$200,000 Gross Commission Per Producer: Dream Or Reality?

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What’s your agency’s break-even point for producers? Does $200,000 sound high? Read this document by Chris Burand to find out why it’s probably a realistic figure for you.

I’ve received incredulous looks and e-mails in response to my speeches and articles stating that producers must produce an average of $200,000 in gross commissions for an agency to break even.

Many agency owners have responded that their towns are too small to generate commissions of this size. Not enough large accounts exist, the accounts are too small, and/or the agency just doesn’t go after enough large accounts to generate $200,000 commissions per producer. If this sounds like your situation, I encourage you to take a hard look at whether large accounts exist and whether you can write them. Often these beliefs become self-fulfilling prophecies.

I’ll always remember giving a presentation in a prairie state where the audience advised me my suggestions weren’t practical for their sparsely populated farming counties. Sounds reasonable, right? Wrong. During a break, one agent told me about several $50,000-$100,000 farming accounts he wrote in the same counties in which the vocal agents lived. Those agents, he said, weren’t his competition because they never tried to write these large accounts.

I’ve found this to be the case many times when I’ve consulted for two agencies in the same small town. One agency will advise that large accounts don’t exist in the town, while the other will be writing many large accounts.

If an agency just won’t write large accounts, is it still critical that producers produce $200,000 in commission? Consider how much it costs to support a producer and their book (industry averages are based on the Growth and Performance Standards, The Academy of Producer Insurance Studies, 2000):

 
Industry Average
Big City Agency
Small Town Agency

Producer’s book (commissions) 

$170,000
$170,000
$170,000
Producer’s cut: 40%
$68,000
$68,000
$68,000
CSR
$30,000 
$32,000
$28,000
Benefits
$9,800
$10,300
$9,300
Selling expense
$27,200
$27,200
$27,200
Administrative expenses
$61,200
$64,600
$56,100
Total expenses
$196,200
$202,100
$188,600

Whether in a small town with lots of small accounts or a large city with large accounts, every year, a producer with an average book costs an agency $18,600-$32,100 more than they produce, or 11%-19% of the book. And this doesn’t include management or owner compensation, staff other than the CSR, benefits for anyone other than the producer and CSR, profit sharing, or profit.

Some producers with smaller books might share a CSR. Even if the CSR’s expenses are split, here are the results:

Producer’s book (commissions) $140,000

Producer’s cut: 40% $56,000

CSR $15,000

Benefits $7,100

Selling expense $22,400

Administrative expenses $46,200

Total expenses $146,700

Even if we pay the CSR only half the going wage, the producer still costs the agency money. In other words, being in a small town doesn’t adequately decrease an agency’s cost of sales. The producer must still generate at least $190,000 to $200,000 for the agency to break even ($150,000 if CSRs are shared). Since we’re spending the same regardless of whether we’re writing large or small accounts, what can we do about it?

First, do you really need a producer or as many producers? Many agency owners believe they need producers to legitimize their business. In other words, with a producer (and sometimes the more the merrier), the agency owner feels more important. Without producers, or as many producers, they sometimes feel inferior to their larger competitors. So they hire producers, even if it costs them their wallets. This is fine if the owner understands the cost.

Second, if the goal is to make money, you must treat producers as investments that must produce more than they cost. Thus, for an agency with average costs, each producer must generate at least $200,000 in commissions. If the agency writes small accounts, the agency’s cost doesn’t decrease enough to allow producers to write less total commissions (in fact, small accounts often increase the cost because the time involved on small accounts doesn’t vary much from larger accounts). When agencies pay producers a cut of what they produce in total, the producer cost is the same regardless of whether the agency is writing small or large accounts, in a small town or a big city.

Third, pay producers for making profitable sales. A compensation system that pays a straight X% on new business and X% on renewals encourages producers to write anything and everything and gives them inadequate incentive to build large books. The only benefit to such a compensation system is that it’s extremely simple. With today’s information systems, firms can administer more complex compensation plans. I strongly recommend compensation plans that consider such critical factors as account size, book size, hit ratios, growth, and retention.

$200,000 might still be an eye-opening amount, but that’s what a producer making the average commission split must generate for an agency to make money. Anything less is a money pit. Improve your agency’s producer compensation and productivity — and watch your profitability, growth, and value improve.

Chris Burand can be reached at Burand & Associates, LLC, PMB 345, 215 S Victoria Ave., Suite E, Pueblo, CO 81003, (719) 485-3868, fax (719) 485-3895, e-mail chris@burand-associates.com, or Web site www.burand-associates.com.
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