Agency Salary Survey Reveals Frozen Salaries; Time to Evaluate Compensation

By | May 19, 2011

Any business owner knows that a great employee is worth a lot. That holds true for independent insurance agencies when it comes to great producers and the employees that support them.

Agencies need good producers, says Al Diamond, president of the Cherry Hill, N.J.-based Agency Consulting Group. But great producers – those who fervently seek to grow their book of business year after year – are worth much more, he says.

“Those people who are always looking to grow their books of business, handing off lower level clients to customer service people or account executives within the agency … are worth their weight in gold because they are always growing the agency’s revenue base,” Diamond says.

In today’s economic times and soft market conditions, adding to the agency’s bottom line is crucial. Great producers and even great customer service representatives could be more valuable to agencies than ever before, experts say. But what are great producers worth? What about great CSRs? And just how should agency owners determine adequate compensation plans?

With average agency salaries remaining relatively flat for the past four years, according to Insurance Journal’s annual Agency Salary Survey, setting fair compensation for great producers and CSRs is all the more important, experts say.

Diamond says his firm’s own research also shows salaries stuck given the times. “There’s a lot of frozen compensation,” he says. “Both in the responses we’ve been getting to our benchmarking surveys, and in the contacts that we’ve made, we’ve seen an awful lot of agencies, a lot more than we expected, that just froze compensation until things get better.”

Producer commissions are not faring so well in most agencies either. According to IJ’s Salary Survey, the majority of agencies reported producer commissions in 2010 decreased (29 percent) or stayed the same in 2010 as in 2009 (44 percent). But even in today’s challenging times a good 28 percent of agencies reported producer commissions increased.

The IJ Agency Salary Survey generated some 833 responses from independent insurance agencies nationwide, providing insight into who’s worth what in the independent agency system. Demotech Inc., IJ’s official research partner, provided analysis and input on this year’s survey results.

The Right Price

Chris Burand, owner of the agency management consulting firm Burand and Associates LLC based in Pueblo, Colo., says the turbulent times are leading many great producers and other agency staff to jump ship, one reason why agency owners must implement fair compensation plans.

“There’s a sense of desperation out there,” he says. “There’s more producer movement from one agency to another agency today than I’ve ever experienced. … There are some agencies that are working harder than ever before to get producers to move over to their shops. You have some good producers that see the writing on the wall that there’s no future in the agency that they’re at because they have shareholder strife or loss in markets, or whatever the reasons may be, so they’re looking to jump.” The very best agency employees seem to be more willing to move than ever before, he says.

Now’s the time for agency owners to make sure their compensation plans are up to par, Burand says, as the right kind of compensation plan could be the key to attract and then retain great employees.

Yet, despite the importance, most agencies have never evaluated how they pay agency employees, says Burand.

“The vast majority have never really evaluated their compensation plans,” Burand says.

According to the IJ survey, most agencies (79 percent) did not change commission structure in 2010 but 12 percent reported a plan to change their agency’s commission structure in 2011.

Burand says that the agencies that do evaluate compensation plans should do so every three years or so. “Three years is a pretty good number,” he says.

In reality, many agencies don’t begin to examine agency compensation plans until they start feeling a pinch in their pocketbook, Diamond says. But he agrees agencies should be evaluating compensation about every two to three years to make sure that the plan treats both the employees and the agency fairly.

“If it (compensation plan) works toward the benefit of one or the other, it isn’t working well,” Diamond says.

Megan Bosma, vice president of financial consulting at Marsh Berry, says market changes require that agencies evaluate compensation plans every couple of year, at the least.

“With shifts in the market I think the focus of the agency changes,” Bosma says. “An agency goes through periods of growth where they may be hiring a lot of individuals. Or they may go through slower periods of time where there may be a reduction in staff,” she says. “I think they have to take a look at it (compensation) at least every couple of years to make sure that they’re adequately staffed and that the compensation of the staff is appropriately based on the market rates.”

