How Is Your Compensation Plan Linked To Performance?

Now well into the new year, agencies throughout the country are taking a close look at their year-2000 business plans. Faced with declining margins, most agencies not only want to grow, but find they must grow to survive. Growth necessitates an aggressive sales effort as well as efficiency and cost control. The question to be answered, then, is how can an agency acquire and retain a strong sales staff in today's marketplace?

Certainly, compensation is an important component of the equation. As agencies focus on growing their business, the challenge is to motivate and reward salespeople for higher performance. As owners push their producers to increase sales, they're examining their own compensation arrangements and tying their own results to performance, as well.

Business Management Group's recent survey of owners and producers found some interesting trends. This national survey of agency owner and producer compensation packages was initiated in response to hundreds of requests from agency owners who were looking for reliable, current information about compensation plans from agencies that were comparable in size and location. In most agencies, compensation and benefits average between 55% and 65% of net revenue-definitely the agencies' largest expenditure. To remain competitive, agency owners want to understand as thoroughly as possible how their peers are approaching compensation for themselves and their producers.

Participants in this survey came from all parts of the country and from the smallest to the largest agencies and brokerage firms. Here are some of the significant findings that emerged.

Across the country, the owner's book of business and percentage of ownership typically determine owner compensation. However, when an owner performs management duties that are important to the growth and profitability of the agency, a management fee is part of the overall compensation package, because these duties take time away from potential production. The agency that wants to grow will understand from these findings that management compensation should be tied to growth, profit, and/or measurable objectives.

Nonproducing owners typically have less ownership share and lower compensation packages than producing owners. Total compensation for owners varies widely because some owners will take as little as possible out of an agency they're trying to grow, and others will take large profits and leave little in retained earnings. We found that the average compensation for owners-that is, salary and bonus combined-is affected by the size of the agency as well as its profitability. It's interesting that in the largest agencies (revenues of $5 million and above), compensation for owners with titles of vice president, CFO, and COO is less that it is in the mid-size agencies. Typically, the larger the agency, the more owners there are to be compensated and the more need there is for regulation of discretionary distribution of corporate wealth.

A significant portion of owner-compensation programs is the annual bonus. Although the total amount available for owner bonuses depends on the profitability of the agency, our survey indicated that larger agencies tend to give smaller bonuses (as a percentage of revenue) because they recognize the need to reinvest their profits back into the agency.

For all owners other than those with the title of chairman, agency profit was the determining factor in calculating bonus amounts. Agency growth is considered far more important than profit for the position of chairman-perhaps because this title is often held by a senior owner whose major responsibility is the long-range growth of the agency through joint ventures, acquisitions, or high-level promotion of the agency.

Most agencies, except for the smallest, pay their inexperienced producers some form of salary, whether it's base salary plus commission or straight salary. The method of compensation differs with agency size and in different regions of the country. Experienced producers, on the other hand, are typically paid straight commission. This remains the case even when they're hired as new employees, because they generally bring a book of business with them.

Compensation for new, inexperienced producers doesn't differ by the type of business handled, whether it be large Commercial accounts or small group employee benefits. However, for the new experienced producer without a book of business, compensation is slightly higher when that producer handles medium-size to large Commercial accounts.

Compensation for seasoned producers with books is directly related to agency size, with the smallest agencies paying the lowest and the largest agencies paying the highest.

Most agencies surveyed aren't planning to increase the salaries of their producers or top executives. This finding is consistent with the trend toward lower profits and the fact that many agencies are attempting to remain profitable by holding salaries at current levels or awarding small cost-of-living increases. Increases in compensation are being gained through performance bonuses rather than actual increases to salary.

Owner-producers are generally paid a lower commission rate than non-owner employee producers. As expected, independent contractors are paid the highest rates since they aren't given other benefits. Agencies are placing greater emphasis on new business sales by paying producers a higher commission percentage than for renewals. Even independent contractors, who had been paid the same percentage on new business and renewals in the past, are being paid lower renewal commissions.

Most agencies offer incentives to their producers and non-owner top executives, and the type of incentive varies considerably. Fewer than 25% of agencies increase commission percentages as a reward for overachieving goals. Rather, they offer such incentives as deferred compensation, stock options, travel, group bonuses, 401(k) plans, and sales contests.

Vesting in one's book is a common method used to retain key producers because it helps a producer obtain equity, though not ownership, in the agency. The survey showed that this retention tool is used most frequently in the western region of the country and among the smaller agencies. On average, it takes producers five years to reach the maximum vesting percentage allowed.

Employment contracts and non-compete agreements are used by agencies in all parts of the country. More than 75% of the agencies surveyed require their producers to sign non-compete agreements, but fewer than half of them offer consideration for the agreement. On average, the non-compete time period is just short of two years, but this varies by geographical region.

Finding new producers remains one of the more challenging aspects of agency ownership in today's marketplace. Most new producers are hired away from other agencies. For this reason alone, it's in agency owners' best interest to compensate their producers well and offer the opportunity for experienced producers to build some asset value for their retirement in exchange for a long-term commitment to the agency.

In-house advancement was rated as the second-best source of finding and hiring new producers. Many agencies are requiring their CSRs and account managers to sell as well as service clients, thus giving them on-the-job training and experience in sales. Agency owners are finding that the better CSRs and account managers are qualified and eager to become producers.

Agency owners who want growth and need their producers to get out of the office and sell are using compensation as a motivating factor, and using both support personnel and automation to help maximize producer selling time. Agencies are paying commissions to CSRs for writing new business through account rounding and cross-selling. They're also giving CSRs more duties that were traditionally done by producers, such as submissions to market and proposal preparation. The types of duties performed by CSRs differ according to the agency's size.

The vast majority of agencies still require their producers to complete applications. More than half of the producers use their agency's automation system to do this.

As agency owners fight for strong profitability ratios and compete for the shrinking pool of experienced producers, they find they must design compensation programs for themselves and their producers that reward achievement, improve employee commitment, and ensure that compensation expenses don't escalate out of control. The ideal plan will be tailored to the characteristics of each agency, but it will benefit the producer and the agency equally, and demonstrate a strong commitment to the producer-owner relationship.