Author: VU Faculty
"What is the average renewal commission that an owner should give his producers? Is there a difference to be considered as to personal vs. commercial lines compensation?" These are among the most common agency management questions we get, ranking right up there with, "How much is my agency worth...1.5 time commissions?" There are no simple answers to these questions, but we'll try to give you a little more than "it depends."
Similar to the questions posed above, here's an "Ask an Expert" question we received within days of the questions above:
"Could you tell me what is currently being used as a split between an agency and producer in a small independent shop? I've heard everything from 50/50 new and 10/90 renewal to 35/65 level. Do you have thoughts on improvements on this split? It's difficult to know how to 'value' one's employees fairly."
One of the most common questions our "Ask an Expert" service gets deals with how much should an agency compensate its producers. Unfortunately, there are probably as many possible answers as there are agency principals asking this question.
Dozens, if not hundreds, of articles have been written about the subject. Entire seminars have been devoted to the subject. But, still there is no clear, absolute best way to compensate a producer, nor is there any certain commission that's appropriate for every agency and every producer. Some agencies don't even operate on a commission basis anymore...they use a salary and bonus or profit-sharing plan.
What plan is appropriate for your agency depends on a large number of variables, with seemingly an infinite combination. However, we still understand the need for some sort of reference point. So below are some suggestions from several of our agency management gurus, including Chris Burand, Judi Newman, Al Diamond, and Howard Candage (and you'll see that even these experts don't entirely agree :-).
There are no average renewal commissions that SHOULD be paid. The average is 35%-40% on commercial and 0%-20% on personal lines.
With regard to the second question above, the split is anything and everything from 70% new/0% renewal to 20%/20% for commercial. For personal lines, the variance is even greater. The "right" answer depends on the support the producer receives, the kind of business being written, whether the agency or the producer pays expenses, what the producer writes, how much experience the producer has, and how big a book the producer has. Anyone who uses "industry averages" is sure to get the answer wrong and it is indeed difficult to appraise the value of the producer. The key is the producer must produce at least $200,000 commissions usually for the agency to break even at any split (commercial lines) if the producer is paid more than 33% on renewals.
On average, most agencies pay between 25% and 30% renewal, this does not usually include personal lines. Personal Lines is most often a one time payment (either a set amount like a finders fee or the first year commission only). New commission on commercial is usually 30% to 40% first year only.
A lot of this will depend on your agency, where it is located and what type of business you expect a producer to bring into the agency. It will depend on whether the producer is just starting out or brings a book of business. It will depend on what you can afford and how badly you want or need the producer. It will depend on what other benefits you want to provide. Whatever you do, don't consider the independent contractor arrangement unless it truly meets the test.
Specifically, with regard to personal lines, whenever possible, an agency should try to pay commission only on new business. We like a 50/50% split or a fee schedule for first year on PL. The fee schedule, to save later discrepancies about when something is new, would be $75 to $150 flat payment for new business. The amount would depend on what the agency would rather have (e.g., auto vs. HO) and maybe the size of the premium. Rarely does a producer get involved in servicing a PL account during the year or at renewal, therefore, why pay commission? If the producer is involved in servicing during the year and at renewal, the producer is probably more of a CSR type. There is not a blueprint for the industry, use your best judgment. Keep in mind, your PL book should be producing about 25-30% profit for the agency. Now, what can you pay on renewals?
With regard to the second question above, it is important to note that the following is most common:
In small to medium sized agencies, and after many years of documentation:
Personal Lines: 50% new, 25% renewal
Small Commercial: 40% new, 30% renewal
Commercial: 40% new, 30% renewal
This varies by parts of the country, however, it is important for the agency to understand completely that they can only pay what they can afford.
The agency must figure out what percentage of the commission it takes in their own agency in their particular geographical location to run the agency and include a bottom line profit. Most agencies, if they are truly honest, can rarely afford to pay much more than 35% new and 25% renewal. Anything higher and the agency is losing money just to have a producer. If the producer is there for other reasons, say to help grow the agency so the agency owner can sell for a higher multiple, than we call that a capital investment. If the producer is there just so the agency owner can say he has a producer, than it is coming out of his bottom line.
There are a few things to always consider when developing a producer agreement for compensation:
1. What can the agency afford?
2. What is the agency willing to pay for?
3. How long can the agency go before results must meet expectations?
In my experience, most agency owners hire a producer and carry them way too long, souring their appetite to try again until they find the right person. Bottom line, know what the bottom line can support.
You can't pay 50/50 just because someone else is, or some seminar instructor says this is doable. You must first understand what your agency must have to stay financially healthy and then develop a compensation arrangement that keeps this in mind.
