Producer Relations

PRODUCER RELATIONS

by Carol Hammes

Despite tough market conditions and economic recessions, some insurance agencies are thriving. While the average agency has grown at an annual rate of 3% over the past several years, these super agencies are continuing to grow at compound rates in excess of 10% with profit margins at levels that most agents only dream about. In our consulting work and in the research for this newsletter, we are constantly on the lookout for those qualities that are common to the better agencies so that we can pass the information along. Over the last several years it has become increasingly evident to us that one of the keys to operating a successful agency in today's marketplace is to make a clean break with the past. You literally have to start over from scratch, rethinking every aspect of the organization and re-tuning it to run under a new and sometimes very different set of rules.

Take the concept of loyalty, for instance. Once upon a time (not so very long ago) it actually meant something to have had a long-term contract with an insurance company, insureds stuck with the agency despite price variations, and employees put more value on security and longevity of employment than they did titles and advancement opportunities. Sales and management techniques that helped you establish and maintain relationships 10 or 20 years ago are of little use today. The agencies that are doing well are lead by people who have been able to change their attitudes and their way of doing things. No longer do they rely upon loyalty to carry them through. They actively pursue and nurture those relationships that they have identified to be the most beneficial to their agency's future. One of the most critical and yet tenuous relationships is with the salespeople. Successful agency managers spend more time with producer relations than they ever did before.

We suggest developing new ideas and strategies for beginning a relationship with producers. These changes can also benefit your relationship with existing producers. Pretend as though they are new to the agency. Evaluate their technical, sales, organizational, and time management skills and develop a training program to fill in the gaps. The evaluation is actually a lot easier to do with existing employees than it is with new hires because you have been able to observe their work habits and knowledge first hand. When setting goals and detailing the action plan, however, your personal experience with the person may be a hindrance. You may be tempted to gear the objective to what they have been able to accomplish in the past. Forget about what has (or has not) happened and focus the goal setting on what you would expect a new employee with the same level of education and experience to accomplish.

This process will provide both the agency and the producer with the opportunity to make a fresh start. The agency's lackadaisical approach to sales management may have been a major cause of the producer's failure to produce as well as you both had hoped. By providing the direction and guidance now, you may be able to salvage this person's potential and turn him or her into a more valuable member of the team. At the very least, you will be setting up a program that will allow you to fairly and legally rid the agency of costly dead wood.

An integral part of the new relationship with the producers will be the agency's specific definition of what it wants producers to sell since it makes sense to have them concentrate on accounts that they have a good chance of attracting and retaining. This means that you have to review the current appetites of the major carriers and decide whether the producer should be a generalist or whether he or she should specialize in a certain type or size of account or in a particular line of business. It is important to consider the producer's own experience and desires, but the final decision should be driven by the availability of competitive products and services from major markets and the agency's overall business plan. Agency management also has to decide what each individual producer is expected to sell to the identified accounts. Options include: new coverages to new account; new coverages to existing accounts originated by the producer; new coverages to accounts assigned to the producer; renewal coverages to accounts originated by the producer; renewal coverages to accounts assigned to him/her; all of the above.

Another key element of the new relationship will be to clearly define the producer's role in the sales and servicing of these targeted accounts vis a vis the agency support staff. Prior to the time that agencies implemented sophisticated computer systems and hired expensive technical staffs, producers were responsible for all aspects of the sales and service effort. In most agencies this is no longer the case. But the change in duties may not have been clearly communicated to everyone concerned. This confusion results in personnel problems between the producers and the support people. It is also at the heart of the never-ending battle over producer compensation. Salespeople who have been around for a number of years remember when they were paid 45% or even 50% on new and renewal personal and commercial lines accounts. They therefore feel that they are being cheated if the agency reduces those percentages or stops paying for renewals on personal lines or the smaller commercial accounts.

In 'starting over' with all of the producers, agency owners can spell out in detail the level of support that is being provided by the agency and how that back-up gives the producer the opportunity to relinquish non-productive tasks so that he or she can truly have more time to sell. Does the agency provide personnel and/or computers that handle all (or some) of the marketing and placement, loss control and risk management activities, telemarketing/direct mail leads or appointments, completion of applications and checklists, calculating of new or renewal quotes, preparation of proposals and correspondence, tracking of sales activity, etc.? What exactly is the producer's role in prospecting, selling, and servicing accounts in your agency? Communicate these duties verbally and through the use of written job descriptions for the producers as well as for the support and service positions.

The compensation plan is a critical part of the agency's relationship with its salespeople. No matter how well the role is defined, the producer has to believe that the level of compensation is fair for what he or she is being asked to do. What you pay must be based upon what the agency is expecting from the salesperson and what services and other support the agency is providing to assist him or her in performing the job that has been defined. This is why the compensation will differ from one agency to the next and in many cases from one producer to the next within the same agency. In situations where the agency provides a high level of support, the producer's percentage will have to be 10 to 15 points less than it is in an agency where the salespeople handle everything. Likewise, in agencies where there is little or no 'house' business to cover basic overhead, the percentage that goes to the producers will have to be lower.

To determine what is fair compensation to the sales force in your agency, subtract your targeted profit margin and the cost of operations from agency revenues. What's left over will be the amount that you can afford to pay to the producers. Agencies that provide the 'standard' level of support, have about 20% of their revenues from house business, and those that want a 15% profit margin will find that the overall percentage that they can pay to producers will be in a range from 27% to 33% of commissions. The level of employee benefits and travel/entertainment/auto expenses provided will dictate whether you are at the high or low end of this range. Remember, there are always valid exceptions to every guideline.