The Good and the Great

Creating a compensation plan that is both fair to employees and the agency is critical in today’s competitive market, the experts say. But to do that agency managers must distinguish between the good and the great.

“We call a lot of folks producers,” Diamond says. But if someone isn’t generating growth in the book of business every year, while they may still be very valuable to an agency, they are not really a producer, and therefore should be compensated differently than a producer, he says.

“They’re managing the book of business and hopefully they’re doing a great job in keeping that book of business with the agency. But they’re not really a producer. A producer goes out and adds growth to their book of business every year,” Diamond says.

Burand says agencies often over pay producers that may not be growing their book of business as well, which hurts the bottom line. He says some agencies pay lesser producers from a perspective of how big their books of business are considerably more than producers with larger books of business.

“So a producer with a smaller book, on average, they’ll be paid, oftentimes, as much as 40 to 45 percent, whereas the very best producers in the industry are often paid between 20 to 25 percent,” he says.

Burand considers this compensation mistake a product of poor agency management.

Agency owners don’t accept the reality that not every sale is profitable, he says. “There are fixed costs attached to a producer’s book of business, regardless of size. And therefore, the larger the book, all else being equal, the more profitable it is. Some agency owners seem to believe that a producer’s book has the same profit margin, regardless of how much business that producer writes. And you see that much more so where the producers are not producing very much business. Those agency owners have the hardest time understanding the concept of fixed costs to a producer’s book.”

Burand often asks agency owners how many CSRs the agency employs relative to how many producers. “The ratio is almost always at least one-to-one, regardless of the size of books that the producer has. So, if the producer has $500,000, and you have the same number of staff as the producer that has $250,000, you can see where the fixed cost or profit margin in that smaller book’s going to be substantially less.”

When evaluating producer compensation, agency owners also should base pay and commission rates on performance, adds Marsh Berry’s Bosma.

“It’s important for agencies to pay employees for their performance. And I think it’s important to identify what the agency deems acceptable performance … and be able to measure performance and then reward employees who actually perform,” Bosma says.

Burand agrees, but adds producer performance should be attached to both rewards and consequences.

Ideally, a producer’s compensation package creates positive incentive, but also has consequences built into it, Burand says. The smarter agency managers will create producer compensation plans that attach bonuses for achieving goals and penalties for failing to achieve minimum production requirements, he says.

According to IJ’s Agency Salary Survey, the vast majority of agencies (68 percent) did not offer a bonus program for non-owner producers who exceeded annual sales goals. The survey did not ask about penalties however.

“The lack of consequences for not achieving goals is one of the biggest causes of failure in so many agencies,” Burand says. “The vast majority of agencies’ producers have no consequences for failing to achieve goals; none whatsoever. You can argue that, well, they’ll make less money because their book will decline, but that’s not really a true consequence. There’s no penalty involved.”

Burand says that while some agencies cringe at the word “penalty,” the smartest agencies enforce them. “And there’s a good reason for it; because some people are only motivated by the threat of a penalty.”

Bosma believes producer compensation plans should have higher new commission rates and lower renewal rates. “I don’t think that the rates should be the same,” she says. “We still run across agencies that have the same new and renewal rates; there should be disparity between the new and renewal rate.”

Like Burand, Bosma also believes agencies should set producer goals that must be met regarding minimum production requirements. If those goals are not met, then the employee should lose their status as a producer, she says.

Bosma also added that expenses such as automobile allowances, marketing, advertising and promotion, travel and entertainment expenses should also be considered when determining producer compensation. “If those perks aren’t paid for by the agency on behalf of the producer, I believe that that justifies a higher commission rate,” she says.

Some 44 percent of respondents to IJ’s Agency Salary Survey said their agency does not offer additional incentives to non-owner producers. Popular incentives in the survey included: cash bonuses (34 percent); educational courses (31 percent); trips (14 percent) and company cars (10 percent).

Of those survey respondents that did receive producer bonuses for exceeding sales goals, 43 percent used discretionary factors, 40 used net book growth, and 37 percent used personal production as a way to determine the bonus.

