Concepts of Producer Compensation

One of the most common questions we hear during consultation involves compensation for owner/producers, existing producers, and new producers. The principal question is how much and how to pay for production that compensates salespeople fairly and gives them incentives for continued growth.

The answer is complex because the same compensation models don't fit all producers.

OWNER-PRODUCERS

Our most important (and most controversial) compensation recommendation is that owner-producers should not “earn” profits. Owner compensation, like all compensation in an agency, should be based on performance. The easiest way to look at compensation is with the Replacement Factor. What would it cost to replace the function on which the compensation is based? In other words, if a staff member (at any level) were to hit the lottery and retire, how much would it cost to replace them with like kind and quality? Total earnings for owners are not limited to performance-based compensation. Bonuses and dividends can boost total earnings for owners to the levels desired (while still leaving the agency fluid and liquid).

If owners can accept base producer compensation based on performance, then the trigger for increased compensation for their books of business becomes growth. As long as their books of business grow in number of accounts, the percentage that they take as compensation should remain stable. We use number of accounts because of the fluidity of premiums and commissions in hard and soft markets. Market conditions can change the amount of commission created by a book of business, even though these conditions don't measure performance accurately.

Because performance relates more accurately to the addition of customers every year, our compensation programs encourage owner/producers to remain active in their own agencies. We avoid the R.I.P. (Retired In Place) owner who decides that once they achieve a certain level of success, they can retire into a service, administrative, or executive role, and no longer have to perform at the levels that caused their success in the first place. The key to the success of this compensation model is to decrease owner/producer performance-based compensation by 1% a year for years in which their books of business (accounts) do not grow. Growing past prior high levels will regain the owners' original compensation percentage.

NON-OWNER PRODUCERS

Non-owner producers are also compensated on a commission basis. But their primary role is to generate sales activity: Defined as sales calls (visits) to prospects. So lower sales activity results in lower compensation levels. Regained activity will restore compensation levels to the nominal levels commensurate with the size of the producer's book of business. This incentive program not only rewards the importance of the revenues that the producer generates, but also keeps them focused on the activity that results in increased production activity.

NEW PRODUCERS

New producers have a compensation level that reduces dramatically for every two months that they miss their activity levels.

This type of focused incentive program does not interfere with commission percentage growth based on the size of a book of business. Agency Consulting Group, Inc.'s Producer Compensation Programs provide for tiered producer compensation that rewards larger producers with higher earnings. This is justified by the economies of scale in an agency. A producer who generates $500,000 of commission is simply more valuable than one who generates $200,000 in commission. The initial tier is based on the overhead and profit needs of the agency.

When these fixed costs (profit should be fixed as the minimum required by any business) are considered, an identifiable percentage of the commission dollar remains available for producer compensation. If an agency pays more than this fixed cost for average producers, they generate a loss on every dollar sold. But if they use this percentage for the average producer, those who far exceed the average will overcome agency overhead and provide greater returns than contemplated in the minimal commission rates.

Our compensation plans provide for 5% commission increases at two or three tiers of production. The agency overhead does not increase with increased production and the excess profits are shared with the agency's most valued producers. This increased commission rate also provides sufficient rewards to the successful producers to avoid their potential loss to competitors.

The final class of producers to consider are new producers who are paid a draw against their potential for one to three years while they establish themselves within the agency. These producers are also paid based on sales call activity - but with a twist. A producer who is as active as an agency projects will eventually earn their draw while building their book of business.

If a producer achieves consistent and active sales call activity, but fails to develop a reasonable number of sales, they're not fulfilling their charter with the agency. It's the responsibility of the agency sales management to train and educate these producers to achieve the closing and success rate needed to achieve their goals. However, if the producer can't generate enough activity to attain these minimum goals, there's nothing that an agency manager can do to motivate the employee.

Therefore, this performance-based program reduces draw-based producers' compensation by 10% for every two successive months that they don't achieve the required number of sales calls. This creates motivation through compensation. If the producer wishes to achieve the promised compensation levels, they must generate the required level of activity that, if consistently achieved, will result in enough successful sales to support their compensation draw (and more).

Although performance-based compensation is only a part of an Incentive Compensation Program, it deserves emphasis because it stresses penalties and rewards for activity - not just for sales.