Compensation: Module Iii-B

COMPENSATION: MODULE III-B

Producers and CSRs must be compensated for Life production, but how? It seems there are as many ways to structure a compensation plan as there are fish in the sea. Each insurance company and each insurance agency develops its own compensation plan. Thus, there is no such thing as a standard compensation plan. A rule of thumb, however, is that a good compensation plan is one that is a realistic evaluation of the effort required to meet the productivity quotas. In this 'Compensation' section, we attempt to give you some guidelines for establishing compensation plans for Life production. Keep in mind that the material is intended as a guideline, not as hard and fast rules that every agency must follow.

The material in this section is tied to the material in your 'Life Operation Options' and 'Marketing Plan' sections. We present compensation suggestions for four of the five options for establishing a Life insurance department (in Option 2, the carrier pays the Life producer, so compensation is not an issue), accounting for some of the various scenarios you might be setting up in your agency. These suggestions cover CSR compensation, renewals, subsidies, high performance producer compensation, and more. At the end of the section, we've included a sample broker agreement, a letter of understanding to use when hiring a producer, a sample producer agreement, a schedule of commissions, and a Life producer commission schedule. These documents, after review by your attorney, can be adapted for use in your agency.

Basic commission levels set under insurance company contracts with your agency can vary widely, depending on the contract and the product. These contracts will outline both basic first year commissions and renewal commissions, generally from the second to the tenth year. Some carriers offer contracts under which service fees-usually in the 2% range-are paid after the tenth year, as long as the policy stays on the books.

You can often negotiate for 'extras' in these contracts, such as an expense reimbursement allowance (ERA), which means the Life company will pay for certain expenses incurred in developing business, as long as the producer meets production quotas. In some cases, the company will pay extra commissions if the producer hits the production target. These commissions will usually be a flat percentage, which may increase as the producer develops more business. This arrangement is similar to the 'high-performance agency' contracts many P/C carriers offer agencies as an incentive to boost their Life insurance production, and is particularly negotiable under Option 1--Using an In-House Producer Subsidized by a Carrier.

The general agent contract states the total percentage of premium that your agency will receive from the Life carrier. This percentage can vary, but for our purposes, we discuss a 75-point general agent contract, meaning the agency receives a total of 75% of Life premium. Within this general agent contract will be provisions for a producer's contract, which states what percentage of the total premium is designated for paying the Life producer (including any CSR who helps the Life producer sell). 'Payment' to the Life producer can include commission, benefits, and expenses. For the most part, our discussion will involve a 55% producer's contract, meaning that a total of 55% of premium is designated for paying the producer and/or CSRs involved in the sale, including expenses. The objective is always to try and keep payment within this 55% contract. In some situations, such as those involving high-performance producers, we discuss variations on this contract.

As a rule, you should ultimately compensate Life producers on a commission/incentive basis, even if your P/C producers are for the most part on salary. Our models will show producer compensation ranging from 40% of the producer's 55% contract (22% of premium), to 60% of a 75-point general agent contract (45% of premium). On sales made to 'new-new' accounts (accounts totally new to the P/C agency, meaning that the Life producer or department generated the lead), commission could be 10% more of producer's first-year commission and 50% more on renewal. Since the time gap between writing the application and receiving the commission is generally six to eight weeks for a Life producer, you need to plan accordingly. This might mean that you want to subsidize the producer for at least one quarter until Life production starts rolling in.

One of the high-performance producer's models that you'll see initially starts with a minimal salary plus a 50% split of the producer's 55% contract. In negotiating commission levels with a producer, you should consider starting at a 50%-50% split between the producer and the agency. Again, this applies to the basic producer's commission contract only. For example, assuming a 55% producer's base contract, 50% would go to the producer (27.5% of premium) and 50% to the agency (27.5% of premium). Overrides, bonuses, and other additional income should go to the agency.

What the agency does with the extra overrides is up to it to determine.

For incentives, try using the suggested formula based on earned commission income. Once the Life producer's production incentive is paid, both parties should know that these sums are not refundable since this incentive should not be a draw against commission (you'll find more information on the concept of draw against commission later in this section). Be sure that the base producer's commission contract covers the formula-in other words, again, all expenses should stay within the 55% producer's contract. Also, all incentive bonuses should be retroactive to the first premium dollar, and you should make the first level fairly easy to attain. As the producer reaches each bonus level, the next level should be in sight. Since bonuses are cumulative, the Life producer can increase his or her percentage of the contract by as much as 25%.

Here are five options for getting your agency involved in Life insurance sales:

Option 1 -- Hire a company-subsidized producer in your agency

Option 2 -- Use a company field representative

Option 3 -- Develop a relationship with an independent broker

Option 4 -- Use your existing P/C staff to sell

Option 5 -- Create a separate Life department in your agency

Option 2 doesn't require any commission structuring on your part. The Life companies will determine the commission level. In the next several sections, you'll find suggested compensation plans for Options 1,3,4, and 5. (Option 1 and Option 5 producers can be compensated on the same basis using our sample compensation plans.)

Under this arrangement, the Life company subsidizes a Life producer who works within your agency. The subsidy usually takes the form of an interest-free loan to the agency. Depending on the situation, this support could be a level monthly payment or some percentage of commissions paid if the producer meets production quotas. In some cases, the arrangement might involve a gradual reduction of the subsidy over an 18- to 24-month period, with commissions paid offsetting the reduced subsidies. In addition, some companies might be willing to forgive the advance if the producer meets certain production requirements. Before you accept this type of arrangement, however, take a close look at any strings that might be attached. Find out if you'll be expected to write more business with the company than you would like to. Also, ask if the subsidy will mean a lower-scaled contract.

For compensation models to be used with this arrangement, see the models presented under Option 5 later in this section. They can be used in both Option 1 and Option 5 situations.