This is a common, but very complex question. It is like asking "What is the "average" that one should spend on a Christmas present?" The answer, of course, is "It Depends":
It depends on how much the agency needs for all expenses and profit before acquisition costs.
It depends on how strong retention is.
It depends on how much the producers produce each year.
The average spent on producers in the industry is between 30% and 33% of the commission dollar. Some agents pay salaries, some a single commission rate, some split commission with more for new business than for renewal, some pay a Base and Growth split (e.g., 25% on up to the total commission of the producer last year -- 35% on growth beyond last year's commission).
Personal lines has been, is and will continue to be a profitable part of an agency IF AND ONLY IF renewal commissions are not paid to producers. Producers are helpful in getting the business, but the inside staff and their response to customer inquiries are what keep the customers. You can't afford the grade of CSR's you need AND pay renewal commissions. The smart money is paying producers a strong new business commission as a finder's fee, then letting the agency use the renewal commissions to pay the rent.
With regard to the second question above, Good Question...and you already have the right answer!! The payouts to producers are all over the ball park. However, the RIGHT payout actually depends on the financial condition of your own agency. If you take your normal business expenses (excluding producer costs) including your compensation as a manager and a fair profit margin (you define "fair"), what's left over is the percentage of each dollar available for "acquisition costs," the principal one of which is producer compensation.
If you spend 90 cents of every dollar on overhead, a fair salary for you and a modest or realistic profit margin, you only have 10 cents of every dollar available to spend on your producer. This doesn't sound like much but, remember, the producer isn't selling to your existing accounts. So 10% of $500,000 existing commission gives you $50,000 available for producer compensation without ANY new business coming in yet. Of course, the producer will be required to produce a specific (or minimum amount) each year. That $50,000 (or a part of it) will be used to sponsor that growth.
Now, to answer your question more directly, what I see most around the country now is 40% new, 25% renewal commission to producers, or between 30% and 33% of the produced dollar over time.
We have been trying to convert agencies from "new and renewal" to "base and growth" commission instead. This would define the producer's production by the gross commission of the producer in the last year. That becomes his base. He gets the fixed, base commission (e.g., 30%) of every dollar he brings to the agency this year up to last year's base commission. Every dollar of growth beyond the base commission is paid at the higher, Growth basis (e.g., 40%-45%).
What this does is eliminate the "fast-cancel" penalty to the agency that happens when it pays the higher new business commission to a producer only to find the policy canceling after the first year because the producer didn't pay enough attention to the client to keep the account more than a year. Under the old scenario, you would pay the higher first year commission to the producer for that account last year, and would again pay the higher first year commission for the account solicited to replace that account this year. You have already spent the money to quote and market the account last year and will do so again for the new account this year. The new accounts to your agency are the most expensive to you (regardless of how much you pay the producer). Paying a higher commission for that sale to the producer as well only makes sense if you are going to keep the account for more than a few years. The commission payment on base and growth penalizes the producer, instead of the agency, for his losses from one year to the next since he must produce up to his "base" commission each year before his "growth" commission kicks in.
Of course, when rates harden, the producer (and the agency) can lose accounts and gain revenue. When that happens, the producer may achieve "growth" commission without writing a single new account. However, the work effort in convincing clients to stay and not shop when their rates are going through the roof is sufficiently difficult to warrant the appropriate producer compensation.
Some of the new producers I know are making 40-50% of their new commission and around 20 or 25% of renewal. The agency who returns 25% ROI after owner base compensation and sales compensation is doing a good job. 30% is a great job! That means that you are losing money on new business and, at 25% on renewals, you are giving the producer most of the money you make. That being said, the 75% included producer compensation, so I think 25% on renewals is fair. If that is the total compensation package plus benefits. If you are paying a salary plus commissions and benefits you are getting quite thin.
With regard to personal lines, it is common for the producer only to get commissions on lines that pay a certain commission level, say 5% or more or even 10% or more. This is usually on new business commissions and not renewals...renewals are usually on the entire book of renewal commissions. If this is the case they are sometimes paid the same as on personal lines. If this is not the case, the commission is usually lower on commercial lines. It is just so much more service intensive. It also depends on what you want the producer to "produce". If you are trying to encourage Personal Lines Production, for instance, I know which one I would pay more for!
One thing I would like to add is that sometimes when the producer comes forward and demands higher compensation, it is a lack of understanding of the entire agency financial picture. The owner's reaction is to then use ownership in the agency as a tool to compensate the producer. In my opinion, ownership is reserved for those who will carry on the agency and only for that. It is not to be used for compensation. Unfortunately, we have educated the young people in our business that ownership is a compensation tool and caused them to demand it through our industry practices. We need to separate the two, not intermingle them and misuse them.
Editor's Note: If you would like more in-depth analysis of these issues, we are aware of some products that provide additional information, worksheets, etc.: