Current Compensation Trends

CURRENT COMPENSATION TRENDS

Inflation as measured by the Consumer Price Index was only 2.2% in 1997, the lowest rate since 1965. Agents who apply an inflationary rate to salary increases will find this to be good news, especially if inflation has been outstripping agency growth recently. On the other hand, the unemployment rate dropped to a 24-year low of 4.9%, so people have a wide variety of job options. This means that unless your agency is located in an area where insurance company or brokerage house mergers have put good technical people out on the streets, you'll probably have to pay more to attract new employees. If you're not careful, you may find that the agency is paying substantially more for a new hire than for people with comparable skills who have been working in the firm over the past several years and who are known quantities.

Many thousands of agencies have seen almost no revenue growth over the past five years. If office payroll started out at 21% of revenues at the beginning of this period and the agency gave 4% raises every year, it would now comprise up to 24.6% of revenues. The old methods of giving raises and setting salaries for new employees hired during a local 'wage war' are getting many agencies into financial trouble. These practices can also create serious morale problems. When people know that everyone gets the same percentage raise, the more productive people may (consciously or unconsciously) start to slow down. Good performers begin to wonder why they should bust their tails all day while other employees spend inordinate amounts of time reading the newspaper or gossiping. An even worse series of events can occur when you pay a new person more than an existing employee in the same position. Somehow, word eventually leaks out, no matter how careful you are with payroll security.

To prevent the problems inherent with traditional salary administration approaches, many agency managers are moving toward performance-based compensation systems that either reflect the agency's growth or profitability and/or pay people a bonus determined by the current year's individual performance. Instead of expecting an automatic raise, employees know that more money will only come from higher levels of performance. In addition, agency principals are also devising more creative ways to meet employee needs through nonmonetary incentives. A happy, motivated group of people will be more productive and can get more work done for each compensation dollar.

Analyze your current compensation system for the service and support staff. Most agencies will have office payroll relating to revenues at 20% to 22%. If your agency is far below that level, there might not be enough service personnel to support the sales effort adequately. Or you may have the wrong kind of people-too many inexperienced clerical workers and not enough technical service reps, for instance. Or the salary levels may be below where they should be. Agencies with a loss control engineer, a marketing department, or a sales center may be at 24% to 25% of revenues for office payroll. In the absence of these positions, an office payroll-to-revenues ratio over 22% might indicate that there are more people than should be necessary for your agency size. Or there may be too many technical people and not enough clerical backup, or your salary levels may simply be higher than the norm.

Next, compare all individual salaries to find any current inequities. Automatic raises over a number of years can put people above the appropriate maximum for their position. Conversely, newer people may be making more than the long-term employees. How do the high performers stack up against the average employees? Performance should be the only basis for salary variations within a certain position. If some Customer Service Representatives (CSRs) are technically more competent than others, they should have a different job description and title that justify the higher salary. In most cases, if more than three people are in a department, there's probably a good reason to have more than one level of CSR. Larger agencies may have as many as five or six different job positions in Commercial Lines, ranging from technical assistant through several levels of CSR to account manager. Corresponding salaries can range from $18,000 to more than $50,000, providing substantial room for employees who want to advance.

Ideally, it would be nice to be able to set the salary levels in your agency without taking into account what other agencies in your area pay for support staff. In reality, it's necessary to keep an ear to the ground to make sure that you're at or near the averages for comparable positions in other firms. The operative word here is 'comparable.' As you may have already discovered, 'CSR' can mean entirely different things even within one organization. When you expand the investigation to other agencies, you will find that a standard job description and set of qualifications for the CSR position does not exist. When comparing salaries with other agencies, try to find out what they expect these people to do, how much technical expertise is required, whether they are licensed, whether they have sales responsibilities, and so forth. Much insight can be gained by having a producer from your agency talk with a producer from another agency about the kind of support coming from the service staff.

Before implementing a performance-based compensation program, it's important not only to set up appropriate base salary levels but to address the identified inequities in the base salaries. Develop a plan to get the base compensation adjusted to the correct levels by giving raises and/or promotions where possible or explaining to those who are currently overpaid that they have several choices:

• They can keep their salary where it is, which would mean that they would not participate in future performance increases.
• They could accept a decrease in salary appropriate to their level of experience and expertise and then participate in the new program.

The choice they make will give you some insight into their willingness to take risks, their optimism regarding the agency's future and their own ability to perform.

In several recent compensation surveys, more than two-thirds of the agency principals indicated that they have put some sort of performance-based programs in place. This is a substantial increase from 10 years ago, when fewer than half of the independent agencies around the country had any type of incentive compensation programs for the service and support staff. We expect this trend to continue, with more than 80% of the remaining independent agencies using some type of a performance-based program by the year 2000.

Literally hundreds of different incentive programs can be designed and implemented. Developing the right program for your agency will require a bit of research, some tough decision making, and a lot of creativity. One of the most important decisions to make is to determine what you want the program to do in your agency. Incentives should be weighted toward encouraging employees to do what needs to be done in support of the agency's business plan. The plan may emphasize new sales or focus more on providing top-notch service to existing customers. The compensation program should be focused on either sales or service, too.

