HOW MUCH SHOULD YOU PAY YOUR PRODUCERS?: PART I
by the IIABA Virtual Faculty
“What’s the average renewal commission that an owner should give his producers? Is there a difference between Personal vs. Commercial Lines compensation?” These are among the most common agency management questions. Although there’s no simple answer, this two-part article by the IIABA Virtual Faculty will try to give you a little more than “it depends.”
Here’s an “Ask an Expert” question we received:
“Could you tell me what’s currently being used as a split between an agency and producer in a small independent shop? I’ve heard everything from 50/50 new and 10/90 renewal to 35/65 level. Do you have thoughts on improvements on this split? It’s difficult to know how to ‘value’ one’s employees fairly.”
One of the most common questions our “Ask an Expert” service gets deals with how much should an agency compensate its producers. Unfortunately, there are probably as many possible answers as there are agency principals asking the question.
Although dozens, if not hundreds, of articles have been written about the subject and entire seminars have been devoted to it, there’s still no clear, absolute best way to compensate a producer; nor is there any certain commission that’s appropriate for every agency and every producer. Some agencies don’t even operate on a commission basis anymore — they use a salary and bonus or profit-sharing plan.
The appropriate plan for your agency depends on a seemingly infinite number of variables. However, we understand the need for some sort of reference point. Here are suggestions from several of our agency management gurus, including Chris Burand, Judi Newman, Al Diamond, and Howard Candage (and you’ll see that even these experts don’t agree entirely).
FACULTY RESPONSE
There are no average renewal commissions that should be paid. The average is 35% to 40% on Commercial and 0% to 20% on Personal Lines.
With regard to the second question, the split can be anything and everything from 70% new/0% renewal to 20%/20% for Commercial. For Personal Lines, the variance is even greater. The “right” answer depends on the support the producer receives, the kind of business being written, whether the agency or the producer pays expenses, what the producer writes, how much experience the producer has, and the size of their book. Anyone who uses “industry averages” is sure to get the answer wrong. It’s difficult to appraise the value of the producer. The key is that the producer must usually produce at least $200,000 in annual commission for the agency to break even at any split (Commercial Lines) if the producer is paid more than 33% on renewals.
FACULTY RESPONSE
On average, most agencies pay between 25% and 30% renewal. This usually does not include Personal Lines commissions, which are usually a one-time payment (either a set amount, such as a finder’s fee, or first-year commission only). New commission on Commercial Lines is usually 30% to 40%, first year only.
Much will depend on your agency, its location, and the type of business you expect a producer to bring in. It will also depend on whether the producer is just starting out or is bringing a book of business. Other factors to consider include what you can't afford, how badly you want or need the producer, what other benefits you want to provide, etc. Whatever you do, don’t consider an independent contractor arrangement unless it truly meets the test.
Specifically, with regard to Personal Lines, whenever possible, an agency should try to pay commission only on new business. I like a 50%/50% split or a fee schedule for first year. To save later questions about when something is new, the fee schedule would be a $75 to $150 flat payment for new business. The amount would depend on what the agency would rather have (e.g., Auto vs. HO) and perhaps the size of the premium. Because few producers get involved in servicing a PL account during the year or at renewal, why pay commission? If the producer does service the account, they’re probably more of a CSR type. Because there’s no blueprint for the industry, use your best judgment. Keeping in mind that your PL book should be producing about 25% to 30% profit for the agency, how much can you afford to pay on renewals?
With regard to the second question, in small to medium-sized agencies, the most common commissions are:
- Personal Lines: 50% new, 25% renewal
- Small Commercial: 40% new, 30% renewal
- Commercial: 40% new, 30% renewal
Although these levels vary by region, the agency must understand that they can only pay what they can afford.
The agency must figure out what percentage of the commission it takes in their location to run the agency and include a bottom-line profit. Most agencies, if they’re honest, can rarely afford to pay much more than 35% new and 25% renewal. Anything higher and the agency is losing money just to have a producer. If the producer is there for other reasons, say to help grow the agency so that the agency owner can sell for a higher multiple, treat this arrangement as a capital investment. If the producer is there just so the agency owner can say that they have a producer, then compensation is coming out of the bottom line.
When considering a producer compensation agreement, ask yourself these questions:
1. What can the agency afford?
2. What is the agency willing to pay for?
3. How long can the agency go before results must meet expectations?
In my experience, most agency owners hire a producer and carry them far too long, souring their appetite to try again until they find the right person. The bottom line: Know what you can afford.
You can’t pay 50/50 just because someone else is, or some seminar instructor says that this is doable. You must first understand what your agency must have to stay financially healthy and then develop a compensation arrangement that keeps this in mind.
This article is reproduced, with permission, from the VuPoint Newsletter of the IIABA Virtual University. For more information on the Virtual University, click here. The members of the University Faculty offer expertise in every aspect of agency management and marketing. Many of these faculty members are available for in-house training or consulting. For contact information on faculty members, click here.