The Price Of Growth: Compensating New Producers

THE PRICE OF GROWTH: COMPENSATING NEW PRODUCERS

by Lee Schexnayder

When agency owners discuss hiring producers, the questions they ask most frequently are, 'What should we pay a producer today?' and 'We pay our producers 50% of  new and renewal commission. Do you think we are paying too much?'

Unfortunately, there is no quick answer to the first question. The quick answer to the second question is generally 'Yes,' unless your agency is an eleemosynary institution.

Hiring and compensating producers is a complex problem, and an extremely important one for agency owners to resolve. No one wants to pay too dearly for growth. At my firm, we guide our clients through a thought process that explores all the facets of starting or improving a sales force. This article focuses primarily on the facets that directly reflect producer compensation.

The decision to increase commission revenue by engaging one or more producers implies that the agency owner prepared to assume certain responsibilities. These migh include:

• Searching for candidates
• Screening candidates
• Hiring
• Training
• Employment or independent contractor agreement
• Covenant not to compete
• Sales plan (structure and monitor)
• Benefit package
• Compensation package
• Ongoing monitoring of income and expense statement
• Necessary internal modifications.

Before beginning the search and screening process, the agency owner must address several issues: the planned growth to be achieved by the new producer; the duties of the producer in achieving this growth; the owner's relationship with the producer; and what funds are available to reward the producer for results.

You should be prepared to set producer growth objectives for each of the producer's first three years with the agency. Your projections will form the basis for the producer's sales plan. From the candidate's viewpoint, it is essential to know what the owner expects not only three months into the relationship, but also several years ahead.

Producer responsibilities need to be spelled out, along with any internal changes required by an increase in the sales force. Issues to study and make decisions on are:

• Leads: Who provides them? How are they to be handled?
• Expiration dates: Who and how questions as above.
• Referrals: Discussed later
• New business responsibilities
• Renewal business responsibilities
• Ongoing service responsibilities
• Premium collection
• Claim involvement

Writing down the producer's responsibilities will help the agency owner gauge the attainability of the sales plan objectives, determine the producer's compensation package, and pinpoint the need for internal staff or procedural changes. Logically, an increased workload for the internal staff and a resulting increase in administrative expense may reduce the amount available for producer compensation. This can be offset by freeing the producer to spend more time on sales. A good producer will enjoy this opportunity to increase sales time. The agency owner sets the goals and the pace with the sales plan and the employment agreement, but frequently the compensation plan is what actually motivates the producer.

The agency owner's ability to create a competitive compensation package may hinge to some extent on the business relationship between the owner and the producer. If the relationship is employer-employee, the concerns and related expenses may be payroll tax, life and medical insurance, retirement plan, and educational benefits. In an independent contractor relationship, some or all of these may be set aside, thus freeing up funds for additional producer compensation. Some highly competent producers prefer to secure their own future.

The agency owner also needs to address the treatment of automobile travel and entertainment expenses. The owner might wish to set rules and limitations, deal with expense account forms, and cope with all the related disciplinary problems. Many agency owners prefer simply to recognize these expenses in the commission split and allow the producer to declare the expenses to the IRS.

Now that you have a handle on the amount of commission revenue growth you anticipate from the producer and the resulting impact on expenses, you are prepared to go to your income and expense statement to perform some calculations. Project your income and expenses with and without the contribution of the planned producer(s).

Four Essential Needs

An increase in work and responsibilities on your part certainly calls for an improved profit or salary to you to make it all worthwhile. Your calculations should lead you to reasonably sound conclusions relative to the feasibility of the overall plan and the flexibility available to you to pay the producer(s).

The producer compensation plan must respond to four essential needs:

1. An ongoing flow of new business
2. Improved profit for the owner
3. Fair compensation for the producer(s)
4. Maximum retention of accounts

This is not a situation in which one can say, 'Three out of four ain't bad.' If your package does not respond to all four needs listed above, you can exp ect to encounter problems down the road. Maximum retention means minimizing involvement with what our industry tactfully calls 'difficult clients.' As an agency owner, you want accounts that renew and do not require an inordinate amount of effort or expense in the form of collection or loss ratio problems.

Don't Use an Even Split

In the matter of commission splits, we grant that simplicity is beautiful. However, to use the same percentage for both new and renewal business serves only one interest. It generally ignores the first and second essential needs of the compensation plan and overemphasizes the third and fourth needs. An even split simply encourages the producer, in spite of the sales plan, to achieve a certain income level and go into a holding pattern. You will begin to wonder why the sales plan goals are no longer being met. The compensation plan has failed to recognize a human characteristic. The plan can accommodate planned growth, as well as variations in producer income objectives, by the way you set the new and renewal commission splits.

If your agency has separate line-of-business departments, you will need to plan for coordination of purpose. If your new producer(s) are Commercial Property-Casualty specialists and you have separate Personal Lines and Life and Group departments, you will want to plan to include referral responsibilities in the employment agreement and reward the the finder in a way that reflects this person's priorities and primary responsibilities.

Conclusion

Earlier I said that there's no quick answer to what an agency should pay a producer -- and I believe that I've proved my point. In our work, we observe far too many situations where a producer enjoys a compensation package much more favorable than that of the agency owner, and yet the producer is not producing at an acceptable level. I suggest that it's time to make some changes, based not on whim but on sound business judgment. To pay dearly for less than acceptable producer growth is not good management.