Agency Compensation Survey 2

AGENCY COMPENSATION SURVEY

As of this writing, the government has determined that the insurance industry as a whole has 2.2 million workers who earn an average of $37,864. The Property/Casualty industry employs 1,340,500 people at an average salary of $37,844. The various P/C insurance companies have a total of 634,800 people earning an average of $41,273 per year. Agents and brokers employ 705,700 people and pay an average of $35,000 per year, which includes the return on ownership generally taken out by principals of privately held firms. Although the rate of increase in employment for insurance agencies has been comparable to the nation as a whole in the past decade (3.7%), the Alliance of American Insurers believes that the increase in available agency jobs will steadily decrease until 2005, when it will be only 0.2%. Advances in technology and office automation as well as business combinations are cited as the major reasons for the projected decrease in the employment growth rate.

The projected decrease in jobs over the next several years will have relatively little impact at the individual agency level, except perhaps in the largest brokerage firms. Agency principals will continue to be faced with attracting and retaining good producers and service reps. Even in areas where insurance company mergers and layoffs have put a number of insurance professionals out on the street, finding people with agency sales and service experience is difficult and often very expensive. In the scramble to find someone who knows how to analyze risks and communicate insurance terminology to clients, many agency principals and managers are tempted to offer more than they believe the job is worth. The result can be inequities in agency pay scales, with loyal employees who have been there for several years receiving salaries lower than those paid to the new hires.

To avoid the inevitable morale problems and additional turnover caused by such a situation, it's necessary to establish a compensation plan with salary ranges, bonuses, and commissions that are competitive and yet still reflective of the functions and level of responsibility handled by each employee. Written job descriptions should include not only the responsibilities and functions to be performed but also qualifications for education and experience. Salary ranges and bonus programs should be tied to the job positions and the individual's eventual level of performance. Job responsibilities may change over time as automation is enhanced or the organizational structure is revised, so both the job descriptions and the salary ranges should be reviewed each year.

For more than 15 years, my firm has been conducting national compensation surveys that give agency managers an idea of what other firms are paying for comparable positions. The information can be used with local salary comparisons to facilitate the annual review. This article presents survey results divided into rural and suburban/urban groups. These results represent averages, not medians, and are comprised of agencies located throughout the United States. Other than for management positions, agency size has very little bearing on the results, since smaller agencies in a marketing area have to compete salary-wise with the larger ones. Adjustments must be made, however, for nontraditional job descriptions as well as for geographic location. The Department of Labor salary data indicates that a number of states have average per capita incomes that are significantly higher or lower than the norm. Here are the national results of the survey. States not shown have per-capita incomes within 5% on either side of the median level.

• 10% AZ IA IN ME NC NE SD TN TX VT WY
• 20% AL AR ID KY LA MS MT ND NM OK SC UT WV

The average rural agency responding to the survey had $511,636 in total revenues generated by 7.1 employees including the owners. The urban agencies had an average of $1,480,993 in revenues, with a head count of 15.4. Revenues per employee ranged from $72,061 in the rural agencies to $96,168 in metropolitan firms. There were 1.6 agency principals in the rural firms and 2.2 in the urban firms. In the total group of respondent agencies, sales functions were handled by 24% of the employees, management tasks were assigned to 16%, and service and support personnel made up 40% of the employee group.

The rural firms reported a pretax profit of 7.0%, with the owners taking out another 29.4% in W-2 income. This puts the ownership return ratio at 36.4% of revenues. Urban owners had an average profit margin of 8.6%, compensation of 24.3%, and a return ratio at 32.9% of revenues. Non-owner producers were paid 15.7% of total revenues in rural agencies and 13.6% of revenues in metropolitan firms. Non-owner managers and staff received 21% to 21.7% of total revenues.

Average wage increases for insurance agency employees were 4.7% for the rural firms and 4.0% for the urban firms. This is higher than the increases reported over the past several years and above the national average for all types of businesses. Almost half of the rural firms have an incentive plan, and 70% of urban firms reward employees based on some definition of agency results. In both locations, the most popular criteria for determining the incentive payments is agency profitability. Revenue growth and increased productivity are also used by many agencies to create the bonus pool. Splitting contingent income has traditionally been one way of rewarding employees, and almost 10% of firms still use that relatively simple method of providing extra income.

Most agencies provide Group Health insurance for their employees, with close to 100% of the employee's coverage paid by the agency and 32% to 43% of the dependent's premiums. Among the rural agencies, 60% have some sort of retirement plan, with half in IRA/Keogh/SEP programs. Only 8% of these firms have a qualified profit-sharing plan. In contrast, 89% of the urban agencies have retirement programs; 42% have chosen the 401(k) option. Another 24% have profit-sharing plans, and 16% make IRA/Keogh/SEP programs available.

The following charts present the most recent average salary ranges for the major service positions in insurance agencies. Most of the ranges have increased slightly over the past several years, although not at the rates we were seeing in the early years of this decade. The entry-level commercial CSR and the employee benefits CSR have remained steady.

