GOOD COMPENSATION PLANS ATTRACT GOOD PEOPLE
by Mark Shlien
Many agencies have had to change their approach to compensation during the recession. Faced with declining revenues and profits, they’ve had to find ways to cut compensation costs. Some have frozen salaries or eliminated any discretionary payments. Others have told their employees the traditional merit increases are no longer guaranteed, and any rewards will be tied to the agency’s performance, rather than employee entitlement. Many agencies hope that these measures are only temporary until the economy improves. However, the truth is that “pay for performance” should become a permanent part of every agency. It not only offers higher compensation for better performance, but also allows the agency to plan for and control compensation spending more effectively.
One of the benefits of paying for performance is that it appeals to job candidates who want more meaningful rewards and appreciate a plan that shows them how they can make more money. As agencies compete for talent, they need to differentiate themselves from their peers – and a good incentive plan appeals to top performers, whether they’re in sales, service, or management.
When designing a pay for performance plan, it’s important to understand that employees (and managers) might initially resist it because they feel entitled to their annual merit raise or the belief that employees in similar jobs should receive the same pay. Some agencies announce the annual salary increase budget (for example, 3.5%), which makes every employee think he or she will get at least the budgeted amount. Although pay for performance need not be complex, it does require more monitoring and more frequent payouts to be effective. Managers might resist the additional work required or having to deal with the average and low performers who will not receive the same rewards. Once the agency has implemented the plan, however, these same managers will see it as a selling point with job candidates who want to be rewarded for their efforts.
What Pay for Performance Should Look Like
Although there are many ways to construct pay for performance, you should consider certain guidelines:
- Replace Merit Pay as the Reward System. Merit pay is fundamentally flawed because it fosters a feeling of entitlement and provides little incentive to top performers. The average employee might receive 3%, while the top performer only receives 5%. This will upset the average employees who don’t receive the expected raise, and discourage top performers. Rather than increase salaries every year, adjust them as the market or cost of living dictates. Reward employees with bonuses tied directly to their efforts or the agency’s results.
- Don’t Rely on Salary Ranges and Market Comparisons. Agencies that focus on market comparisons can foster the belief that salary ranges should be adjusted upward constantly to match the competition. In reality, you should base them on what the company can afford. The reality is that some employees will be paid below market and some above.
- Use Measurable Performance To Determine Annual Incentive Payouts. It’s relatively easy to tie bonuses to measurable performance in an agency. You can measure retention of business, new business, cross-selling, and growth. Basing bonuses on individual or group effort adds a component for overall agency performance.
- Add Long-Term Incentives. A meaningful compensation plan should help you retain your top employees. Producers, managers, and key specialists should know that there is a payout waiting for them if they stay with the agency. Provide these incentives only employees who meet tough performance requirements. They would also forfeit large portions of their award if they leave before a specified time. There should be no assumed right to long-term incentives based on their position, but rather on their contribution to the long-term, sustainable financial success of the agency.
Sample Plan
The objective of this plan is to have every individual in the organization understand the goals and contribute to the success of the organization through their personal efforts. For example, Account Managers would be rewarded for retention and growth of their books, while Managers would be rewarded for growth, profit, and productivity. The agency compensation plan will have two parts: a base salary and a bonus/incentive.
Base Salary. Tie the base salary the duties of the position, as outlined in the job description, at an expected level of satisfaction/competence. The employees would need to have the minimum qualifications perform the duties at an acceptable level. For example, a CSR who isn’t licensed or doesn’t have a minimum level of knowledge, will not meet the minimum qualifications and will be paid less than others in the same job. Set a one-year period during which all employees must meet the minimum qualifications for the position and perform the position as described at a satisfactory level. Make annual adjustments to salary when cost of living or market information indicates that this is necessary.
Bonus Compensation. In addition to salary, pay bonuses to employees who are responsible for retaining accounts. Employees who don’t service accounts would be eligible for a bonus based on the office profit and growth results. Reward managers for department growth, department profit and revenue per employee.
Setting up the Plan
When setting up the plan, you must first develop agency and department growth and profit goals and a budget to support the goals. Each department and each individual would also have goals tied to their jobs. After you negotiate and establish these goals, communicate them to all agency employees. You should also develop the reports needed to monitor progress and track results. Periodic performance reviews will help management communicate results to employees and recommend how the employees can improve results.
Sample Account Manager Plan. To encourage retention and support of the sales effort, Account Managers would receive a bonus based on the department growth objective. If the department achieves the growth objective, the Account Manager would receive a percentage of salary as a bonus. Bonus percentages would increase as the department growth increased. This approach would give Account Managers the incentive to retain accounts, ask for referrals, cross-sell, and support the sales efforts of others.
The Account Manager would receive a second bonus if the office achieves its overall growth objectives. The Account Managers would have the incentive to provide leads to other departments and to work cooperatively with all members of the agency, not just their department. As with the first bonus, as the growth rate increases, so does the bonus percentage. Non-service staff would also receive this bonus to reward them to support the retention and sales efforts of the other employees.
Sample Manager Plan. Managers can have multiple components to their bonus plans, depending on their role. Tie the bonus of the Commercial Lines Manager to the growth of the department’s book of business and the profit the department generates. Managers can also have an effect on profitability by increasing employee productivity, identifying ways to cut costs, and recommending more effective ways to do work or structure their departments. This means that revenue per employee should also be a goal, as well as such non-financial goals as implementing new technology or revising department procedures.
For Managers and other key personnel, long-term incentives provide additional motivation to stay with the agency, while also focusing on the long-term implications of their performance. Examples of long-term incentives include deferred compensation with money set aside for these individuals to receive later. You can also use profit-sharing plans and ESOPs as long-term incentives. Stock options and agency ownership act as key motivators for agency managers and producers.
Producer Compensation. Although most producers are paid on commission, there are wide discrepancies in the percentages they’re paid and the expectations for their position. Agencies that provide more incentives for producers are more highly valued. Examples of producer incentives include paying higher commissions for exceeding goals, higher car allowances for larger books, new business sales contests, deferred compensation based on book size, and Account Executive support based on book size. Top performing producers usually look for incentives that recognize their sales efforts and offer them such long-term rewards as ownership or deferred compensation.
Conclusion
The goal of any superior compensation plan should be to offer top performers the opportunity to earn more money than they would elsewhere, to receive recognition for their efforts, and to know that if their performance is superior to others, their compensation plan will reward them appropriately.
Mark Schlien is the principal of iPeople, LLC, an executive search and recruitment firm for the insurance industry. You can reach him at iPeople, LLC, 611 Pennsylvania Avenue, SE, Suite 311,Washington, DC 20003; (202) 544-7675: (202) 544-0550 (fax); (202) 415-1599 (cell); e-mail: [email protected] Web site: www.theipeople.com.