High Energy Agency Performance

The difference in agency attitudes, energy levels and motivation never ceases to amaze us as we travel from agency to agency in our consultations. While one agency could have excited owners, motivated managers and employees, and a spirit of entrepreneurship running through the organization, another in the same city could have desperate owners, unmotivated management, and a casual, lackadaisical service and sales team. As we analyzed the problems in one and the exceptional behavior of the other, we concluded that teamwork and energy levels were the most telling differences.

The HEART of every agency is its owner. If the owner is excited, professional and operating at a high level of energy, he sends renewed life-blood to every employee every day. If, on the other hand, the owner is operating out of crisis every day, desperate in his attempt to keep the business afloat, he will paralyze the employees as well as himself. When we analyze an agency in flux we invariably begin at its heart, the owner. We often find that while the symptoms of the agency's problems lie in production, service or finance, the source of the difficulties is the owner.

If the agency's heart and lifeblood springs from its owner, it's DRIVE comes from the managers or key employees. Whether these people are owners or not, they either cause things to happen at an agency if they are highly motivated and have high energy, or slow down the gears until no amount of fresh blood can keep the agency circulation going. We have encountered high-energy owners who attempt to jump-start the agency over and over again only to be slowed to a crawl by low energy managers and key employees. We have also seen loyal managers and employees who desire the growth and profit of the agency tainted until they leave due to low energy owners who cannot seem to make a decision and commit to any process for more than a month at a time.

While the heart and drive of any agency responds to its owners, managers and key employees, the FUEL of any agency is its production. A consultant is hardly necessary to find the problem when an agency's performance is reviewed to find either no active producers (regardless of how many employees have that title) or too little production being accepted while retention losses keeps the agency shrinking. On the other hand, we have seen good, strong producers learn the trade at an agency only to leave it because of a lack of HEART, a lack of DRIVE or a broken ENGINE (see below). The high energy/low energy example fits producers perfectly. A few minutes with a producer discussing marketing, sales techniques and number of prospects in the 'mill' quickly differentiates between the high energy producer who, win or lose, keeps pumping clients into the process and the low energy producer who shifts from extreme highs when a policy is sold to paralyzing lows when one is lost.

The service and administrative staff in every agency are the critical gears in the agency's ENGINE. If they don not operate together and in a similar fashion, the engine falters and grinds to a stop. These staff members are the most sensitive parts of the agency, easily spoiled and difficult to recover, once lost. Many agencies have recruited good, strong service staff and provided them little training, no procedures and a general lack of support once hired. 'Here's your desk. When the phone rings, help the customer,' is the general tenor of agency support. Then the agency owners are surprised when the employee becomes less than 'high energy' and leaves within a few years. When you hire bright, high-energy staff members, agency owners, managers, and key employees must nurture them and raise them in the organization as you would raise young children (regardless of how much experience those new employees have). Producers must consciously NOT pressure them as they become accustomed to the agency operations. Many existing employees are stars waiting to be uncovered.

If they feel unappreciated, they will eventually become Low Energy performers and will look like a 'problem employee'. However, if they are motivated, treated with respect and as a partner (instead of as a 'go-fer') some of these employees will again become High Energy employees and will become working cogs in the engine again. Those employees who have stalled and have become frozen in place cannot serve your company or your customers. Like a bad cog in an engine, they misfire and slow down the agency, rather than help it progress.

While loyalty is a great strength in some situations, remaining loyal to a non-performing employee does not best serve them, your customers or your business. Once they become 'new' employees somewhere else, they will regain their High Energy, at least for a while. Many agents have wondered how a non-performing employee that has left them has become a star for their new employer. The answer is appreciation, respect and motivation - the oil that keeps the cogs in the engine operating.

Just like a chain is as strong as its weakest link, an agency can only operate at peak High Energy levels if owners, managers, producers and staff are all working at similar High Energy levels. Any weakness in this agency machine will deteriorate the High Energy levels of the other members and ruin the company's success.

Everything begins and ends with the owner(s). Low Energy on the part of the agency owner will, at best, drive the stars from the company. At worst, it will lower the performance and energy of the High Energy staff members until all are operating at the same, low expectations of performance. This is the death knell of an agency. Most owners in this situation are already defunct - they just have not been told that the game is over. Their businesses (and their morale) will deteriorate until they find the right person with whom to merge (or sell).