If company relations are paramount in the agency, a bonus that relates to loss ratios or the achievement of growth bonuses/contingents would be in order. Or the strategic plan might focus on increasing employee benefits business while simply trying to maintain the Property/Casualty book in this crazy marketplace. In this case, it would be important to set up an incentive program that tracks with total agency growth performance rather than the individual departments, so that the P/C people will not be shortchanged. The selected program will also depend on the agency principals' management and sales philosophy. You can't set up a plan that encourages service personnel to take charge of the servicing and expansion duties on the accounts when the producers or principals are unwilling to give them the opportunity to do so.

A third important element in developing the new program is to assess the qualities and needs of the current employee group. Unless you're willing to throw them all out and start over, you must take into account the skill levels and personalities you're dealing with. If five in six CSRs prefer processing business to talking with clients, installing a program that expects them to generate a significant amount of new sales is unrealistic and sure to create major anxieties on the way to its failure. It may be that you'll have to identify different job descriptions with different compensation programs to accommodate the various personalities.

For example, if there are several Personal Lines service reps who enjoy sales and several who do not, the agency could have two types of positions. The Customer Service Agents (CSAs) could handle all the new and expansion sales, and the CSRs could handle the processing and data-entry functions. The CSAs would get a base salary plus commissions (or per-policy flat dollar awards) for sales. The CSRs would be rewarded on the basis of retention. Or a CSA might be teamed with a CSR to handle one part of the alphabet, and the team would have a compensation program based on an increase in the book of business from one year to the next.

If the agency currently has a performance-based compensation program that is improving morale and teamwork with a corresponding increase in productivity and profitability, leave it alone for now. If what you have is not doing what you want or if you have no such program, it is time to consider implementing one for next year. Even if you do have a good program now, chances are that it will need to be tweaked or changed entirely within a year or two. You should have a new plan ready when and if the results start becoming less than satisfactory.

Some agencies have one program for everyone. Some separate them out by department. Some have individualized plans for each employee. Some have a combination of all three. Some base the computations on profit, some on revenue growth, some on contingents, and some on a formula combining profits and revenues. For the agency or department programs, two basic decisions must be made: a formula must be devised for creating the bonus pool, and a method should be calculated for dividing it up among the employees. The following examples are provided to give you an idea of where the research and creativity has led other agencies. Remember that all the principals must agree with the plan and commit themselves to it. And be sure to test the formulas with some 'what if' situations before you announce the program to the employees. You Don't want to come down to the end of the year and find that you have agreed to give away the store. The sample formulas shown below have worked for a number of firms, but you may need to change them to fit your particular situation.

Once the bonus pool is created, it's necessary to develop an equitable way of distributing these dollars to the employees. We recommend that you choose one that rewards individual performance as well as agency results. The following are some of the more common formulas used:

In addition to or in lieu of agency or department performance bonuses, many agencies apply an incentive compensation calculation to the traditional CSR jobs in Personal Lines, Commercial Lines, and sometimes employee benefits. Although in the past, the majority of these programs paid the CSR a percentage of new commissions or a flat fee per policy written, many are now taking a broader approach. Putting too much emphasis on new sales can sometimes be detrimental to retention, which is still the main thrust of these job positions. To mitigate the effects of pushing new production over servicing, more firms are moving toward measuring the increase in the book of business that the CSR is handling, thus rewarding both retention and sales. The following are some of the more common formulas used:

Many larger agencies have set up production units and are also now beginning to track compensation with the success of those teams. The more new business brought in, the better the placement efforts, the higher the retention rate, and the more money everybody makes. Bonuses can be paid based on hitting or exceeding new and renewal production goals. For example, the entire team, including the producers, might get an aggregate amount of 50% to 75% of the commissions produced in excess of a goal. Or the service staff in the team could get 25% of the increase in the book of business handled by the team. The team would then decide how to allocate the bonus, or it could be allocated as a percentage of base compensation. The ultimate in profit center compensation is to give the team 50% to 55% of the commissions that they bring in and have the entire amount allocated to the producers and service personnel to cover base salaries and bonuses.

The average agency spends 15% to 17% of the total payroll on payroll taxes, Group insurance, contributions to retirement plans, and various other employee benefits. Most firms provide Group insurance for the employee, and 30% provide full dependents' coverage, and others require some participation in those premiums. Very few agencies have qualified profit-sharing or pension plans any more, although around 35% have installed 401(k) plans with some matching contributions. If your agency provides much better benefits, it's important that you point this out to current and future employees. If you provide less, you may have to increase base compensation levels to be competitive.

The objective, however, is not to have benefits that are better than those of any other agency, but to have benefits that best meet your employees' needs. In many cases, especially with working parents, time off and/or flexible hours are more valuable than actual dollars. As a result, a relatively new trend seems to be taking hold in insurance agencies of all sizes. In addition to standard flex-time scheduling, agencies are now using automation to let employees work at home several days a week. With a business phone line and computer terminal, the location of the person is completely transparent to the client. Not only does this provide a real benefit to the employee, but it actually seems to improve their productivity! Another variation on the flexibility scheme is job-sharing. With the proper file documentation that's already necessary for E&O protection, two employees can handle the same group of customers at different times during the week. Some firms are also now allowing employees to earn paid time off in lieu of bonuses. Using the formulas discussed earlier and an hourly rate of employee pay (including salary and payroll taxes), the bonus dollars can easily be converted into extra hours or days off.