These are the national averages, which must be adjusted for regional variations. For example, if the agency is located in a metropolitan area in Illinois, you should take the +10% factor just shown and apply this to the national salary range. To adjust the salary range for an experienced commercial CSR, the computations would be: 1.10 x $31,110 - $38,542 = $34,221 - $42,396.

A number of firms use the size of the book of business to determine the salary for Personal Lines CSRs. For example, CSRs handling $125,000 in commissions might get a salary of 20% of that book, or $25,000. If they were to increase the book to $130,000 during the year through expansion and the production of new business, their salary for the next year would be $26,000. In many agencies, Personal Lines CSRs also receive additional compensation for selling new business and expanding existing accounts. Among rural firms, 44% have some type of incentive. This ranges from an average of $11 per policy to 37% of the first-year commissions. More than half of the urban agencies (58%) have such programs, paying either an average of $17 per policy or 37% of new commissions and 5% on renewal.

Producers in rural agencies tend to have less correlation between performance and compensation than their counterparts in the cities. More than one-third of them receive a straight salary, as opposed to only 10% in urban agencies. When there's a connection between sales and compensation, the most popular way to determine the salary level is as a percentage of the previous year's production. Among the rural producers, 37% get commissions or production bonuses in addition to salaries, while 31% of the metropolitan salespeople receive a salary plus incentive compensation.

Location apparently makes a big difference in determining who gets either straight commissions or a salary as a draw against commissions. Only 26% of the rural producers have such a plan, whereas 57% of the urban salespeople do. For those who are paid on a commission basis, the following charts present the current average rates. Note that these are nationwide averages and not recommended sales compensation percentages. They may indeed be too high for most firms if there's little house business or if the owners expect the agency to produce a reasonable profit. Some agencies provide little or no backup support to producers, while others have technically proficient CSRs, sales centers, and marketing assistance. These extra support expenses must be taken into account when analyzing sales compensation levels.

In addition to the base compensation most agencies pay for education, Group insurance and business travel, in rural areas 44% provide a car and another 24% give a car allowance averaging $200 per month. Urban agencies provide a car only 18% of the time, although 39% have a monthly allowance averaging $322. Entertainment expenses are covered by 24% of rural agencies and 39% of metropolitan firms.

There has been a significant increase in the number of agencies that have employment contracts with their producers. Now 62% of rural agencies report having contracts (up from 53% two years ago), and 77% of urban agencies have written agreements with salespeople (up from 68%). Producer vesting plays a role in 27% of the rural agency relationships and 35% of the city agencies. To get an idea of what expectations agency principals currently have for a new producer, we asked respondents to give us the level of commissions that they'd expect a salesperson to have developed after working for the agency for 18 months. The rural agencies expected a book of $43,925, and the urban agencies were looking for $63,808.

The following two charts present the average salary levels, bonuses, and total compensation for the major management positions found in general-lines agency operations. In every single category, the management salaries and bonuses have increased over the past two or three years, sometimes significantly. It's important to note that the average rural agency in this study has only one-third the revenues of the average urban agency, so agency size as well as location enters into the difference in management salary and bonus levels between the two groups.

Bonuses make up a significant portion of the income of the president/CEO and sales managers-generally 20% to 28% of the total compensation amount. In most agencies, the people who hold these positions are also agency principals, so it makes sense that the bonus amounts would be higher. Almost 80% of independent agencies nationwide give both owner and non-owner managers a bonus, with most of them paying on a discretionary basis. Of firms that use some kind of tangible criteria for determining the bonus dollars, a percentage of agency profits is by far the most common, distantly followed by a percentage of agency revenues.

More agencies are now treating the agency principals as employees first and owners second when it comes to compensation issues. But the vast majority still uses some combination of performance measurement and ownership percentage to come up with salaries and bonuses. The two major factors cited in determining salaries are the size of the existing book and the ownership percentage, with rural agencies favoring the latter and urban agencies more oriented toward rewarding for sales performance. Management contribution is also taken into account in a large number of firms. Regardless of location, the primary criteria for determining bonuses was percentage of ownership, followed by the size of the book handled and management contribution. For both salaries and bonuses, each group indicated that longevity is no longer a major component for determining an agency principal's compensation.

When a commission percentage is used to determine the owner's salary, 33% of the rural firms use the same rate used for non-owner producers, 50% have a higher rate, and 17% have a lower rate. The situation is quite different in the urban agencies, where 68% pay owner-producers the same percentage of commissions as they pay the non-owners, while only 11% have a higher rate, and 21% pay a lower commission percentage.

It's hard to understand why any agency principal would want to make less money for handling the same job as a non-owner employee, but it might relate to the need to bring new people along for perpetuation purposes. Unfortunately, not enough agencies have perpetuation plans to help them make such a determination. Only 54% of rural firms said they have such a plan, down from 61% two years ago. And 67% of the urban agencies report having taken care of this most important element of planning, down from 71% in the previous survey.