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Concepts of Producer Compensation

During the soft market, most agents continued to grant salary increases and permitted their profits and personal incomes to erode each year. However, prudent agents implemented Incentive Compensation Programs (ICP) to reward employees and to keep the strongest performers in their agencies. As we all know, the soft market is over. However, while the circumstances are different than a soft market, the ICP in a hard market is a tool to both reward and motivate your strong employees....

One of the most common questions we are asked during consultations and from agents visiting our website (www.agencyconsulting.com) and calling us for advice (800-779-2430) regards compensation for owner/producers, existing producers and new producers. The principal question is how much and how to pay for production that both fairly compensates salespeople and continues to incent them for continued growth.

The answer is complex because the same compensation models don’t fit all producers.

The most important (and most controversial) compensation issue that we espouse is that owners should not “earn” profits. Owner compensation, like all compensation in an agency, should be based on PERFORMANCE. The easiest way to look at compensation is with the Replacement Factor. What would it cost to replace the function for which the compensation is based? In other words, if a staff member (at any level) were to hit the lottery and retire, how much would be paid to replace him/her with like kind and quality? Total earnings for owners are not limited to performance-based compensation. Bonuses and dividends can boost total earnings for owners to the levels desired (while still leaving the company fluid and liquid).

If owners can accept base producer compensation based on performance then the trigger for increased compensation for their books of business is growth. As long as their books of business grow in number of accounts, the percentage that they take as compensation should remain stable. We use number of accounts because of the fluidity of premiums and commissions in hard and soft markets. Market conditions can change the amount of commission created by a book of business. Those market conditions do not act as an accurate measure of performance.

Performance is better related to the addition of customers every year. So our compensation programs incent owner/producers to remain active in their own agencies. We avoid the R.I.P. (Retired In Place) owner who decide that once they achieve a certain level of success, they can retire into a service, administrative or executive role and no longer have to perform to the levels that caused the success in the first place. The key to the success of this compensation model is to decrease owner/producer performance-based compensation by 1%/yr for years in which their books of business (accounts) do not grow. Growing past prior high levels regains the owners original compensation percentage.

Non-Owner producers also are compensated on a commission basis. But their role is primarily one of the generation of sales activity. Sales activity is defined as sales calls (visits) to potential clients who are not yet insured by the agency. So lower sales activity results in lower compensation levels. Regained activity regains compensation levels to the nominal levels commensurate with the producers’ book of business size. This incentive program rewards, not only the importance of the revenue size of a producer, but also keeps producers’ focus on the activity that result in increased production activity.

New producers have a compensation level that reduces dramatically for every 2 months that they miss their activity levels.

This form of focused incentive program does not interfere with commission percentage growth based on size of book of business. Agency Consulting Group, Inc.’s Producer Compensation Programs provide for tiered producer compensation that rewards larger producers with greater earnings. This is justified by the economies of scale in an agency. A producer who generates $500,000 of commission is simply more valuable than one who generates $200,000 in commission. The initial tier is designed based on the overhead and profit needs of the agency.

When these fixed costs (yes, profit should be fixed as the minimum required by any business) are considered, an identifiable percentage of the commission dollar remains available for producer compensation. If an agency pays more than this fixed cost for average producers, they generate a loss on every dollar sold. But if that identified percentage is used for the average producer, we must understand that producer who far exceed the average will overcome agency overhead and provide greater returns than contemplated in the minimal commission rates.

Our compensation plans provide for 5% commission increases at two or three tiers of production. The agency overhead does not increase with increased production and the excess profits are shared with the agency’s most valued producers. This increased commission rate also provides sufficient rewards to the successful producers to avoid their potential loss to competitors.

The final class of producers that must be considered are the new producers who are paid a draw against their potential for from one to three years while they establish themselves within the agency. These producers are also paid based on sales call activity – but with a twist. A producer who is as active as an agency projects will make them eventually successful earns his/her draw while building his/her book of business. If a producer provides consistent and active sales call activity and does not develop a reasonable number of sales is fulfilling his/her charter in the agency.

It is the responsibility of the agency’s Sales Management to train and educate the producer to achieve the closing and success rate needed to achieve goals established for the producer. However, if the producer cannot manage sufficient activity to minimally result in achievement of sales goals, there is nothing that an agency manager can do to motivate the employee.

So, this performance-based program reduces draw-based producers’ compensation by 10% for every two successive months that they don’t achieve the required number of sales calls. This leads to a motivation by virtue of compensation. If the producer wishes to achieve the promised compensation levels, (s)he must generate the required level of activity that, if consistently achieved, will result in sufficient successful sales to support the compensation draw (and more).

Performance-based compensation is only a part of an Incentive Compensation Program. However, it bears the emphasis of a separate article because it stresses penalties and rewards for activity, not just for sales.

Note: For additional articles on agency staff compensation, click here.