Personnel And Compensation Dilemma

PERSONNEL AND COMPENSATION DILEMMA

by Carol Hammes

It’s never been easy to attract the best young people to the insurance industry. In a competitive job market, it becomes almost impossible. When the unemployment rate is low, college graduates command even larger starting salaries. How does the average independent agency or insurance company compete with such immediate riches and the opportunity for even greater rewards in the future?

Unfortunately, the diminishing pool of viable candidates has come at a time when the independent agency system needs intelligent, energetic, automation-savvy people. In some parts of the country, agencies are so desperate for customer service representatives (CSRs) that they’re hiring anyone who’s breathing. Producers are brought in even though they score poorly on sales aptitude tests or have already failed at several other agencies. Desperation will often cloud good business judgment, leading to bad hires. An empty desk is better than an employee who pulls down the rest of your staff, adversely affecting sales and productivity.

FINDING GOOD CANDIDATES

At this point, it’s probably better to forget about the recent graduates and try to find producers and other employees elsewhere. But stay in touch with the ones who’ve gone for the gold. In two years, the company they chose might be going under and they might be much more reasonable about salaries, benefits, working conditions, work ethics, and opportunities.

In the meantime, there are several things that you can do. One is to get them into the industry before they graduate. Some agencies have launched intern programs for high-school students and developed the students into some of the best service reps in the industry.

Second, to find candidates out of the work force, you must define the job. This sounds very basic, but it’s surprising how many agencies rush to hire someone without determining exactly what they want and need. The object isn’t to hire a producer or CSR; it’s to hire the right one for your agency. Take some time to develop a job description that contains not only the job duties and responsibilities, but also the qualifications and specifications. Will the person need to have both selling and CSR skills, or be oriented towards only one area? Will this person be in Personal Lines, small Commercial, large Commercial, Group, Life, or all of the above (as it could be in smaller agencies)? Is a college degree important, or would a person with less formal education fit better with your customer base? Do you need someone young enough to participate in the perpetuation plan?

Once you define the job, develop a list of selection criteria, including the desired educational background, work experience, and personality traits. Target recruitment efforts to places where this type of individual might be found. Independent agencies have traditionally obtained their producers, underwriters, CSRs, and marketing personnel from insurance companies or other insurance agencies, hoping that they’ll at least get people who understand the business. But reliance on these sources might not produce the type of employee who can help you build a strong agency team.

If you’re looking for a technical account executive or account manager, then a company underwriter might work out, though trying to get them to take off the 'company hat' might be more difficult than training a new person. Hiring someone from another agency to produce or handle service work might work out. Then again, it might not. Many of these people can’t seem to use their past experience to help you improve your procedures, but rather use it to complain and procrastinate.

Today it’s not as important as it once was to hire someone with insurance experience. There are hundreds of opportunities, internal and external, to train a new person in whatever type of insurance job you want them to handle — sales, customer service, marketing, automation, or administrative support. Insurance carriers, associations, and other organizations have video, Internet, and classroom training programs for little or no cost. This gives you the opportunity to hire someone with the type of personality that you’re looking for and train them in technical insurance knowledge.

Many of the most successful producers I’ve encountered had been involved in athletics. The desire to be part of a winning team and the ability to accept defeat are invaluable traits for a salesperson. For that same reason, coaches can make good salespeople as well as managers. People who’ve been involved in sales of any type can be turned into good agency producers. One of the best that I’ve run into was selling shoes in a department store when he was 'discovered' by an agency principal.

Depending on the definition of the job, other vocational areas to look for employees include teachers, recent early retirees with good business contacts in the community, former military personnel, bank loan or trust managers, and other bank employees who’ve been involved in customer service. And don’t forget the pool of talent already located in your agency. The receptionist might make a very good CSR. A CSR might become a top-notch producer. Find out what each employee wants to do in the future, test them, train them, and bring them along. They might be your most valuable employment resource.

COMPENSATION

Compensation is critical to the agency’s relationship with its producers and employees. These people must believe that their pay is fair for what they’re being asked to do and consistent with their qualifications. The average agency spends 20.9%-24.1% of revenues for service and support personnel, and 30.1%-35.3% of revenues for executive and sales payroll and commissions. This adds up to 51%-59.4% of revenues going out in total payroll and commissions. When you add in employee benefits provided for employees, compensation levels in average agencies nationwide are 63.4-66.8% of total revenues. Spending these dollars wisely can make the difference between success and failure when it comes to the profitability and value of the firm.

The producer compensation plan must be based on the agency’s expectations of its salespeople and the services and support the agency provides to assist in the sales process. This is why compensation will differ from one agency to the next and in many cases, from producer to producer in the same agency. In situations in which the firm provides ample support, producers’ commissions will have to be 10-15 points less than it is in an agency where the salespeople handle the account from start to finish — doing almost everything in the sales, marketing, and servicing process. Likewise, in agencies where producer commissions are paid on all business, including renewals for Personal Lines and small Commercial, the overall percentage paid out will need to be lower. House business helps support higher commission rates for the other larger accounts.

