Successful Compensation Plans

SUCCESSFUL COMPENSATION PLANS

by Catherine Oak

How much can you afford to pay non-owner producers? The typical response: “It depends on the job performed.” The critical question – the criterion on which pay should be based – is, “Who is doing the work?”

For example, do your producers also perform most of the servicing on their accounts? Are the technical service reps and support personnel competent enough for producers to delegate these tasks to them?

What is the servicing function? A true customer service representative (CSR) should handle most of these activities on existing accounts:

• Client phone calls

   

• Client and company request mail

   

• Claims reporting

   

• Driving the information-gathering process for renewals

   

• Marketing/placement activities (unless you have a central marketing department).

   

PRODUCERS SHOULD DELEGATE

Producers need to be somewhat involved in these servicing activities – but to what extent? Once again, this depends on the technical capabilities of your agency’s service and support staff. It might also depend on how well the producers’ clients are trained to deal with CSRs and assistants.

Producers often create service work for themselves for one of two reasons:

1. They lack confidence in the CSR’s or assistant’s capabilities.

    

2. They don’t know how to delegate this work.

    

Sometimes, the producer’s ego is the problem (“My customers expect me to be involved” or “No one can handle my clients as well as I can”). Clients want good, timely service. A good, properly trained service staff can satisfy that need if producers want them to. What’s more, delegating servicing activities will allow producers time to sell new accounts. The firm’s growth depends on this new business flow from producers.

WHAT CAN YOU AFFORD TO PAY?

Besides being based on the job performed, producer compensation also depends on

1. What your competition is paying

    

2. The average size of accounts available to be written in the area

    

3. Where you’re located (metropolitan, suburban, or rural)

    

4. What you can afford to pay

    

Today, a well-run firm that’s managing expenses properly and paying producers benefits and business-development expenses can’t afford to pay more than an average Commercial Lines commission of 30%. This is true if the owners want to realize a 15% to 20% pre-tax profit-before excess compensation (bonuses) to owners. It also assumes that 20% is spent on support staff for these producers.

Note the term “average commission.” Some owners who want their agencies to survive have decided to invest a portion of their profits in new business. This investment is their acquisition cost. Higher commissions for new business reward good producers for bringing new accounts to the agency.

The average renewal commission paid by well-run, high-valued firms is 25% to 35%. This range depends on whether the employer pays for certain expenses resulting from the producer’s employment and activities, including:

• Employee benefits (including Health insurance, payroll taxes, retirement plans)

   

• Business-development expenses (including travel, entertainment, auto, club dues, etc.)

   

The affordable commission rate also depends on whether:

• Good technical service reps can take on responsibilities delegated to them.

   

• A central marketing/placement department supports producers’ new business efforts.

   

COMMERCIAL LINES

Employee benefits and business-development expenses usually account for approximately five additional points of commission. Accordingly, you should base an affordable commission rate not only on who does the work, but on whether you pay benefits and perks and provide strong service and marketing support.

There’s a trend today to pay producers less commission for small accounts. “Small” is usually defined as Business Owner Package policies (BOPs) or small monoline accounts. However, the definition of “small” also depends on the makeup of your agency’s book of business and what’s available to be written in the area.

Firms are beginning to delegate their small accounts to CSRs to sell and service. The accounts should also be put on direct bill to avoid collection problems. If you have a Small Commercial Lines department (or CSR) handling small accounts from the start, don’t pay producers a first-year finder’s fee or commission.

If producers do some of the initial work on the account, some first-year commission or fee might be warranted, but they should be paid less than they receive for medium to large commercial accounts. If CSRs do all the service work, don’t pay producers renewal commission. The accounts should be put on direct bill, if possible.

PERSONAL LINES

The trend in compensation arrangements for producers of Personal Lines accounts is similar to that for Small Commercial accounts. Pay Commercial producers (not Personal Lines producers) little or no commission on Personal Lines business if the CSRs are doing the work. Some agencies are paying Commercial producers neither first-year nor renewal Personal Lines commissions.

Producer compensation for at least VIP Personal Lines package policies might be warranted, however, to encourage Commercial producers to refer the leads on these good-sized accounts to the Personal Lines Department CSRs. These packages usual generate adequate commissions, which allows for first-year commissions to producers.

The types of accounts available to be written in your area might also justify paying Commercial producers commissions for Personal Lines business. Once again, keep in mind who’s doing the work when designing the agency’s compensation plan.

LIFE/GROUP BUSINESS

Most P/C agencies also write Group and Life insurance. Producers usually refer these accounts to in-house Life/Group specialists or to an outside specialist with whom an arrangement has been made. Compensation in Group insurance should usually have the same commission basis as medium-size to large Commercial accounts because of the commission paid by carriers and the service work involved.

Life insurance commissions are usually split between the referring producer and the Life expert for the first year only. Some agencies keep all Life-renewal commissions and overrides from the insurance companies.

SALARY VERSUS COMMISSION

You producer compensation method must be fair. Consider salaries or draws against commission only as a convenience for producers, since the timing of renewals can leave some lean months.

If you pay salaries (rather than paying commissions as accounts are written), base them on a commission formula (25% to 35% of the existing book handled the previous year as of year’s end). Give salaried producers bonuses for new business written throughout the year, perhaps monthly or quarterly.

Some producers and CSRs are compensated for new accounts written on a “net new” basis— that is, “net” of lost accounts. This encourages producers to work on account retention. This concept has great merit, since it’s difficult to change producers’ salaries mid-year.

OTHER MOTIVATORS

Compensation is not the only motivator for producers. Different producers are motivated by different things. Find out what motivates your firm’s producers. It might be time off. Older producers are often concerned with their need for a pension or profit-sharing plan, which can be added to their Benefits package. They need to build something for their retirement, since they often have no stock in the firm to sell off.

SUMMARY

Compensation for owners and producers is never easy to address. This is a major agency expense that can’t be ignored by rationalizing that “This is what we’ve always paid.” This attitude can, and often does, creates financial problems.

Grandfathering the existing compensation plan for a period of time (or indefinitely) for accounts already on the books is one way to introduce a new compensation plan, preventing an immediate impact on producer incomes. Apply the new plan to new accounts written as of a certain date. This gives producers a chance to write new business to make up for the reduction in future commissions.

Take a look at who’s doing the work in your agency and how this relates to your existing producer compensation plan. Then determine what you can afford to pay, taking into account your expenses, as well as benefits and perks paid to producers. Following the guidelines in this article should help you design an equitable, effective, and profitable compensation plan for your firm.