Author: VU Faculty

Most of the compensation questions our agency management gurus get deal with producers since the variations are widespread. But, compensation issues for managers, CSR's and others can be just as complex, as indicated by this recent question, "How would you structure compensation for a commercial lines manager? This is a new position and the individual is also a producer paid on commission."

It is often difficult to know what is a fair and reasonable amount to pay largely noncommissioned staff members. Like insurance rates, compensation rates should be adequate, but not excessive, not unfairly discriminatory. There are a number of salary surveys conducted annually by a number of consulting firms, but a "CSR" in one agency may have responsibilities, skills and performance levels totally different from a "CSR" at another agency.

When you consider such factors, along with the fact that the person is a commissioned producer, it gets even more complicated. Below are just some of the considerations suggested by our agency management gurus in response to the inquiry above. In addition, here is some additional information that our agency management experts asked about the agency and the position:

QUESTION: What will the production responsibilities be for this person, ie: goal of new business, renewal retention, etc.?

RESPONSE: None set at this time but in a growth mode.

QUESTION: How many people will this person supervise?

RESPONSE: 5 to 6 people

QUESTION: What is the job description for the person?

RESPONSE: To manage all aspects of the commercial lines dept. with emphasis on production.

QUESTION: What are the specific commercial management responsibilities?

RESPONSE: Supervise CSR's, work with producers on marketing accounts including calls on clients and prospects, hiring and training new producers, PR with current carriers and acquiring new ones.

This person has been with the agency for the past 16 years. The agency has recently been sold and the new owners have asked him to manage the commercial lines department. They are not sure how to compensate him, so this is the reason for the question. They have discussed an override of some kind but did not know how to base it or at what percent.

First, I wouldn't have someone managing who was also a productive producer. Something will suffer -- either production or management of the production of others in the agency.

However, if you must do so, identify the proportion of time spent on management vs. sales. Sales time is compensated through commissions. Management time is compensated on a salary commensurate with the management task at hand. For instance, if you would pay $50,000 to "buy" a full time manager for the department and your manager worked the job for 50% of his/her time, the right compensation would be $25,000/year.

Another way of compensating would be through objectives that managed the growth of the department (total revenue, not just his/hers) combined with loss ratio and retention. A service department certainly manages loss ratio through active risk selection and retention through quality and proactive customer service. In many agencies, it does not manage new business -- that is the domain of the sales department or producer staff and marketing departments.

You, as owner set objectives re: retention percentage (of customers), loss ratios, and overall growth. If achieved, the "manager" gets a proportion of the book of business as compensation (it need only be a small percentage). You start the first year based on expectations of these measurements. If not achieved, the manager is demoted or has compensation reduced in the second year. If achieved or exceeded his/her salary is justified or (s)he gets a raise.

I hope this simplistic answer to a complicated question helps you.

 
I always use the same rule of thumb that all management compensation should total approximately 5% of revenue. That 5% can go to one manager or split in some fashion for several managers but it should never exceed the 5% total. The person should then also be paid the regular producer compensation. I have found this system works quite well because it prevents managers from subsidizing producers and yet it keeps managers from being overpaid. I hope this helps.

 
Depending on the part of the country, the base salary for this position ranges from $47,000 to as much as $70,000. Many agency owners structure the compensation to provide a basic income and a bonus system that rewards performance.

Since this position appears to encompass sales and service and I will assume marketing activities, there are a couple of ways to structure the compensation.

Base Salary, plus....

Profitability Bonus - this would include a part of the contingency payments received from insurance companies for meeting objectives. Generally the commercial department has the biggest impact on this incentive.

Retention Bonus - Getting new accounts is expensive, keeping them allows the agency to build a profit margin. There should be some kind of measure based on premium, commission, and number of policies that you will start with and determine what is reasonable to have at say the end of 12 months. A ratio for each is advisable.

Growth Bonus - since the agency is in a growth mode, rewarding success seems to always work. Here it can be divided into two parts: new business growth and overall book of business growth. New business is easy, it is what comes in the door and there should be enough to meet or exceed the goal. Overall growth includes new business and retained business including rounding of accounts, growth of accounts, etc. There should also be a goal for this activity.

So, an example is as follows:
Base Salary
Profitability: 1% of agency profit
Retention: goal is 85% meet or exceed goal 5% of annual salary
New Business: 1% of goal
Overall Growth: 0.5% of difference from last period to current period.

Based on the agency's overall goals, percentages can be adjusted to make sure that everyone in a position to do is directing their efforts where they should go. Hope this is of some help.

 
The easy answer is to approximate the time the person spends managing the C/L department. Let's say 50%. You then find out what the going rate is for a C/L manager in the area, by calling other agencies. Let's say $46,000. The compensation package then is 50% of $46,000 + whatever the commission split is for a producer. The problem is that I've never seen this work. Either the person will spend their time selling and spend insufficient time managing, or vice versa.