Compensating Producers

There probably is no subject in the field of insurance agency management that is discussed as frequently, but on which there are such divergent thoughts, as the appropriate level of compensation for producers. Some of this diversity results from the inherent fear expressed by agency owners and managers that they may be over-compensating producers, which eventually will bankrupt the agency. Others, such as producers, believe they are blatantly under-compensated and they are not receiving the share of the agency compensation pie they deserve. All of this is complicated by the attitude of insurer personnel, who are completely confident that all insurance agency/managers/producers are grossly overpaid. Such is the misunderstood world of insurance agency producer compensation.

Over the years, sales executives and certain persons who write about such matters have assumed that the best motivator for any sales force, including insurance producers, was more money. The often-quoted bromide was, 'Money may not be in first place, but it is way ahead of whatever is in second place.' The truth of such assertions does not exist. In fact, studies of recent times reveal that once a sales person has reached a standard of living which is, at least minimally, satisfying to the salesperson, additional money compensation no longer serves as a motivator.

This has been a hard lesson for some of us to learn, especially those who remember the 1930s and other pre-inflation times when money was sine qua non, since there never was enough of it to provide a reasonable acceptable standard of living. But before we cast out money worshippers, it should be noted that what motivates one salesperson might not motivate another, and money may be higher on the scale of motivators for some persons than for others.

Any producer compensation plan must be equitable; that is, it must be equitable in relation to the other producers in the agency including the agency owners and managers. If producers perceive that others in the agency are receiving more for comparable work, morale will suffer. It is true that agency owners and managers may receive more than a newly-hired producer in total compensation; however, some of that compensation will be in the form of bonuses, profit sharing, and return on the owners' investment. The compensation received by owners and managers for selling should be approximately that received by other producers.

Compensation to producers in your agency should be comparable to that which is being paid by your competitors to their producers. The agency's compensation scheme should have a strong incentive element. Each producer should have the opportunity, through greater effort, to earn additional compensation; that is, the harder the producer works, the larger the reward should be. The producer compensation plan should be multi-faceted to encourage producers to perform service tasks as well as straight selling. The compensation plan should aid in maintaining a stable agency producer force.

Unfortunately, most agency producer compensation plans go awry because they are based on some 'revealed truth' that producers should be paid a set percentage of commission. It seems as if 50% has been set in concrete and is used whether or not it is appropriate. Starting with such a set percentage will be certain to doom the compensation plan and, possibly, the agency. What should be done is to tie the producers' compensation to agency profits. Very simple. The more profit produced by the sale, the more income that can be allotted to the producer.

There are two acceptable methods of accomplishing this purpose. One method is to determine a projected profit level for the agency and work backwards to what is available for producers. For example, from the agency's projected profit, one should deduct owners' compensation for investment in the agency, then deduct agency expenses, including other staff compensation. This will provide what, essentially, is available for producers. This will be expressed as a residual percentage, if other deductions from gross commission are expressed as percentages. The interesting aspect of this method is the fact that you are dealing with a residual amount of profit you can allot to producers, and not an arbitrary percentage.

The other method involves establishing a percentage of commission for producers that is relatively low, and then designing a profit-sharing plan that will enhance their compensation. This, in effect, ties the compensation to agency profit on a retrospective basis.

There are a myriad of compensation plans in use involving salary, draw, commission, bonus, and other monetary elements. What works for one firm probably will not work for another. There is no absolutely right or universal combination. However, there is one basic principle I believe agents and brokers should keep in mind when designing a plan for their firms. The better producer, the one you want, the one who wants to control his or her income, will want to be compensated on a straight commission basis.

Perhaps in the early stages of employment producers will need a draw or guarantee arrangement until commission earnings are sufficient to provide them with a decent income, but the new recruit should 'validate' or earn the draw or guarantee quickly. Beware of the salesperson who wants a salary or wishes to remain on some maintenance-of-income arrangement.

This raises the question of how to compensate producers who service existing accounts. However you decide to arrange this compensation, do it on a percentage of the account's commission earnings, not on a fee or fixed-income basis. Good sales people are challenged by the possibility of additional income through commissions, not by a weekly or monthly salary. How much of the commission on a particular sale or account should be allotted to a producer who has sold or developed it? Again, there is no 'right' percentage, except to say it should be the maximum the firm can grant to the producer.

In my opinion, the firm would be well advised to think in terms of retaining from the sale or account commission only a fee for placing and processing the business, plus a small profit for the firm. Maximum commission to producers will provide encouragement for them to produce additional business. Seizing too much of the commission will cause the better producers to seek their fortunes elsewhere-perhaps with your competitor. As an additional element of compensation, producers (like all employees) should participate in a profit-sharing program. Such programs serve as an additional incentive to produce more profitable business.

Compensation plans understood fully by the firm's principals and only somewhat understood by the new producer are doomed to failure. Compensation, fringe benefits, etc., should be thoroughly explored with the new producer. He or she should understand what income opportunities are available, when they can occur, and what must be done to obtain them.

The items listed by producers most consistently as important to them are job satisfaction, being able to realize one's full potential as a person, and the ability to control one's income level. Agency ownership also was ranked as very important. Salary, commission, bonus, etc. were ranked in the lower one-third of the scale of importance. Too many agency owners and managers fail to give the necessary attention to what composes a good compensation plan by ignoring these motivators. They attempt to motivate producers only in absolute money terms. This error often is compounded with continual manipulation of the salary, commission, bonus, etc. in search of the magic formula that will increasingly motivate producers.

The matter of firm ownership should be considered each and every time a new producer is added. This is not to say that such ownership is to be offered to producers immediately on their being hired, but it must be a part of the initial producer contract negotiation discussion. There is little probability that any firm will be able to hire the kind of producers it should be hiring, the kind that will aid in perpetuating the firm into the future, unless ownership is a definite possibility for each new producer. After all, it is ownership-quality producers that the firm should be recruiting and selecting, not persons who will be satisfied with a salary and no input to the firm's governance.

This raises a like area of concern with respect to producers, especially new ones. Far too many firms fail to make those producers feel they are part of the team. Ownership may have been discussed and an agreement reached that it will be available at a subsequent time. Meanwhile, little is done by the firm to counsel producers or establish sales goals for them. The producers do not feel as if they are part of the firm. The sense of belonging is lacking and motivation to perform the sales function for which they were hired deteriorates. Some of this occurs because owners and managers are not adept at managing the personnel function and are even less able to perform the critical function of sales manager. These functions are not minor matters and really do need the constant, best efforts the owners and managers can muster.

It should be obvious that producer compensation is a matter that needs considerable attention by a firm's owners and managers. The non-monetary aspects of the producer's 'income' should be given especially careful consideration.