To determine the appropriate compensation for salespeople, subtract your targeted pretax profit and all operating/selling expenses, including office and management payroll, from agency revenues. Calculate the percentage of direct commissions for the remainder. This is the commission percentage that your agency can afford to pay to producers. For example, assume the agency has $1 million in total revenues, with 90% coming from commissions and the rest from contingents and investment income. The following would be the scenario in an average firm:

1. Profit $150,000

1. Selling expense $ 6,300

1. Office payroll $209,000

1. Management payroll $ 50,000

1. Employee benefits $ 88,000

1. Operating/Admin. expense $230,000
   1. Total non-producer expense $733,300

This would leave $266,700 to pay producers, which is 29.6% of the total commissions in the agency. Most agencies have about 20% of their commissions coded as house business for which producers aren’t getting paid. So only $720,000 of this agency’s commissions will generate producer commissions. The $266,700 in available producer compensation dollars relates to the $720,000 in producer-related commissions at 37%. This is the overall level that the agency can afford to pay producers. Generally, the range will be from 27% in agencies with heavy sales support services to 40% in agencies with only the basics. Note that if there’s a change in the amount of house business, the targeted profit, expenses, or reimbursed travel, auto, or entertainment expenses, this percentage can be significantly different. Note also that with the exception of the amount allocated to management payroll, the agency principals’ compensation has been included in this sales compensation calculation.

In most urban agencies and even in many rural firms, the principals have decided to provide greater rewards for selling new business than for maintaining an existing book. Rather than pay 30% new and renewal across the board, for example, they’ve front-loaded the compensation and will pay more for new business on those accounts on which CSRs service and handle most of the renewal process.

The following is a standard producer compensation program in an agency that has an affordable producer compensation margin of between 30%-33% of producer-related commissions.

The definition of 'small Commercial' varies significantly, depending on the marketplace and the orientation of the agency. To find your level, calculate 80% of total Commercial commissions. If Commercial commissions are $800,000, the target number is $640,000. Run a list of Commercial accounts in descending order by commission. Add up the commissions, starting from the top, until the subtotal is $640,000. Note the commission level per account when you reach that total. This is the break-off point for your small-account definition. In some agencies, the break-off point is $300 in commissions, in others it might be as high as $2,000. You’ll find that accounts that produce the top 80% of commissions will be far fewer than the accounts in the lower 20% of your income. In fact, it often turns out that the top 20% of the accounts produce 80% of the commissions. Likewise, the definition of 'large Commercial' will depend on the agency’s size and its particular book of business. In general, these will be the top five or so accounts.

When a producer has been assigned accounts to handle, agencies often pay a reduced renewal commission of 15%-20%. When referrals are made from P/C to Group or vice versa, the standard referral fee is 10%-15% of the first-year commissions only. There are, of course, always extenuating circumstances either for the agency as a whole or for a particular situation, so it’s important to maintain flexibility. The sales manager or agency principal wearing that hat should be the one to make the final decision regarding commission allocation and splitting.

Because it’s difficult for people to live on fluctuating income levels, most agencies will use commission percentages to determine a salary or a draw that’s adjusted quarterly or annually. Bonuses for new business would also be paid quarterly or annually. This salary or draw can be based on the renewal commission percentage for the previous year’s production. Or it can be set at 75%-80% of the prior year’s total commissions, new and renewal. It shouldn’t be 100% of the total prior year’s production results, simply because the loss of a large account or some other event could cause a reduction in the book. Asking a producer to give money back is hard, and can add to the demoralizing effect of the lost business.

Setting the draw or salary for new producers is more complex. A scientific way to go about it is to determine what you jointly believe the book of business will be at the end of the third year. Then set the salary or draw at your renewal commission rate, applied against that future number. No commissions would be paid for new business until that draw is validated by the renewal book. Whenever the targeted level is reached (or at the end of the third year), the producer would go onto the formula. If at the end of one and one-half years it’s clear that the forecast was too optimistic, adjust the salary/draw accordingly or suggest that the producer go elsewhere. Do not continue to pay the initial amount for the full three years.

This number will obviously be higher for experienced producers than for those new to the industry. A producer who believes they can bring $300,000 in commissions to the agency by the end of the third year would be paid a draw based on 25% of that amount, or $75,000. A new producer at a minimum should be able to put $50,000 in new Commercial commissions on the books the first year, renew 90% of that and add $50,000 the second year, and renew 90% and add another $50,000 the third year. This would put the book of business at $135,500 at the end of the third year. If the agency pays 25% on renewal, the draw to start out would be $33,875. Another way to handle the compensation for new producers is to seed them with an existing book of business. If you can initially give them $50,000 in commissions to handle, the target for the end of the third year would move up to $176,000 and the initial compensation could be $44,000.

You should also carefully review your current compensation trends for service and support personnel. These people are becoming an invaluable resource for helping producers to write and keep business. Their compensation must reflect this role.