Bosma says performance based compensation plans — penalties or not —should be implemented on all levels of the organization, from production through support staff.

CSR Compensation

Diamond’s Agency Consulting Group has been an advocate for more than 10 years for agencies to implement incentive based compensation for every person in the agency; not just producers. While many larger agencies have adopted some incentive based compensation for CSRs and other support staff, Diamond says smaller agencies are now moving in that direction as well.

“In the last two or three years, it (incentive compensation) has taken off like crazy for the mainstream agencies,” Diamond says.

Many agencies have not grown much in the past five to 10 years due to market conditions and yet still face pressure from employees about compensation. Diamond says this pressure has caused some agencies to modify traditional longevity or merit based compensation programs to incentive based compensation for employees, including CSRs and in some cases even administrative workers too.

“We may have been forced into incentive compensation but that incentive compensation is causing a lot more growth in the agencies because now that service employees feel the pinch when they lose customers,” Diamond says. As a result service staff try much harder to keep customers. “They also welcome the producers generating new business. … That’s a very healthy trend.”

Burand agrees that agency employees should be tied to production in a perfect agency world; however, he says realistically that’s impractical.

“The traditional CSR cannot handle the idea of their compensation being tied strictly to commissions. In many cases, they can’t handle the idea whatsoever of even being paid for making their own sales. They don’t have the producer mentality. And if you institute a compensation plan that relates to it … even though they may make more money, even though you give them all the assurances in the world that they’re going to be protected, they’ll be so uncomfortable that they’ll leave.”

Agencies must examine and understand that if a person is in the CSR role, one of the reasons may be that they like a lot of security, he says. “And if you tie it to commissions, they may see insecurity.”

Although Burand added that the more sophisticated agencies might hire someone individuals willing to relate to some part of their compensation to commissions.

According to IJ’s Agency Salary Survey, 41 percent of agencies do not offer CSRs incentive compensation for personal lines, while 47 percent do not offer CSRs incentives for commercial lines. Of those that do offer CSR incentives, 31 percent base it on new business in personal lines and 26 percent base it on new business for commercial lines.

Marsh Berry’s Bosma added that if the CSR is performing functions more in line with an account executive role then they should be paid a commission rate in addition to salary.

“If they’re actually going out and visiting clients and presenting the renewal to the client and taking on some of the traditional production related duties, I think that an account executive could earn a commission.”

Or if the agency isn’t structured where they have the account executive type of model, Bosma says the service person should be paid for their level of experience and performance with a bonus program tying into the goals of the agency. “If the agency is really looking for the service staff to retain the business, there should be a retention component of the bonus plan as well as participation in unit goals or overall agency goals,” she says.

Overall, agencies should pay producers on a commission schedule but act quickly to modify compensation plans when producers are performing or not performing, Bosma concludes.

“You have to be able to hold those individuals accountable so that if their book does decline their compensation should decline as well,” she says.

When it comes to compensating service staff, Bosma says agency owners must evaluate what works for their agency. “So if you’re more of a sales organization, maybe you want every individual in the organization to try and generate new sales, and performance can be related to sales,” she says. But “if you’re more of a service organization, you may be looking more at retention and paying service staff based on retention numbers either for their line of business or in total.”

It’s important to remember that support staff can contribute to overall agency performance, Bosma says. “They don’t get involved so much in the sales and the retention side of it but in terms of watching expenses and managing the profitability of the agency, I think that’s where their performance metric could be utilized.”

Burand says agencies need to look at how to modernize their firm’s compensation plans, especially in today’s challenging market. “Everyone that’s never really done it (evaluated compensation) in detail should do it right away because the old-fashioned compensation plans have no future in this industry. They’re just flat out too expensive.”

Diamond agrees agencies need to act now. “Even the most steadfast of historical agents have been shocked into some sort of action because now it’s affecting their bottom line, their own compensation.”

About Andrea Wells

Andrea Wells is a veteran insurance editor and Editor-in-Chief of Insurance Journal Magazine. More from Andrea Wells

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