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Producer Compensation...How Much Can You Afford?

Unfortunately, there is no magic to setting up producer compensation programs for commercial lines. As many agencies as exist is just about how many different types of compensation plans are in place. Each agency owner or manager asks fellow agents to describe how they handle commercial compensation and invariably add their own twist to it. There are however, three things to keep in mind...

Recently, the VU "Ask an Expert" service received a question from an agent regarding what kind of compensation program he should provide for his commercial lines producers. While this can be a complex question, this article seeks to focus on a couple of important considerations. When establishing or modifying a producer compensation program, considerations include:

Are producers also owners?
Do producers have a vested interest/ownership in their book of business?
Do you have a star producer (more than $350,000 in commission produced)?

Each of these will probably require that you make some adjustments of your own to any standard compensation plan. So for starters, here is what I recommend to clients.

First of all, it is not just what you pay producers, it has to be what you can afford to pay producers. So any plan you design, should take into consideration a profit percentage for the agency.

The first step is to figure out what it costs to handle the business of the producer. We like to tell our clients to take 15% right off the top as profit directly to the agency's bottom line. Take into consideration a percentage of operating expense, management expense, and sales expense. If you provide employee benefits, retirement plans, a matching 401K, auto allowance, and/or expense money for entertainment, these all need to be considered in developing the compensation plan.

In addition to that, you may need to consider your market area...are producers difficult to retain, do they move from agency to agency? This will also need to be considered in the overall package.

Once you determine the expenses related to handling the producer's book of business and take your profit off the top, you have the realistic number you can pay this person. What, this only comes to a 15% cut of commission for the producer? No one will work for that! You are right! So there are a couple of things that you must take into consideration. What expenses did you load that would not really apply? What percentage of the commission dollar does the producer receive in non-direct commission split?

Now it makes sense why most large brokers see fit to pay producers 20% of the commission they generate. If they meet or exceed their goal, they usually receive a bonus because they have, after all, made a major contribution to the continuing success of the organization. On the other hand, if they fail to meet goal, they are penalized with a lesser commission rate or told to seek employment elsewhere.

It is equally important to tie the compensation plan to the agency's bottom line and to take into consideration the producer's needs. Consider also, the agency's growth goals...is the producer key to achieving these? Then you may want to consider higher percentages for new business and a lower amount for renewal. This will cost the agency in the first year if the producer actually brings in the new business, but then there is a price to pay for most anything worthwhile.

Anyway, I hope that you have the general idea that many issues and concerns go into developing a compensation plan that will meet your agency's needs first and, secondly, attracts and retains the right kind of producer for you. I hope that this was able to stimulate some thoughts for you.

Judi Newman
Phaze II Consulting, Inc.
1-800-638-0657
judinewman@aol.com

[Editor's Note: For additional information on producer compensation, Judi produces a three-volume agency management reference manual called The Master Agency Manager (MAM). Be sure to check out Judi's bio or contact her to find out how you can subscribe to this manual.]