  • Insurance – Key Person
  • Insurance – Property/Casualty, Errors and Omissions
  • Interest
  • Licenses, Permits and Taxes
  • Office Supplies and Printing
  • Postage
  • Rent or Leases
  • Repairs and Maintenance
  • Telephone
  • Travel and Entertainment
  • Utilities
  • Miscellaneous Expenses

Based on a percent of agency revenue, some of the more important expenses to focus on include: Rent or Leases (3.54 percent); Insurance – property/casualty, errors and omissions (1.72 percent); Advertising and Promotion (1.40 percent); Automation and Data Processing (1.32 percent); and Accounting, Legal and Professional (1.28 percent).

Compare Other Agency Performance Benchmarks

Agencies become top performing agencies because they look at the details and work on improving in all areas that make a difference to profit and growth. While this short article focuses mainly on expense control and compensation expenses, there are many other agency benchmarks to examine. For example, three additional important agency benchmarks are annual revenue growth, account retention, and average account size.

Annual revenue growth varied from 13 percent in the smallest agencies to -1 percent in the larger agencies. Growth rates are generally down from past years, given the slow economy. If we look at the top performing agencies in the same agency size categories, revenue growth varies from 51 percent in the smallest agencies to 7 percent in the larger agencies. The top performers are still achieving significant growth rates, even in a difficult economy, so it can be done!

High account retention is important for an agency to consistently perform well from year to year. Annual account retention for commercial lines varies from 88 percent to 91 percent, depending on agency size. With personal lines, retention varies from 89 percent to 90 percent. These account retention rates are consistent with prior years’ studies, showing that insurance agencies are still achieving good retention rates, even with the sluggish national economy. Agencies that establish good relationships with their clients and provide consistent service can keep their clients from focusing solely on price and allow clients to appreciate working with a top agency.

Average account size is another important benchmark. Larger accounts typically lead to higher productivity numbers and increased agency profitability. Agencies can increase their commercial lines account size by targeting larger accounts and working in niches where the larger accounts exist. For personal lines, account rounding, or writing several policies per account, can increase account size. Commercial lines account size (in commission) varies from $506 in the smallest agencies to $1,634 in the largest agencies. For the top performing agencies (top 25 percent), the commercial lines account size varies from $1,204 to $2,751. Personal lines account size does not vary as much with agency size, from $178 to $259 in commission per account. The top performers do better getting $284 to $453 in average account size.

In Summary

Agencies should use performance benchmarks to gauge their past performance and set goals for the future. In a tough economy, expense control is vital, especially with compensation expenses, which make up the majority of agency expenses. Agencies should closely monitor all their expenses and compare themselves to other agencies of similar size. Other important benchmarking numbers include annual revenue growth rate, account retention, and account size. Agencies should compare to the average benchmarks, but the top agencies should always strive to do better than average and be among the top performers.

The National Alliance Research Academy’s Growth and Performance Standards (GPS) study can be used as a tool to compare an agency to other agencies of a similar size or metro area, with respect to income and expense averages, productivity measures, and balance sheet ratios. For more information, go to www.TheNationalAlliance.com

Cuprisin, CIC, is the research director for The National Alliance Research Academy where he conducts surveys and publishes studies. He is also the editor of Resources magazine. He has over 25 years experience in the industry, with initial experience as an underwriter with two different insurance companies.

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