HOW MUCH SHOULD YOU PAY YOUR PRODUCERS?: PART II
by the IIABA Virtual Faculty
“What’s the average renewal commission that an owner should give his producers? Is there a difference between Personal vs. Commercial Lines compensation?” These are among the most common agency management questions. Although there’s no simple answer, this two-part article by the IIABA Virtual Faculty will try to give you a little more than “it depends.”
FACULTY RESPONSE
This is a common, but very complex question. It’s like asking, “What’s the ‘average’ that one should spend on a Christmas present?” The answer, of course, is “it depends” on:
- How much the agency needs for all expenses and profit before acquisition costs.
- How strong retention is.
- 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, others provide a single commission rate; some split commission with more for new business than for renewal; while others 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 remain, a profitable part of your agency if and only if you don’t pay renewal commissions to producers. Producers are helpful in getting the business, but your inside staff and their response to customer inquiries are what keep customers. You can’t afford the grade of CSRs you need and pay renewal commissions. It’s better to pay producers a relatively high new business commission as a finder’s fee, and then use the renewal commissions to pay the rent.
With regard to the second question, payouts to producers are all over the ballpark. However, the right payout depends on the financial condition of your agency. If you take your normal business expenses (excluding producer costs), including your compensation as a manager, plus a fair profit margin (you define “fair”), what’s left over is the percentage of each dollar available for “acquisition costs” — primarily 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 available to spend on your producer. This doesn’t sound like much, but remember that 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. Of course, the producer will be required to produce a specific (or minimum amount) each year. Use this $50,000 (or a part of it) to sponsor that growth.
I’m mostly seeing 40% new, 25% renewal commission to producers, or between 30% and 33% of the produced dollar over time.
We’ve been trying to convert agencies from “new and renewal” to “base and growth” commission instead. This would define the producer’s production based on their gross commission in the past year. They get the fixed, base commission (e.g., 30%) of every dollar that they bring to the agency this year, up to last year’s base commission. Every dollar of growth beyond this base is paid at the higher, growth basis (e.g., 40% to 45%).
This eliminates 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 pay the higher first-year commission again for the account solicited to replace that account this year. You’ve already spent the money to quote and market the account last year and will do so again for the new account this year. These new accounts 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 makes sense only if you’re going to keep the account for more than a few years. The “base and growth” commission penalizes the producer, instead of the agency, for their losses from one year to the next because they must produce up to their “base” commission each year before the “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 might achieve “growth” commission without writing a single new account. However, their work in convincing clients to stay and not shop when their rates are going through the roof is hard enough to warrant appropriate producer compensation.
FACULTY RESPONSE
Some of the new producers I know are making 40% to 50% of their new commission and around 20% or 25% of renewal. The agency that gets a 25% ROI after owner base compensation and sales compensation is doing well. That means that you are losing money on new business and, at 25% on renewals, you’re giving the producer most of the money you make. That being said, because the 75% included producer compensation, I think that 5% on renewals is fair, if that’s the total compensation package plus benefits. If you’re paying a salary, plus commissions and benefits, you’re getting quite thin.
With regard to Personal Lines, it’s common for a producer to get commissions only on lines that pay a certain commission level, say 5% or more or even 10% or more. This is usually on new business and not renewals — which are usually on the entire book of renewal commissions. If this is the case, they’re sometimes paid the same as on Personal Lines. If this isn’t the case, the commission is usually lower on Commercial Lines because it’s far more service intensive. It also depends on what you want the producer to “produce.” If you’re trying to encourage Personal Lines production, for instance, I know which one I would pay more for!
Sometimes when a producer comes forward and demands higher compensation, they don’t understand the entire agency financial picture. The owner’s reaction is often to use ownership in the agency as a tool to compensate the producer. In my opinion, ownership should be reserved for people who will carry on the agency and only for that. It should not be used for compensation. Unfortunately, we’ve educated the young people in our business to believe that ownership is a compensation tool, thus causing them to demand it. We need to separate ownership from compensation, rather than intermingle and misuse them.
This article is reproduced, with permission, from the VuPoint Newsletter of the IIABA Virtual University. For more information on the Virtual University, click here. The members of the University Faculty offer expertise in every aspect of agency management and marketing. Many of these faculty members are available for in-house training or consulting. For contact information on faculty members, click here.