EMPLOYEE PERFORMANCE REWARDS
by Carol Hammes
More than 14% of all full-time workers in the United States switched jobs this past year. Turnover hits the bottom line of a business very hard, with more than $9,000 in direct costs associated with finding and training a replacement. The indirect costs of recruitment fees, management time, and possible signing bonuses can more than double that amount. Some experts in personnel management estimate that a firm may spend $50,000 or more for the loss and replacement of an employee that makes a salary of more than $30,000. Add this expense to the difficulty in finding good people and most agency managers will find some compelling reasons to do their best to keep the good employees that they have. People aren’t a cost factor that you should try to minimize. Instead, think in terms of investment and continuity. What can you do to develop employees who want to be part of what you’re creating? And how should you reward them for participating in your success?
Building a positive agency team involves setting objectives and allowing employees — both individually and collectively — to participate in the spoils for helping the agency accomplish its goals. Management must operate with a results-oriented approach, making decisions only after a careful review of what the agency hopes to accomplish when hiring an employee. Your results will depend on hiring the right person for the right job. You must then communicate the agency’s goals to employees and show them how they can help in accomplishing them individually. Involve producers and staff personnel in procedural decisions that affect their work environment and their job functions. Instill positive motivation by providing personal recognition and professional growth opportunities. The total compensation package must foster team spirit.
ADDITIONS TO BASE PRODUCER COMPENSATION
In addition to, or as an alternative to, base commission percentages, many agencies establish bonus arrangements tied to performance goals for producers. The average producer has a book of business of around $250,000 in commissions. An agency can set up incentives that reward producers who develop books that are in excess of their average.
For example, if a producer has more than $300,000 in total commissions you could award them a bonus equal to 50% of the commissions in excess of that level, an increase in their car allowance, or a higher commission percentage for that year. You can treat accounts that are part of a separate marketing program differently. You can also award extra points or dollars on accounts for which the producer has provided leads that have resulted in employee benefits or Life sales. There are hundreds of possible bonus formulas that you can use to encourage producers to perform at higher levels. Keep the plan relatively simple, however, in order to avoid administrative gridlock.
Another reward can be some sort of equity, either in the producer’s book or in the agency itself. The best way to provide equity in the book of business is to set up a deferred compensation plan while still maintaining ownership of expirations with the agency. If the agency’s perpetuation plan calls for bringing producers into ownership of stock or partnership interest, the vested deferred compensation amounts can be traded for equity interest in the agency.
When you’re developing a long-term producer relationship remember that money isn’t the only motivator. People have unique needs. The more that the agency can do to meet those needs, the more successful the relationship will be. Perhaps a title is important to someone. They might want a larger office, a dedicated CSR, or an expense allowance. The more you do to meet the needs of individual producers and other employees, the more successful the employment relationship will be.
Although you should personalize the total compensation and motivational program for each employee, it’s also important to tie their fortunes to each other — and to the total agency’s success. This is where sales contests can come into play. Hold a number of different but simultaneous contests: some monthly, others quarterly, and at least one that’s annual. Include service and support personnel in the spoils as well. Rewards can range from a traveling trophy or a weekend in a nearby city, to a cruise or a ski trip. Criteria for winning could be the producer or team with the largest percentage or commission growth, the highest number of new accounts, or any other measurable item that can be tied to sales success.
Many agencies have instituted sales programs that don’t seem to motivate producers, leading them to decide that contests aren’t a good idea. There are four basic elements for a successful promotional campaign: meaningful rewards, attainable goals, fair administration of rules, and keeping participants informed of their progress in relation to their competitors. If even one of these items is overlooked the contest will fail.
PERFORMANCE REWARDS FOR SERVICE/SUPPORT PERSONNEL
More than two-thirds of independent agencies base part of their service and support compensation plan on performance. It might be agency results, personal contributions to the agency’s overall effort, or a combination of both. There are hundreds of different programs you can implement. Think through the various aspects carefully and develop a plan with components appropriate for your particular situation. Developing the right program for your agency will involve a bit of research, some tough decision making, and a lot of creativity.
Incentives should encourage employees to perform in ways that support the agency’s business plan. If the plan emphasizes new sales, the rewards should direct employees toward this goal. If the plan is to improve service levels to existing customers, the incentive program should direct your team to that end. Perhaps your business plan is to strengthen company relations. A good bonus program would be to reward employees for helping to improve loss ratios. Your program should mirror the management and sales philosophies of the agency. Don’t set up an incentive program that’s based on expanding accounts when the owners and producers won’t allow them the time or the freedom to do so.
Another important element of an incentive program is to consider the skill levels and personal needs of your employees. It’s not practical or wise to throw away what you have in order to hire people that are more sales oriented, that have more education, or that have different personalities. If most of your CSRs prefer processing renewals over talking to clients, installing a program in hopes that they’ll generate a significant amount of new business is unrealistic and sure to create major anxiety. With this type of employee a retention-based reward structure might be more effective. Give CSRs who enjoy sales the title of Customer Service Agent and reward them for expanding and selling new accounts.