But an owner is the easiest person to re-motivate and re-energize. If he can see the light at the end of the tunnel and re-commit to the business principals that permit success, most owners will do anything necessary to re-invigorate their businesses.

The road to High Energy begins with Planning for the Future, doggedly implementing the Plan in small steps, self-congratulating and stroking all employees as the agency reaches each small plateau toward High Energy. The hardest part of the path is identifying those employees who have been de-motivated to the degree that they can not be re-energized and permitting them to seek higher energy levels and career development elsewhere. If this is not accomplished, all other motivational and development plans are worthless.

The loss of those employees (managers, key long-term employees, producers or service staff) who can no longer become High Energy performers will, in itself, send the right message to the remaining staff members and set the stage for a sustained higher level of performance for all employees.

Steps:

1. Evaluate all employees, including yourself, identifying what each needs to accomplish to be considered a High Energy employee,
2. Develop an Energizing Plan for each employee with measurement steps no further than one month apart. Let everyone know that those not achieving the Plan will need to work elsewhere.
3. Using all employees, create an Energizing Plan for the agency to 'jump-start' its performance in those areas identified as profit depressors (i.e. new production, retention, employee productivity)
4. 'Catch Someone Doing Something Right' every day. You, as the owner, are the primary cheerleader of the group. Begin to praise, rather than criticize on a daily basis. This will turn morale almost immediately. It will make you feel better, too!
5. Celebrate agency success whenever possible. This will become a self-fulfilling prophecy and will enhance performance even faster.
6. Once the agency is performing notably better, evolve a Strategic and Tactical Plan using all employees' participation. This will raise their level of importance to themselves and to you.

Once these steps have been taken, ENJOY THE HIGH ENERGY LEVELS THAT YOU WILL CREATE!!

Agency Consulting Group, Inc. has been assisting agencies in establishing and managing compensation programs for 15 years. During the last eight years, we have developed and matured numerous incentive based compensation programs.

The Incentive Compensation Program (ICP) is, by far, fairer to employees and to the business, and more objective and easier to manage (once the management tools are in place) than predecessor compensation programs that have been based on subjective evaluations and management discretion. We would like to explain the process of establishing an ICP to permit agency owners to determine if this would benefit their companies.

The 'incentive' in Incentive Compensation refers to tying compensation gains by the employee to productivity and profit gains by the company. The 'Merit' raise systems in effect in most agencies are supposed to respond to the same principals.

However, most companies readily admit that they do not properly measure results, even if evaluations are based on rating performance, and that raises are often a single percentage given to everyone (that management believes is doing a good job).

Managers and owners are always uncomfortable performing evaluations because the employees are deaf to everything in the evaluation until the subject of their raise arises, and most evaluations are based on 'gut feel', manager's impressions, or the number of mistakes or complaints received about an employee.

But how does the company know whether the efforts of the employee has enhanced retention or accelerated customer loss? Is the employee profiting the agency from his/her actions or causing losses?

Aren't these questions most appropriate to determine the degree (if at all) of compensation gain deserved by the employee?

An ICP is based on the growth of the productivity (in terms of revenue managed or handled) and the profitability of the employee during the period measured. The principal on which ICP is based is that employees that are more productive and more profitable to the company are worth more than employees (in the same jobs) who are less productive and/or less profitable. While productivity is a good measure of performance, it is always second to profitability. Frankly, an employee's profitability to a company should dictate his/her value to the company. However, there are many more factors in profitability than in productivity, and productivity is more directly and easily controlled by the employee, him(or her)self.

An ICP is directly controlled by the agency's budget. Rather than permitting compensation (always an agency's largest expense) to control profit, budgeting permits the agency to assign the percentage of expected revenue that will be allocated to compensation to permit the desired level of profits to be reached. Of course, historical performance is a limiting factor. If compensation has been 50% of revenue and profits have been nil, you cannot simply decide to lower compensation to 40% to drive a 10% profit (unless you have some very aggressive growth goals implemented). However, if compensation levels at the current percentage (last fiscal year) permit you to enjoy a profit level that you find satisfactory, you can easily determine next year's compensation expectation by multiplying the current percentage and the expected revenue level for next year. This result is your new compensation cap as long as your revenues do not outperform your expectations. Of course, if you generate more income than you expect, compensation will increase, as well. The expectation is that even if compensation is 50% of the revenue dollar, additional dollars over Plan will add to profit, even if 50% of each dollar is spent in compensation, since other overhead will not rise to consume the remaining 50%.

