Use this plan to give your producers an incentive to target growth, while protecting the agency from financial losses.
Everyone is motivated by money to some extent. For some people, money is the source of security, providing funding for home, food, and the necessities of life. For sales people, money is also a way to get things. Things form a sort of scorecard by which many salespeople measure success. The more money they make, the more things they can have. This is not meant as a value judgement. It’s just a fact: Money motivates salespeople more than people in other types of careers. Yet in sales as in other careers, most participants have a target, called the Comfort Zone, at which they have the things that they desire. After they reach the Comfort Zone, their goal is to maintain it more than to exceed it.
For many years, agency producers have been paid a commission on new business and renewals. This is not bad in itself; the producer ought to be interested in keeping the business that has been put on the books, as well as in writing new business. However, a strange phenomenon takes place when producers generate a large enough book of business to reach their Comfort Zones: They basically retire from sales into a service and maintenance career. Sure, they’d sell if a referral called them or if some of their customers left the agency (to re-achieve the Comfort Zone). But their “fire in the belly” vanishes. Rather than climbing the sales ladder, they settle into a maintenance groove, based on renewal commissions.
We lure salespeople into the insurance field with the incentive of continuing growth of income through renewal commissions. Yet we’ve never properly addressed what happens when producers reach their Comfort Zone and no longer seek new business like they used to. Here is a compensation program designed to challenge producers to keep going after new business.
Step One: Initiate a structure of base and growth commission, instead of new and renewal commission.
One major problem in producer compensation in the past was the concept of greater commission for new business than for renewals. We assumed this would be a logical way to give producers an incentive to pursue new business. However, if new business pays 40% and renewals pays 25%, they would certainly concentrate on new business (if they have any to generate) — sometimes to the detriment of renewals. Many of our agency analyses show a severe loss in producer-generated new business after the first year. Some producers over-promise to get the new business and can’t deliver, thereby losing the renewal. Unfortunately, the agency pays high new-business commission in the expectation of recapturing its profit after two or three years of policy renewals.
If, instead of new and renewal commissions, we convert to base and growth commissions, this problem is solved. Base commission is defined as the total agency commission generated by the producer last year. Growth commission is agency commission generated this year in excess of that generated last year.
For example: If Bob Producer generates a total of $150,000 of commission last year and $200,000 this year, the first $150,000 would be paid as base commission and the next $50,000 would be calculated at a bonus rate as growth commission.
Step Two: Institute a level-one bonus for growth.
The current compensation levels most prevalent in our industry pay an average of 30% to 33% of the commission dollar to producers. Currently this is done in a 40% new business/25% renewal commission split. We suggest that base commission be established at 25%, with a level-one bonus for growth beyond base of 15%. This means that Bob Producer would earn 25% of all commissions generated and a 15% bonus for production above his prior-year base.
This would mean that during the year, Bob would earn 25% of every commission dollar generated (25% of $200,000 = $50,000). Once he generates a commission level equal to his base (prior year total), he would earn an additional 15% bonus for every commission dollar in excess of his base ($150,000). A $50,000 growth would bring Bob an additional $15,000. Bob’s annual income would be $57,500, or 29%.
Step Three: Add a level-two bonus for growth beyond target.
Strong growth is beneficial to the agency because it doesn’t take additional staff to support marginal growth. This means that if Bob grows his produced book of business to $210,000 instead of $200,000 it’s unlikely that the agency would require substantial additional expense. Strong growth should also be beneficial to producers by rewarding them geometrically. We recommend that you measure growth in one year and increase growth expectation by 10% for the next year. The producer who exceeds that expectation should enjoy an additional 10% bonus for growth beyond the target.
The producer’s historical growth is the basis of future growth. In our examples, if Bob’s prior-year growth took him from $125,000 to $150,000, his target for this year would be $25,000 growth plus 10% — $27,500. Since he grew by $50,000, he would achieve a second-level bonus (at the end of the year) of 10% on the growth beyond his target. This would earn Bob 10% more commission on $22,500 — a $2,250 level-two bonus.
In this new scenario, Bob has earned $59,750 (30% of gross commission). We have initiated compensation programs with additional bonus levels, as well: 15% of growth over 20% (above base) and 20% of growth over 30% (above base) provide incentive for producers to hit ever higher levels of commission.
The best part of this type of compensation program is that the producer and the agency are penalized by lost business, because that business must be made up before growth bonuses can be earned. Previously, producers could earn higher new business commission in one year, lose much of the business in the next year, and earn the higher new business commission again for writing additional lines that may just bring their volume to prior levels. This is no help for the agency, which must continuously pay higher new business commissions.
One other caveat protects the agency. Producers must achieve a gross commission level at least as high as their prior high level (within this program) before qualifying for bonus commission. This prevents the loss of one or two major accounts while still providing growth bonuses as the producers regain their commission position.
CONCLUSION
This compensation program protects the agency from financial losses while giving producers an incentive to target growth without disregarding renewal retention.