It’s important to keep the agency’s operating budget in mind when setting up incentive programs. The average insurance agency spends 21%-24% of total revenues on office payroll — excluding payroll taxes and other employee benefits. This is up several points from just five years ago. If you already have salaries that are at 25% or more of revenues, your agency might not be able to afford a lucrative performance bonus system. Analyze your current salary levels to see how they compare with the marketplace. Automatic raises might’ve made long-term employees’ salaries higher than they’d get elsewhere and also above what they should be paid for their skill and education level. To give them additional compensation wouldn’t make good business sense. With these people it’ll be necessary to freeze the base salary and only provide bonuses when current performance warrants.
For non-sales jobs, it can be difficult to tie compensation to the quantity of business handled. In these cases it’s often necessary to tie bonuses to the agency’s overall performance. For example, if the agency grew 5% last year, then the overall raise or bonus could also be set at 5%. An employee with average performance might get an increase or bonus of 4%-5%, one that’s marginal might get 1%-2%, and one that’s exceptional could get 6%-7%.
If base salaries are already appropriate for their experience, education, and level of performance this relatively simple approach of calculating a raise or bonus will generally provide the results you want: rewarding people for the agency’s and for their individual performance over the past year. But if you have a lot of long-term employees, calculating their raise or bonus as a percentage of their already high compensation might not be a good idea. You might shortchange newer and lower paid employees who might’ve outperformed others during the year, because you’ll calculate their raise or bonus from a lower base. This situation can create morale problems and cause top performers to shut down.
Instituting a performance point system of calculating raises or bonuses can eliminate the negative effects of setting increases as a percentage of base salary. This can also facilitate tying the increase to overall agency results. In this approach you create a bonus pool based on agency profit, annual growth, or any combination of factors. Some agencies set up the pool based on entire agency results. This is particularly popular with smaller firms. Others create a pool based on the results of a department, specialty line of business, or team. Or you can personalize a bonus program for each employee, again usually as part of the performance evaluation plan.
It’s important to set the rules in advance, establish a formula for creating the bonus pool, and a method for dividing it. Be sure to test the calculations against some hypothetical situations before you announce the results to employees. You don’t want to find at the end of the year that you’ve agreed to pay a lot more than you’d anticipated. There are several ways to create an agency or department bonus pool. One or a combination of several might be right for you:
- Difference between base salaries and a target of 22%-23% of revenues
- 25% of contingent income
- Percentage of overall increase in agency, department, or unit commissions or revenues
- Percentage of total revenues or commissions
- Percentage of agency profits before owner bonuses
- If revenues per employee increase over a certain threshold, a percentage of this amount could create the pool
After you determine the formula you need to decide how to divide the gross amount among the employees. It’s vitally important that you base this on each employee’s individual contribution to helping the agency attain its goals. The key to this determination will be a performance evaluation that measures the quality, as well as the quantity of the employee’s work during the year.
Have a performance evaluation form that allows the manager or supervisor to give numerical ratings to employees on a number of criteria, such as work quality, punctuality, attitude, and team spirit. Each employee would then get a numerical ranking you could use to create "points" for the bonus or raise pool. For example, if the total pool is $20,000 and the total numerical ranking of all employees is 2,000, each bonus point would be worth $10.
An employee with 100 points would receive $1,000, while one with 200 points would get $2,000. Contrast this to bonuses based on existing compensation, in which a long-term employee with a bad attitude making $35,000 would get a 5% raise of $1,750 and a hard-working new hire making $20,000 would get only $1,000. This approach will put a damper on the new person’s enthusiasm very quickly. In this new employee marketplace it’s critical to let employees know that they can make more money when the agency does well and when their individual performance contributes to this success.
NON-MONETARY INCENTIVES
While money is a primary motivator, it’s important not to forget the non-monetary aspects of motivation. Smaller agencies often have good team spirit simply because they have fewer people. Employees in smaller firms tend to have relatively similar values and backgrounds, and they interact closely with each other. Once the agency grows beyond 12-15 people, however, personnel management becomes a much more important and time-consuming function. Managers must spend a significant amount of time reassuring employees that they’re all working towards the same end and that they’ll share in the rewards. Set aside time to have short monthly agency and/or department meetings to discuss specific topics and bring up communication problems or concerns. Take employees’ concerns seriously and fix what’s bothering them or explain why something can’t be done. Buy lunch or throw an impromptu party when your team writes a new large account, reaches a monthly goal, or when everyone pitches in to reduce a temporary backlog.
It’s important to recognize that today’s employees have different needs than those who started working during the Depression or even in the Fifties. There are three major issues that an insurance agency must address if it wants to attract and retain good people. First, you must provide room for them to grow, professionally and financially. You want them to look at the insurance industry as a career rather than just a job. Show them that they can achieve their personal goals as part of your organization. Have several different levels of service representative. If they know that they can be promoted with more experience and education they’ll be more inclined to participate in the process and in the growth of the agency.
Second, people seem to crave personal recognition. Give your employees positive feedback often and you’ll find that the mutual respect that develops will produce weeks of extra effort on their part.
The third motivator for today’s employee is flexible work hours. Parenting has become more complicated. The time needed to get kids to sporting events and to watch them play makes working for an agency that recognizes the importance of this priority very important. With new computer systems that have account information easily retrievable by any service rep, job sharing has become a welcome reality for many agencies and their employees. If flexibility meets their needs, it will help the agency accomplish its goals.
The late Carol Hammes, principal of the Middleton Group, was one of the Independent Agency System’s most widely respected management consultants. She will be sorely missed. Reproduced, with permission, from The Middleton Letter.