If revenue does not achieve your expected goals, compensation will be somewhat above budget this year since it is fixed, but can (and should) be adjusted in the following year.

A business that tracks its historical Operating (P&L) Statements already knows what percentage of income (net income is total agency income less commissions paid to brokers) is represented by total compensation and, with a little analysis, by department and by each individual. Agency Consulting Group, Inc.'s annual Composite Groups of Agency Operations, used by thousands of agencies to benchmark their own performance, indicates that the current percentage of revenue devoted to direct payroll is between 50.9% and 54.1%. Office Compensation (excluding executives, sales, and management) ranges between 20.3% and 22% of Net Revenue. Many agents also calculate compensation as a percentage of revenue for each operating department (i.e. PL, CL, Life & Health, etc.). If a service employee in the CL department earns $35,000 and services a book of business that generates $400,000 of income in a department that generates a total commission income of $1,200,000 in an agency that generates $2,500,000 total Net Income, she earns 8.75% of her book of business, 2.9% of the department income, and 1.4% of agency income.

Since the CSR is in greatest control of her own serviced book of business, her salary for the following year will initially be determined by multiplying her serviced book of business at the end of the year by the 8.75% that represents her performance in the current year.

If the serviced book of business rises, so does her salary. If it falls, her salary is frozen until her serviced book of business rises above its previous high annual point.

An ICP treats each employee differently based on that employee's performance and contribution to the agency's productivity and profitability. While the example, above, considers service employees, every employee in the agency (except producers who are paid on commission) has a productivity factor, whether size of the serviced book for service employees, or annual number of telephone calls for a receptionist, or total number of agency customers for administrative employees and total number of policies for processing employees. All employees can virtually measure their own performance toward a potential raise during the year.

Generally, yes! However, bonuses are still possible for extraordinary efforts that deserve one-time rewards. Standard bonuses (i.e. Christmas or year-end bonuses that become institutionalized and expected) are eliminated in favor of the ICP.

The ICP is completely separated from Performance Evaluations. The best way to look at it is that management decides, through Performance Evaluations, whether or not an employee is performing adequately enough to be employed at the agency. If so, the employee decides how much s(he) gets in compensation by virtue of his/her productivity and profitability to the agency.

One of the difficulties in implementing an ICP is the preparation need to create one and the time it takes to completely put it into effect.

Only Planning agencies can implement an ICP. A Plan that fairly an accurately determines income projections, and a budget for expenses is necessary to anchor the ICP in achievable dollars and percentages of revenue.

If an agency cannot measure either employee department, or agency productivity (in terms of revenue per employee) and profitability, it must create these measurements before it can establish an ICP. If the information is available, these are simple calculations. If not, it takes a year to build the 'track' on which the ICP is to run.

The ICP is meant to be self-administered by the employees, themselves, since they are most concerned with their own compensation levels. Each employee has a measurement tool (i.e. commission size of the serviced book of business) and a goal. Management provides the mechanism for the employee to measure his/her own performance in this key area on a monthly basis to permit them to gauge their chance and amount of an annual raise.

Incentive based compensation is a big change both for agency principals and for the employees, themselves. Like any change of this magnitude, taking it slow and easy makes it more comfortable and understandable for everyone.

We recommend that ICP's be implemented over three years in three distinct steps.

Compensation growth at the end of the first year is based on revenue growth for the department (for service staff) or for the agency (for administrative staff). This is always easiest to measure since we seek gross commission income or agency revenue only.

In the second year, compensation growth is triggered by individual growth, rather than department growth. The example, above would be a good second year example.

During Years one and two, the agency creates profitability models for each operating department, as well as for the agency as a whole. In year three, compensation is determined by a combination of individual growth and department profit (or agency profit for administrative employees).

If an ICP is created and managed, the agency owners will find that the employees' morale increases, as does their spirit of entrepreneurship. The agency is providing them with an excellent reason to care about every new and existing client and every transaction and how they affect the client/agency relationship. The primary change needed for agency owners is to plan for profit instead of expecting windfalls when growth is unexpected. The knowledge that compensation expense can only rise above budget levels if the gross revenues also increase above expectations and that every growth dollar will bring more to the bottom line than the percentage paid to compensate employees should comfort the agency owners seeking full control over their compensation levels.