In the Spring of each year, crocus’ bloom, the grass turns green, and a myriad of “SURVEYS” are released, all valuable, spouting “industry averages” and best practices.  Agency owners are drawn to these surveys like flies to sugar because we’re never sure whether we are cheating ourselves or our employees in terms of their salaries.  That’s why our Composite Group studies, the largest in the industry, is released in the Fall instead of in the Spring.  We don’t ‘think’ that numbers lie, we KNOW they do!  Statistics can give you averages and medians, but who wants to strive to be average?

We have all the statistics available that the smaller surveys have.  But instead of calculating averages to see how much and how best to pay our people, we ask the successful agents how they do it and share the results with you.

Here are some (paraphrased) responses we have received from agents, big and small, regarding their methods of compensation (and our editorial remarks for clarification):

When the agency makes more money, I make more money as the owner and I share the benefit with my employees through bonuses and strong raises.  When the agency loses money, I take the “hit.”  I try to pay a raise, even in bad times, but it may be minimal.  If I can’t pay my bills, then there are no raises for anyone.

This represents the traditional approach in which the agency owner treats their employees like family.

I give my folks a decent raise every year to keep up with inflation, a Cost of Living Adjustment (COLA).  If the year is good, they still get the COLA and I make more money myself.  If the year is ‘not so good’ they still all get the Cost of Living Adjustment and I take a hit.

Some of these agents are just trying to keep their employees up to the changes of cost of living, 2% to 3% regardless of performance of the individual or of the agency.  Many will lose their most valuable employees if there are others who perform poorly and still get the same amount.  We’ve noticed that some of these agents will take exorbitant compensation for themselves in the good years (as their “just due”) and complain bitterly but still give COLAs to their employees when they are actually losing money.

The agency supports my family.  I need to make a certain level of living.  If the agency provides me that amount, I’ll consider raises on an equal basis or by individual performance.  If the agency doesn’t make enough, there are no raises until my compensation model is achieved.

This type of agency could be very small, but we’ve also seen quite large concerns act the same way.  They often leave no money in the agency at the end of the year.  Raises for employees depend on whether the agency is making MORE or less money than in prior years and could be on a COLA or merit basis but not on an incentive basis because they want to guard against paying employees more when they don’t have to.   This is the ‘subjective approach’ to compensation.

The business is a BUSINESS and, like any other business, it is required to make a reasonable profit for its stockholders.  If it were a large, public company and didn’t keep its stockholders happy, they would sell their stock and find other, more lucrative ways of investing.  Even though it’s a small company with only a few stockholders, we have ‘options’  and if we don’t make money or lose money, we will certainly consider earlier retirement or sale to use the value of our asset better.  We set a profit target and no one gets a raise until that target has been achieved.

Most of these agencies are achieving sufficient scale to have professional management (owners or not).  The owner(s) are businesspeople who seek a fair compensation for themselves (compared to what non-owners would get for the same job) and require that their asset gives them an ROI that is competitive to what they could do with the value in cash in the marketplace.  Their compensation programs are usually Merit based or Incentive based and tied to budget results of the agency or even of the departments.

We set a profit goal within our Annual Planning and Budgeting.  But our employees are our most important asset and we keep them motivated by paying them according to their productivity growth.  Everyone knows their measures of success and tries to achieve them every year.

This response has come from a number of Agency Consulting Group, Inc.’s ICP (Incentive Compensation Program) agencies. Link here if you haven’t been familiarized with the ICP concept.

We’re large enough that our budget controls our compensation levels.  We see the surveys and reports every year, but, frankly, we pay more attention to our bottom line than to any statistics.  If we achieve our budgeted revenue, we know that our profits will be there and we allocate a specific percentage to compensation.  We allocate a percentage of that growth to raises and distribute those amounts to our divisions by virtue of their revenues and profits.  Some of our departments pay on commission, others pay based on individual merit and we have some groups that are working together in an incentive basis where group success achieves group raises.  We only bonus for unique and exceptional situations, not for general success.

These are usually larger agencies but, surprisingly, some small, fast-growth agencies also appear in this group.  These agencies have an owner or key manager who is financially very astute.  By years of effort, they understand that productivity and growth is key to profits and compensation is a lifeline to profits.  So the budget is KING in these agencies and compensation advances are tied to agency or department growth and profit. 

One common thread that ran through all of our responses is that difference in treatment of Contingencies and in how (and if) bonuses are paid.

Small Mom & Pop shops can’t pay their bills without a good contingency.  They count on it to operate, so they just include it in growth and profitability.  They pay any net contingency to themselves (the owners) and/or to employees as bonuses, a benefit of a good year.

Agencies who have been burned by needing contingency money to operate and experiencing a bad year (or a bad run of years) have gotten smart enough to limit their spending to their commission income only and leave their annual contingencies as bonuses for the owners and/or employees.

Agencies smart enough to know that they only benefit from GROWTH have learned to use some or all of their contingency income to support their growth (new producers, new support staff, marketing efforts, acquisitions, etc.).

Some agencies with historically strong Contingency Ratios (this year’s received contingency income compared to last year’s Commission Income) set aside a part of their contingency income (as a percentage) each year before consideration of bonuses.  They actually budget contingency income BELOW THE LINE (after Pre-Tax Profit in the Operating Statement) to make expensing without contingency the norm instead of the exception.

Other agencies with historically strong Contingency Ratios (usually because of sufficient premium in carriers to insulate contingency income from those Companies -- $5MM to $10MM+ of Premiums with a carrier) will return to melding contingency income into general revenue for expense distribution and growth and profit budgeting.  If your agency underwrites its book of business with a specific carrier to historically profitable levels those premium levels will generally insulate you against severe contingency changes with the exception of Cat Codes (usually addressed with Stop Losses).

If you would like to learn more about Incentive Compensation Plans, other producer, owner/manager and employee compensation programs and Strategic Planning and budgeting, please call us at 800-779-2430.