PRODUCTIVITY UP, PROFITS DOWN
by Carol Hammes
It's common wisdom that profitability should track directly with productivity. Often this is true: If the employees are more productive, the bottom line will increase. But the common wisdom isn't always the case - look at the updated peer group statistics for 1999. Although revenues per employee and commissions per person are higher than they were for 1998 in almost every agency size group, relative profit levels are mostly lower than they've been in recent years. The reason stems from the independent insurance agency's largest expense - compensation, which is now 63%-67% of revenues. So although overall revenues per employee increased 3.4% in 1998-1999, compensation per employee rose 7.2%. It's no wonder profit levels suffered, decreasing by 2.6% from the prior year.
Recognizing the importance of a professional team in accomplishing their goals, agency principals have been upgrading their sales and service staffs. Attracting and retaining the best takes money. Raises for existing agency employees can run 3%-4%. Compensation levels have increased because of the higher salaries that replacement service personnel have received due to the ongoing upgrading. Also, many agencies now have split commission percentages for producers, with new business paying a higher rate than renewals. Producers have had to sell a lot of new accounts to stay even during the Commercial soft market, which means overall sales compensation has been inching up as well.
The answer isn't to go back to hiring cheaper CSRs and less aggressive sales people. To get ahead an agency must help its employees increase productivity faster than overall compensation goes up. This is the second most difficult management challenge facing agency principals today, after determining how to increase Commercial revenues in a soft market. Principals have to analyze all operations and root out the inefficient practices and procedures that impact productivity. There's a tendency to ignore or explain away the effect of old-fashioned methods on attempts to modernize: 'If it's worked well for 20 years, let's not mess with it.' Well, the agencies that are experiencing more than $150,000 in revenue per employee did mess with it. In fact, they threw a stick of dynamite into it.
Here are the primary characteristics of the most productive independent agencies:
- They have a specialization or niche that lets employees service clients and deal with insurance companies more efficiently. The niche may be a particular line, such as Professional Liability or Employee Benefits, or a certain type of account, such as aviation or poultry farms.
- They use automation as extensively and effectively as possible. They use computers for most of their data storage and communications and run a paperless operation (even Commercial lines).
- They have strong leaders who set the agency's vision and show the team how to reaching it.
- Personnel management is a top priority. Employees receive frequent performance feedback and encouragement to pursue career and personal growth. There's ongoing, thorough training in coverages, sales skills, customer relations, and automation. Teamwork is emphasized via constant communication, requests for input on decisions, sharing of agency/department results, and a reward system that measures both agency results and individual participation.
PRODUCTIVITY MEASUREMENTS IN THE AVERAGE AGENCY
Its important to use a comparable peer group to compare with industry norms. Chart 1 presents some major characteristics of each composite that's been compiled. Generally, bigger agencies are commercial and have larger accounts. If your agency's mix of business or average account size differs from that of agencies with comparable revenues, select a peer group that mirrors your type of business and refer to it on all the charts.
For example, your agency has $4 million in revenues, 95% of which is in Personal Lines accounts averaging $125 in commissions per account. Use the first peer group, which has comparable account sizes that are more in Personal than Commercial Lines, instead of the composite for agencies with more than $3 million in total revenues.
| | Group 1 | Group 2 | Group 3 | Group 4 |
| Agency Revenues | $548,422 | $1,120,801 | $2,397,611 | $6,291,894 |
| Comm./Pers. Mix | 41/59 | 60/40 | 62/38 | 72/38 |
| Avg PC Comm/Acct | $174 | $282 | $372 | $674 |
| # Commercial Cos. | 5.3 | 7.8 | 10.1 | 19.9 |
| #Personal Lines Cos. | 5.3 | 6.2 | 7.2 | 10.8 |
| Avg Comm. % CL/PL | 13.7/14.0 | 13.1/14.5 | 13.3/14.0 | 12.3/14.2 |
| Chart 1 |
Remember that these measurements are averages, comprised of the actual results of hundreds of independent agencies nationwide. The very best and the very worst performers are combined with those in the middle to arrive at these figures. To convert the guidelines to high-performing levels, increase the average by 1.25. For example, if the average agency your size and with your basic characteristics has $84,174 in revenues per employee, the above-average goal should be $105,218.
Chart 2 presents the most common productivity measurements by size of agency. In making the comparisons with your firm you must use the same definitions used to compile the statistics. Revenues per employee include all agency revenues (commissions, fees, contingents, investments) divided by the total number of full-time-equivalent people working in the agency (including owners and salespeople). For the third year in a row, this measurement increased in all four peer groups. The smaller composites increased less than 1%, and the two larger groups had increases greater than 4%.
| Agency Revenues: | Less than $600,000 | $600,000 $1,500,000 | $1,500,000 $3,000,000 | Over $3,000,000 |
| Revenue/Employee | $69,118 | $84,174 | $96,063 | $108,198 |
| Compensa/Employee | $40,701 | $46,452 | $56,635 | $65,787 |
| Difference | $28,417 | $37,722 | $39,428 | $42,411 |
| Profit/Employee | $4,662 | $4,174 | $6,522 | $4,665 |
| Chart 2 |
The compensation per employee divides the same total number of employees into the total compensation, including payroll, sales commissions, payroll taxes, group insurance, retirement contributions, and other employee benefits. This number rose in all four peer groups, with the two largest groups seeing the sharpest increases. The difference between the revenues and the compensation per employee is the amount with which all other agency operating expenses are covered and the profit funded. This figure was down this year in all but the third peer group. The profit per employee (using the same number of employees and the reported pretax profit) was down significantly in all four groups.
In recent years each group showed a greater percentage of employees who are involved in sales, and now the percentages seem to have stabilized. This year the number of service personnel decreased, with a corresponding increase in administrative employees. As more firms have adopted upload/download capabilities and transactional filing, customer service positions have become data entry jobs, which is reflected in the increase in administrative personnel. It doesn't make sense to pay for technical insurance expertise and then give that person noninsurance tasks that a less expensive employee can do.
| 1999 AVERAGE AGENCY PRODUCTIVITY MEASUREMENTS |
| | | | | |
| AGENCY REVENUE SIZE: | Under | $600,000 | $1,500,000 | Over |
| $600,000 | $1,500,000 | $3,000,000 | $3,000,000 |
| Commercial Lines: | | | | |
| Commissions per account | $426 | $746 | $1,034 | $2,131 |
| Commissions per service person | $149,952 | $185,754 | $197,494 | $221,624 |
| Accounts per service person | 352 | 249 | <
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