Before setting your producer compensation plan, read this article.
Past articles in industry publications about producer compensation incited many calls from anxious agency owners. Unfortunately, these articles were misleading. Each inaccurately concluded that big agencies paid producers better than small agencies. One article even concluded that big agencies could afford to pay more, so they did.
The articles were based on a study which found that producers in big agencies (agencies with more than $10 million in revenue) were paid an average of $116,487, while producers in smaller agencies (less than $2 million in revenue) averaged only $47,170. Wow ! These averages would be news if they had significance. But in our industry, they do not.
They're worthless statistics that can lead readers to such wrong conclusions as:
- Big agencies pay more for the same work
- Producers shouldn't work for small agencies because they don't pay enough
- Larger agencies can afford to pay more
- Smaller agencies need to pay producers more to keep up with the larger agencies
These conclusions are inaccurate because they're based on the wrong measurement. For example, consider the first error: Big agencies pay more for the same work. The study actually points out that large agencies pay between four and 12 percentage points less commission. If producers in small agencies average a 35% commission rate, four to 12 percentage points less equals 11.4% to 34.3%, less wages for the same work! How can anyone claim that large agencies pay more when producers in large agencies are paid a lower commission? The answer? By focusing on dollars when percentages are the more important measure.
Percentages are more significant because most producers are paid on a commission basis. By comparing dollars earned instead, a reader could easily infer that producers at big agencies are paid more for the same results — but the real reason that they make more is because producers in big agencies sell more! Based on the results of the study, producers in big agencies average at least 147% more in commissions than did producers in small agencies. When a percentage is applied to a larger number (such as bigger books), the result is more money (compensation). The reality is that producers in large agencies, although they make more, are actually paid less.
Consider this scenario: Two producers are both paid 30%. Producer One's book is $500,000 and producer Two's book is $250,000. Producer One makes $150,000 and Producer Two makes $75,000. Is Producer One paid more? No! They're both paid 30%. Producer One makes more because he sells more, but he's not paid more. The difference between the words “pay” and “make” might seem trivial, but these two words have quite different meanings that, when misapplied, can lead to wrong conclusions and bad decisions.
A producer's compensation is not like that of a staff person. If one CSR gets paid a salary of $50,000 and another gets $25,000, one CSR is paid twice as much as the other. “Paid” and “make” are synonymous when discussing staff compensation. They are not synonymous when discussing commissioned salespeople.
From an agency manager's perspective, which would you prefer: A producer with a big book paid at a lower commission rate or a producer with a small book paid at a higher commission rate?
Consider the following scenarios:
|
Producer's Book
|
$1 million
|
$500,000
|
|
Producer Compensation %
|
20%
|
30%
|
|
Producer Compensation Amount
|
$200,000
|
$150,000
|
|
Money Left to Pay Other Bills
|
$800,000
|
$350,000
|
If I were an agency manager, I'd much rather have the producer who makes more because the revenues and profits are so much greater.
What do big agencies do to empower their producers to sell more? The simplest and often overlooked difference is that they're BIG. Big accounts like doing business with big agencies. Other important factors include more carriers, more alternative markets, larger support staff (especially in marketing), and better management. This is like a great running back — no matter how good he is, he'll gain more yards behind a good line than a mediocre line.
Although big agencies pay producers less (even though their producers make more), their profit margins are not significantly larger. All the extra support, better management, and even extra carriers cost money. The difference, though, is that 9% of $1 million is a lot less than 9% of $10 million.
I don't mean to stress the benefits of large agencies over small agencies. Such a statement would greatly oversimplify the situation. Numerous factors other than size contribute to a successful agency. Nor am I suggesting that all great producers work in large agencies. That again would be an over-generalization. My purpose is to stress the importance of taking a logical look at producer compensation.
Producer compensation is essential to the success and survival of small agencies. So when a headline screams that big agencies pay producers more, many small agency owners will conclude that they need to pay their producers more so that they won't leave for the big shops. Rushing to pay their producers even more only compounds their problem because most small agencies are already overpaying too many mediocre producers.
For example, if an agency pays 35% for $100,000 commissions, this chart shows how the agency is paying far too much:
|
Book
|
$100,000
|
|
Producer Compensation
|
$35,000
|
|
CSR (agencies average one CSR per producer)
|
$35,000
|
|
Benefits (*15% of wages)
|
$10,500
|
|
Sales Expense (*5% of commissions)
|
$ 5,000
|
|
Administrative Expense (*24.5% of commissions)
|
$24,500
|
|
|
|
|
Total Expense
|
$110,000
|
(*GPS, APIS, 2002 national average of agencies with revenues of $1 million to $2 million)
Very few agencies even need an experienced producer selling less than $200,000 in commissions. In most cases, the agency would be better off without the producer.