If you're an agency owner wondering why your carriers are making it so difficult to do business with them, you're not alone. While the reasons vary, one topic overshadows all others. In this document, Edward Curry examines why it's so hard to get along with carriers.
To get a better understanding of what's going on, get out the dictionary and look up “compression” and “pressure.” What the heck, I've done it for you:
This is what the Oxford Dictionary has to say about compression: “Compressing to squeeze; to contract.' According to the same source, pressure includes the following definitions: “Force exerted, inducement, prevail upon, affliction or difficulty under financial pressure.” Those two terms will definitely apply to P/C agency owners in the months and years ahead.
Many carriers are basking in the glow of the rate increases they've received, while remaining relatively untouched by any unexpected payouts for natural disaster losses. With a rising stock market and balance sheet repairs behind them, many companies are “cruising.” As an agency owner, however, don't expect much, if any, of this largesse to end up at your doorstep now or in the immediate future. In fact, look for the opposite: Pressure.
Many agencies will experience both compression and pressure as carriers see now as an appropriate time to reduce agency commissions. These companies think that the increased rates, in spite of reduced commissions, will lessen their agencies' pain.
I believe, however, that many agencies will lose net worth in the coming months because of these carrier actions, unless these agencies can write a considerable amount of new business.
Agencies that are already geared for “hard running” will be able to withstand this change. In many other agencies, meeting these new challenges will force (pressure) the principals into re-examining, and revamping, their business models. Agency owners who are not already in the production-for-pay mode will find that they can no longer afford to keep nonproductive employees on the payroll. Measuring agency productivity must become an immediate priority for agency owners. They'll need to set new hiring and pay guidelines.
This means that agency owners must begin to look at their business as a “cash-flow machine,” examining every aspect of agency operation to make sure that all their employees are sales minded. The owners must also make sure that they're treating their books of businesses as platforms for new sales. Agencies can no longer afford to carry individuals who don't understand the relationship between referrals, clients, prospects, and their paychecks. Let's look at each of these changes:
ADJUST PAY STRUCTURES
An agency owner's most immediate concern should be getting payroll under control. If your payroll is out of whack, your other actions will have minimal impact on the agency's financial future.
Agencies with payrolls of more than 60%-70% of gross revenues will run into serious problems if a significant pothole or downturn on their financial road pops up without warning.
If you're not already in the pay-for-productivity mode, it's time to switch from regular annual raises to a bonus structure based on productivity. Most employees take annual raises for granted and they might or might not earn the extra money.
If your payroll is top heavy, exercise your communication skills and make the needed adjustments. If you need to reduce the salaries of any employees, make the pill palatable by paying an on-the-spot bonus for the balance of the year that would make up for any pay shortfall. When you provide this bonus, make it clear that the employee will need to make up any shortfall in next year's pay by increasing their productivity.
You'd be surprised at how many agency owners believe that extra high pay ensures loyalty. My experience has taught me otherwise: Those who take risks (the principals) should stand at the head of the pay line and not the other way around.
SET JOB DESCRIPTIONS AND SALARY POLICIES
The second area that needs shoring up involves written criteria for hiring and job performance. Documenting these standards can provide a valuable “insurance policy.”
Set production standards for every position in the agency. Spell out your salary policy and make it clear that you pay bonuses based on meeting annual productivity standards. Do not consider job longevity a benchmark for salary increases.
Each time an employee moves into a better, higher paying job, they should expect to pay a price in the form of longer hours, greater dedication, and improved job skills. Don't lull the worker into thinking that the salary tree grows straight up to the sky. Instead, each job carries with it the implied notion that there's a pay ceiling.
Agency owners are usually reluctant to discuss how they arrive at employee salaries, other than saying that they have to meet the competition — whatever that might mean. Owners need to understand how much it takes to run an agency while still paying themselves the money they need to assume all the risks. Be sure to set aside enough money for those unexpected rainy days.
RETAIN DEDICATED WORKERS
Some agency owners confuse employee loyalty with longevity, and link longevity with ever-increasing salary levels. They don't wish to even think about replacing any high-caliber associates, regardless of their salary, for any reason. And so, the upward money spiral continues.
In today's agency environment, individuals are loyal and dedicated only as long as the agency keeps meeting their needs and desires. That means fair pay for the jobs they perform, good working conditions, and leadership to which they can relate and understand. Many agency owners underestimate the importance of their individual leadership on the longevity of their employees.
I've found that agencies with excessive turnover are spending roughly $30,000 for each employee they have to replace. This average might be a little low when you factor in benefits, training, salary, morale, and time wasted with a low or nonproductive employee. This is an expense that comes right out of the “hurt line” — the all-important bottom line. Yet many agency owners still regularly “buy” turnover by giving the problem short shrift and chalking it up as just another cost of doing business.
In the employee exit interviews that I've conducted while completing agency evaluation appraisals, the most frequent reason employees gave for leaving was incompatibility with management (this held true whether the departure was voluntary or involuntary). The other two major reasons given were that the job was boring — a situation that didn't look to improve — and that little, if any, thought was given to training.
Where did pay rank among factors in employees deciding to leave an agency? A number of employees said that although pay is important, if an agency owner proved to be a good person to work for and the job was interesting, then pay played second fiddle. It's been said that most people live lives of quiet desperation and that all they strive for is to survive for another day. The one thing that we all live for is hope. Making the workplace a happy and safe environment is something for which every agency owner should strive. That doesn't mean passing out happy pills every day. But it does mean that agency owners should consider what departing employees have to say about their working environments.
Consider conducting exit interviews regardless of how you feel about the departing employee. If possible, the person conducting the interview should be neutral. This will lead to trust and believability on the part of the employee leaving the firm.
A final word to the wise: If you have non-productive workers who will never fit into the production for pay mode, it might be wise to admit your hiring mistakes. It's easy to overlook the problem and just let things meander along. But an agency owner who isn't willing to make necessary adjustments in today's environment will find that they're in charge of a declining asset.