Producers As Profit Centers

PRODUCERS AS PROFIT CENTERS

Sales is the lifeblood of your agency, and your sales force is one of the biggest investments in your agency you can make. How you compensate your producers affects producers' satisfaction-and thus their effectiveness. More important, it directly affects agency profitability.

An effective compensation program should help you with the three Rs:

• Recruit the best staff available
• Retain these employees through motivation and incentives
• Reward behavior that helps the agency meet its overall business goals

Each producer should generate more revenue than it costs to support his or her sales efforts and to service the book of business. In other words, each producer should return a profit to the agency.

Viewing each producer as a 'profit center' has several benefits:

• Evaluating individual producer performance-not only the size of the book of business, but its ability to generate a sufficient return on your investment-lets you accurately measure the effectiveness of your sales force.
• Measuring individual profitability facilitates individual goal setting for new and experienced producers. It's also a great management tool for helping producers understand the economic drivers of the business and their contribution to agency profits.
• Understanding the costs associated with producing business permits you to make more intelligent business decisions about adding to the sales force. It also provides insight into the amount of service staff required to support a producer's book of business.
• Reviewing income and expense at the producer level enables you to know what you can afford to pay your producers, and allows you to measure the success of your compensation plan and make adjustments where necessary.

Profitability can be measured by allocating sales and servicing costs to each producer. Many agencies do this to some extent, but most don't go far enough. It's generally easy to allocate direct expenses such as producer salary (or commission) and benefits, travel and entertainment, and automobile. If customer support staff is assigned directly to producers, some of the costs for support staff salary may also be easily identifiable.

However, many more expenses should be accounted for to determine the profitability of your producers' business. In fact, only a few line items legitimately should not be charged against producer profitability: Non-cash items such as depreciation and amortization of books of business are the primary ones. If some discretionary owner compensation is categorized as sales or other expense, this also should not be included in producer allocations.

Everything else should be. Operating expenses such as telephone, printing, data processing, rent, building utilities, professional fees, and so on are all necessary expenses to running the business. They should be allocated to individual producers based on a pro-rata basis. Furthermore, a representative share of salary and related costs for administrative support staff as well as customer service staff should be charged against each producer's 'profit center.'

With this profit center approach, 'house' business is also treated as a profit center. The house account will undoubtedly be more profitable than any producer profit center, simply because no compensation is being paid to a producer to handle the book. But other expenses do apply. The bottom line is that an individual producer should be 'charged' for expenses associated with his or her book-but not for expenses to service and support other agency business.

If actual costs are known, allocation is a simple process. When costs are pooled, they need to be allocated based on a percentage of revenue, number of accounts, or on the basis of head count (in the case of some expenses, such as costs for rent, utilities, furniture, and computers).

With diverse books of business across a large producer staff, additional analysis may be necessary to weigh business for degree of complexity or service intensity. For example, some large accounts generate relatively little more service than small accounts. Average premium per account should be considered, since producers specializing in large accounts typically will generate significantly more profit than producers with large books of small accounts. And some classes of business are much more service-intensive then others, making profitability more difficult to achieve.

It generally takes a lot of work to generate a full producer profitability analysis, and unfortunately, you probably won't get much help from your management system. Some systems allow profit center accounting, but you'll have to create your own formulas for allocating salary, benefits, and operating expenses to each profit center. What's more, few agencies have set up their systems to treat individual producers as profit centers. If your system will allow you to do this, we strongly recommend it. A one-time effort will give you years of improved management information-information that will help you make better decisions about your business.