The determination of adequate compensation levels for the staff is one of the most difficult issues faced by agency owners and managers. Compensation is dependent on so many different aspects of the agency operation that it must be individualized for each organization. What some agencies are doing will not necessarily be right for you. You can get advice from other agents, consultants, articles, and The Middleton Letter, but the final approach must accommodate and complement your specific agency's business plan.
In another Middleton article, we presented the key to increase productivity and profitability-pay employees based on performance and combine the compensation with non-monetary motivational tools. As the commercial market continues to soften (can this really be happening?) and personal lines commission rates decrease, there will be fewer dollars per account with which to pay employees and meet other operating expenses. It is essential that the amount that is being paid is indeed improving productivity and increasing the number of accounts that each person can effectively handle.
In another article, we will tackle producer and owner compensation in this difficult marketplace. In this issue we are focusing on compensating the service, support, and management personnel but many concepts and methods can also be applied to salespeople and particularly to owners who are functioning primarily as managers. What it all boils down to is that everyone must be on a compensation system that fosters creativity. People must be encouraged to find the smartest way to get things done and they should be rewarded for the quality and quantity of performance rather than the number of years that they have been with the agency.
Over half of the agencies in this country still do not have a formal compensation plan for non-sales employees. Those that have implemented such a structure are much more successful in tying compensation to performance and in accomplishing the results we talked about last month. Do it NOW. The smaller the agency, the easier it is to put guidelines and salary ranges. Implementation of the plan is a traumatic experience and it is easier when there are fewer employees to absorb the changes.
A formal Salary Administration Plan for the non-sales employees will help insure that:
- everyone will be paid fairly and equitably based upon the value of their position to the agency and the performance of the required functions of that job;
- each employee knows what has to be done to obtain a promotion and/or an increase in compensation;
- each employee has the opportunity to advance as far as he/she wants to and is capable of;
- there is a systematic and fair method of adjusting compensation based on performance.
There are five steps involved in implementing a salary administration program:
1. understand the job involved;
2. determine what the job is worth;
3. relate compensation to similar jobs in other agencies;
4. reward individual achievement;
5. establish policies, guidelines, and procedures for administering pay.
The starting point in putting together such a plan, then, is to prepare written job descriptions. Have each employee write one. Have each supervisor or manager write one for the positions they manage. And when you have gotten over the shock of the different perceptions of the positions from employees and managers, conduct a complete evaluation combining their input, and classify each job position.
Consider the management, administrative, and professional responsibilities of each position and rank them on a scale of one to five for the following categories. Does the job influence these things?
- Monetary impact-the direct influence that the job has on income and/or expenses and therefore profit;
- Decision-making responsibility- the level of decisions that can be made without having to go to a higher authority for approval;
- Complexity of analysis and problem solving-the level of technical analysis and professional knowledge required of the position;
- Degree of innovation-requirement for developing new ideas or changes in methods, procedures or services;
- Nature of relationships-contacts that the position has with other people in the agency, management, clients, company personnel and the level of diplomacy and persuasiveness necessary to carry out the job;
- Educational requirements-the level of education (including professional insurance courses) that should have been attained;
- Experience requirements-the work experience and insurance industry experience desired and the nature of this experience (company, agency, etc.);
- Number and nature of positions supervised/managed-people managed and skill level of the subordinate positions.
It is extremely important to conduct this evaluation of the positions without regard to the current incumbents of the position, even if that person is doing a good job. What should the job description be? And what type of person should be filling the position? If you are lucky, you will already have the right people in the slots-if not, you know what you will need to be doing in future hiring situations.
Once this exercise has been completed, relative job classifications can be assigned and the actual job description can be written that include reporting relationships, overall job purpose, specific responsibilities (usually 8 to 10 basic tasks), and job qualifications. Be sure to include as one of the responsibilities: Other tasks assigned by the (Manager / President); to avoid being confronted by; That's not my job; Everyone needs to know that, while they may have specific routine tasks, any assignment deemed to be necessary by management is to be performed because it is helping the whole organization achieve its goals. Employees have to understand that the accomplishment of the overall objective is the ultimate purpose of every job in the agency.
Along with job descriptions and classifications, the employees filling the positions must be given individual direction on what they need to do to get a raise next year or to get a promotion to a higher job class. The performance evaluation should focus on past performance strengths and weaknesses as well as what could be improved. Quantifiable items such as volume of work handled, days absent, should be included and the following qualities graded: accuracy, orderliness, reliability, appearance, job knowledge, written and oral self expression, intelligence, decision-making ability within the parameters of the job definition, resourcefulness, initiative, acceptance of responsibility, and most importantly attitude and team spirit.
Having a negative attitude and pulling the rest of the employees down is probably the single most important reason for firing someone . . . no matter how well they perform their job otherwise. Low morale can reduce productivity by as much as 75%. An employee who continually voices a negative attitude cannot be tolerated.