When working with an independent broker, you will need an arms-length brokerage agreement and a mutually agreed-upon commission structure. We've provided a 'Broker Agreement' at the end of this section as an example of the type of agreement you should expect to use under this arrangement. This example is provided as a guideline only; if you decide to use it, you should first have it reviewed by your attorney.

We recommend that you agree to a 60%-40% split of the general agent contract between the independent Life broker and the independent agency on first-year commissions. For example, if the general agent contract is 75% of premium, the broker's share would be 60 x .75, or 45% of premium, and your agency share would be 40 x .75, or 30% of premium. Usually under this case, the Life broker will have already established his or her own Life company contracts and facilities. Each party should bring the following components to the agreement.

The P/C agency supplies:

The Life broker supplies:

1. the Life companies and facilities
2. selling and Life markets expertise
3. support (e.g., clerical, computer, home/office liaison, quality control of applications, policyholder service, and so on)
4. commission accounting (payout to the agency)
5. accountability once per week to review activity and results

• These points assume the Life broker is using his or her companies and facilities. You are not precluded from using your own contracts and facilities in working with an independent broker. If you do, you need to increase your percentages of the general agent contract.

Renewals under this option can be handled in two different ways:

If you want your present staff to sell Life insurance, you can compensate them in a number of ways, depending on your specific arrangement. You can choose to have your P/C producers add Life insurance to their products, have your CSRs sell Life insurance, or some combination of the two.

The following three scenarios are suggestions on how to compensate your P/C staff for Life production. The objective is to keep all your expenses within the 55% producer's contract.

The expenses for this scenario include training, supervision, and so on, and will total $14,000. These expenses were projected and laid out for you earlier on page MP-9 of the 'Marketing Plan' section.

This scenario involves a CSR and a P/C producer. In this case, the producer does most of the work-setting appointments and selling. The CSR only completes the Life Prospect Profile Sheet (found in the 'Training' section of 'Life Personnel'), generating a qualified lead. The profile sheet is turned over to the P/C producer, who sets up the appointment, makes the sale, and completes and processes the Life application.

For this scenario, we will assume $61,200 in annualized premium, which, if you refer back to your 'Marketing Plan' section on page MP-10, would result from your P/C staff fulfilling 150% of the Rule of Fifty at an average premium of $425 per case. (If you recall, the Rule of Fifty calls for 2 closes per week; operating at 150% of the Rule of Fifty calls for 3 closes per week. In this scenario, that's $1,275 per week for 12 weeks each quarter. Your 'Marketing Plan' section explains this concept more fully.)

So, we have $61,200 in annualized premium. Under a 75-point general agent contract, the agency earns $45,900 in base commission. The CSR will earn between 3% and 6% of the producer's 55% contract for the lead. We'll set the CSR commission at 5.45% of the producer's contract, or 3% of total premium. The producer earns approximately 50% of the producer's 55% contract (27.25% of the premium). The CSR earns $1,836 each year on the business, and the producer earns $16,677 annually. This means the total commission payout to the CSR and the producer is approximately 55% of the producer's 55% contract, or 30.25% of premium ($18,514). Here's how the numbers work:

This scenario also involves both producer and CSR, except the CSR is more actively involved. The CSR completes the Life Prospect Profile Sheet generating a qualified lead, and sets the appointment for the P/C producer. (Remember, the CSR must hold a Life and Disability license in order to do this.) The P/C producer makes the sale and completes and processes the Life application.

Assuming $61,200 in annual premium, and a 75-point general agent contract, the agency earns $45,900 in base commission income. The CSR receives 15% of the producer's 55% contract, and the producer earns 40% of the producer's 55% contract. This works out to 8.25% of the premium for the CSR and 22% for the P/C producer. Annually, the CSR earns $5,049 and the producer earns $13,464. This means the total commission payout to the CSR and the producer is is $18,513, which equals 55% of the producer's 55% contract, or 30.25% of premium ($61,200 x.3025 = $18,513 total first-year commission). Here's how the numbers work out:

In this case, the CSR handles all the transactions. (Remember, CSRs must be licensed before they can sell.) He or she completes the Life Prospect Profile Sheet, sets the appointment, makes the sale, and completes and processes the Life application. No other producer is involved in the process.

We are assuming $40,000 in annual premium (less than two cases per week), because the CSR will be busy with other duties in addition to producing Life business. The annual premium, under the general agent 75% contract, earns the agency $30,000 in base commission income. The CSR earns 25% of the 55% producer's contract, which equals 13.75% of the premium. The dollar figure per year for the CSR would be $5,500.

You may choose to create your own Life insurance department. If your agency can support a full-time producer, both financially and operationally (the 'Marketing Plan' section can help you determine this), you can either subsidize the Life producer yourself or pay the producer on a commission-only basis. There are countless variations of these two basic compensation methods. In the following pages, we present several models for these two basic methods, using various scenarios.

No matter what compensation method you choose, it should be agreed upon by both you and the producer at the start of the relationship. At the end of this section, you'll find some forms-the 'Producer Agreement,' 'Schedule of Commissions,' and 'Life Producer's Commission Schedule'-that you can use as guidelines in establishing the agreed-upon commission arrangement with your new producer. These forms are presented as guidelines only; before using them, you should have them reviewed by your attorney.

In theory, the ideal compensation formula would be straight commission, with incentive bonuses. With this arrangement, your agency isn't advancing unearned dollars and the producer can earn the highest possible percentage since there's no need for a reserve to cover potential losses. However, your Life producer may need to receive a draw or advance, especially at the start of your relationship. If, as some studies show, the average person is about 10 days away from bankruptcy, the Life producer is probably no different. That means if the producer can't start making sales from the first day, he or she will need help in the form of a subsidy.