Most of the more effective producer compensation plans that we have seen contain three distinct elements: a basic living allowance in the form of a salary or draw; incentive pay based upon some formula related to performance; and a piece of the future such as 401(k) contributions, profit sharing, ESOP, vesting, partnership, or ownership of business. If the primary thrust of the job is to service existing business, the incentive portion may simply be the opportunity for a raise in the salary. If the producer is strictly sales-oriented, the incentive portion may make up virtually all of the compensation. If the agency wants to emphasize new sales, the incentive should be weighted in that direction.

When you have determined what you can afford and how you want to pay the sales people, it is very important to show them exactly how the plan will work if they meet the goals that have been established. Anything that you can do to eliminate the potential for misunderstanding will definitely improve the results that you get as well as the overall working relationship with producers.

An effective compensation plan allows the producer a draw against the formula of 40% on new commercial commissions and 25% on renewal. We recommend that the draw be based upon 90% of what the formula produced the prior year to avoid having the producer 'owe' the agency some of the draw if several large accounts are lost during the year. The balance that the formula produces during the current year would then be paid as a bonus twice a year. Initially, the draw should be based upon what the formula would pay after the second year of production when you expect the producer to validate. More experienced producers that might have $175,000 in commissions at the end of year two could therefore be paid a draw of $50,000 whereas a person new to the industry might be only paid a draw of $20,000 assuming much lower production goals. One option is to set the initial compensation draw at $25,000. Note that the producer must 'make up' the production deficit before receiving the full formula commission percentage. Our formula shows compensation of $33,925 due the producer in year two (based upon 90% renewal retention rate: $40,500 x 25% = $10,125; $59,500 x 40% = $23,800; $10,125 + $23,800 = $33,925) but the producer had to cover the $7,000 deficit from year one so the amount he or she received out of the basic commission formula was only $1,925.

The compensation plan we propose provides for an extra bonus amount that is based upon the producer exceeding the expected production goals. This agency will pay the producer 50% of all commissions received in excess of the goal. In the second year this producer had a goal of $95,000 and actually brought $100,000 of commissions into the agency. A bonus of $2,2500 (50% of the $5,000 excess) was paid at the end of the year. In the third year, the goal was exceeded by $10,000 and the bonus was $5,000. This extra incentive gives them a reason to push a little harder and still provides the agency with the basic income necessary to cover expenses.

To address the future needs of the producer you should include a deferred compensation program that allows him or her to vest in the value of the accounts that have been produced. In this particular program the producer will accrue value beginning with the third year of employment. The vesting might be 10% a year up to a maximum of 50%. The value of the deferred compensation is the vested portion of 'one times' the annual commissions. This deferred compensation will be payable to the producer over three years after termination of employment as long as he or she honors the agency's non-piracy restrictions. At the agency's option, the vested value may also be converted to agency stock at some point in the future.

There are many variations of this basic type of producer compensation plan.

The basic percentage can be adjusted to accommodate different business plans.

Some examples include:

• 45/20 in agencies where new business is being emphasized and where the support staff handles more of the renewal activities
• 45/15/5/0 for small commercial accounts with little growth potential
• 50/0 for personal lines accounts in agencies with professional CSRs handling servicing
• 30/30 on larger commercial accounts where a higher level of producer involvement is necessary for servicing and renewal sales
• 35/35 on jumbo accounts

The incentive bonus can be based upon a percentage of the excess over the goal as we have done in this action plan or it can be an increase in the base percentage if the book exceeds a certain size. For example, in year two instead of paying 50% of the excess $5,000 in produced commissions over the goal, the base percentage for new production could be increased to 45% from 40%. By exceeding the $95,000 goal, the producer would have the 45% factor applied against the $59,000 in new commissions rather than 40%. This revised formula would result in additional commissions paid to the producer of $2,975 instead of the $2,500 bonus. Some agencies set up a number of different commission rates for different sized books of business, but you have to make sure that the computer system can handle this effectively or the administrative costs become prohibitive.

Another way of rewarding producers when they hit certain production levels is to give them a new title, an increase in the car allowance or expense budget, a larger office, a dedicated CSR, etc. Sometime these types of recognition will provide more incentive than simply increasing the bonus or commission percentage. When developing a producer relationship you need to remember that money is not the only motivator and that each person has his or her own needs. The more you do to meet them, the more successful the relationship will be.

The total compensation and motivational program must be individualized for each producer but it is also important to tie the fortunes of the salespeople to each other and to the success of the agency. This is where the sales contests come into play. Have a number of different programs going at once, some that are monthly, some quarterly, and at least one that is an annual contest. Rewards can range from a traveling trophy, a weekend in a nearby city, the right to go on an insurance company bonus trip, a 4 or 7 day cruise or ski trip, a monetary bonus. Criteria for 'winning' can be the producer (or team) with: the largest percentage of growth; the highest commission dollar increase; the highest number of new accounts written; the best hit ratio of written/quoted; or any other measurable item related to sales activities.

There are four basic rules to follow if you want to conduct a successful promotional campaign. The rewards have to be meaningful, the goals must be attainable, the administration of the rules must be fair, and the participants must be kept informed of their progress vis a vis the progress of the other producers. More often than not, one of these items has been overlooked and the contest fails to provide the motivation that you had hoped for.