Formal performance reviews should be conducted at least once a year. These should include a review of the goals set the previous year, the employee's own assessment of his/her performance and related strengths and weaknesses, and the manager's perception of the results of the review period. The final evaluation should be in written form and signed by the manger and the employee to avoid possible EEOC problems should it become necessary to terminate the employment of the person. You need proof that they have adequate notice that their performance needed to be improved.
The performance review will take care of some of the feedback that is necessary to meet the needs of the employees. Paying attention to the members of the team is also important on a daily basis. Don't assume that having a performance evaluation plan is a substitute for the positive stroking and the gentle remonstrances that are an integral part of personnel management. One of the most common complaints that we hear in agencies is that people never know what management is thinking unless they've done something wrong and the screaming starts. Why don't they let me know when I've done something right?
Salary ranges for each position will increase either because of inflation or because of changes in the local market area for the past several years ranges have gone up an average of 3%, but historically the increase has been closer to 6%. General salary increases are designed to have employees keep pace with the pay of peers in other agencies.
Rises in the salary levels of the individual people will be dependent on the overall increase applied to each salary range and the individual performance ranking of outstanding, above average, average, or below average. An average performer should get no more than the general range increase. The standard agency will have around 60% of the total employees at the average level with 30% above average, 5% outstanding and 5% below average (presumably people on the verge of exiting).
These general guidelines should be communicated to the employees to reinforce the understanding that most people will perform in an average manner and that to really get ahead, they need to strive to be in the elite few that are above that level. Pay increases for improved performance are investment spending. There are few other opportunities that an agency will have where the yield is higher and the risk is lower.
Because there is only so much economic value to service and support positions in agencies, there has to be a top to the salary range. What do you do about a good performer who has reached the position ceiling and does not want (or is not qualified) to enter sales or management? First determine whether it is possible to promote them within the job-from CSR to Sr. CSR, for example.
Such an administrative promotion leaves them in effectively the same job but it gives them additional duties and responsibilities. When that option has been exhausted, you simply have to make do with bonuses based upon incentives. It is your job as manager to convey the realities of the business world to these employees in such a way that they understand and accept the situation.
Some agencies directly tie volume of work handled to the person's place in the salary range and to the percentage of increase that they will receive. Others provide separate incentive bonuses above slightly lower base salaries for CSRs that can handle more work than some of the others. To use either one of these approaches, you have to know with a reasonable degree of accuracy how much the average CSR can handle.
An incentive program that is based upon inappropriate measurements is worse than no incentive at all.
Although the number is decreasing, there are still some agencies that provide an incentive for personal lines CSRs to sell policies and round out accounts. If this is done, the base salary range should also be slightly lower. The extra incentive can be a percentage of commissions or a flat amount per policy sold (roughly equivalent to 50% of the average commissions per policy in the agency). It has been our experience that this type of incentive program does not encourage CSRs to sell unless it is also tied to other motivational activities, but it can provide some extra income for people working in agencies that have not been able to afford to raise salaries much over the past several years.
Incentives that tie the bonuses paid to overall agency or department performance are now being used much more extensively for the non-sales staff as well as for managers. The following is a dual program that can work in any size agency with larger ones being able to use departmental basis. The emphasis is on growth, profitable business, and productivity since the fewer the people that it takes to accomplish the results, the more each receives individually. Play with the percentages both for the goals and for the payout. Make sure that the objectives can be reasonably be accomplished in your agency and that the reward is high enough to provide real incentives and yet not so rich that it breaks the bank. It should also be recognized by everyone that zero bonus awards are inevitable in some years.
Agency Incentive Plan-Payout is 5% (more or less) of contingent income received and/or 5% (more or less) of commission growth in agency or department. Employees may have bonus shares based simply upon head count for people who have been with the agency for the full year and pro rated for others. Or the bonus shares could be based upon the performance review. For example, an employee that receives an outstanding rating gets 2 shares, above average--1.5 shares, average-one share, etc. Managers may receive additional shares in the general pool or may be set upon a separate program that also takes profit of the agency/department into account. Profit should only be used, however, if the manager has control over this area.
There are many variations to this type of incentive program. You might want to base it only on new sales or on a specific retention rate. Certain lines of business could be included or excluded as dictated by the agency's business plan. Agencies located in a volatile employment market want to build golden handcuffs into the program by deferring payment for a year. Depending on the perpetuation plan, this mechanism could be used to get employees involved in actual agency ownership. Or it could be used for the distribution of phantom stock.
One agent in rural Kansas had his own unique bonus program that he shared with us: I have one employee who receives a bonus each year of six cows and six calves with an approximate value of $6,000. She keeps the cows and sells the calves the next year which increases the bonus yearly. Whatever fits your agency situation . . . Whatever works . . .
We expect that most will start using incentive bonus programs like the ones described above. These plans reinforce the commitment by the employees to the organization and to work excellence. It's been our experience that this is one of the best ways to accomplish the elusive team spirit that we believe will be critical for success in the nineties. You have to remember, however, that these success-sharing programs will only work in successful agencies. That means that the agency must have owners and producers who are willing and able to be constantly selling new business while working with the staff to retain the existing book.