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Hello Edward,
Thanks for posting on our discussion board.
Here is some general info that you might find useful. This is an excerpt from a document originally published in our sister company’s (Insurance Marketing & Management Services -- IMMS) Library.
Your inquiry is very timely, in that we are about to make a whole host of informative content available right here on CompleteMarkets.com – stay tuned for more info.
Meanwhile, read on:
Producer compensation among independent agencies varies tremendously. Pick up several compensation surveys and you’ll observe variations that seem to confuse more than clarify the issue.
There is no best way to compensate producers. However, there are some principles that you can observe in order to ensure that producers are fairly compensated and motivated to produce.
Producers’ Duties
The way to develop an effective compensation plan is to first determine your goals, and then model your compensation plan to reward producers for meeting those goals.
Chances are, you won’t be hiring a pure producer-very few agencies are able to have someone simply selling full time. Usually, there are other administrative or service-oriented tasks that this person must handle. Although you may base your hiring decision purely on selling skill, your compensation plan must reflect all the responsibilities you expect the producer to fulfill-or the responsibilities will probably not be carried out.
The first thing to do is to clearly define the tasks you expect the producer to perform-as we’ve said, this can be accomplished with detailed job descriptions for every agency employee. Many agency owners also establish the relative value of the producer’s job to other positions. For example, if the major responsibility for prospecting and X-dating has been shifted from the producer to the Sales Center, the compensation for that function should shift as well.
But if you want your new producer to spend part of the work day performing administrative, managerial, or customer service duties, your producer should be paid on a salary basis for those duties and on a commission basis for his or her sales activity. This allows you to keep the producer accountable for his or her performance in a number of areas.
Regardless of the type of compensation-salary, commission, bonus-the method used to determine the amount must be based on a quantitative formula that is documented and communicated to producers.
And agency objectives must be supported by the compensation plan. Profit, growth, new business, retention, agency loss ratio, collections ... all of these are key objectives for an agency and must be supported by the manner in which producers are paid. For example, when determining compensation for sales, determine your primary goal:
• Do you want to encourage heavy sales activity? Set your first-year (new business) commissions at higher levels.
• Do you want a strong customer service commitment from the producer? Keep your renewal commissions at a higher level.
• Do you want long-term business that you can count on for stability? Tie the producer into the future of the agency with equity ownership.
It’s important to reward and recognize individuals for major accomplishments. In addition to the compensation for ongoing production, a compensation plan should provide incentive and motivation to accomplish major goals or to devote attention to special agency programs- Additional financial or non-financial rewards may be designed for these goals or programs. This permits the manager to focus the producer’s attention on special tasks and motivate him or her toward short-term goals.
Keep your ear to the ground and determine what the competition is paying. This is important in order to know what must be paid to attract new talent and retain existing talent.
Design a plan that is simple to administer, easy to understand, and effectively communicated to producers. These are the three benchmarks of effective producer compensation. Be careful that the plan is not so complex that it suffers by generating confusion and distrust among producers. You may have the best compensation plan, but if it isn’t communicated to producers effectively, it could be perceived as a poor plan or no plan at all.
The first step in designing a producer compensation plan is to determine how much you can afford to pay your producers. This involves identifying administrative expenses and direct sales expenses and deducting them from every commission dollar a producer generates, then determining what percentage of the agency commission dollar you wish to retain for profit, so that you can add that percentage to expenses and determine how much of the commission dollar is left to compensate producers.
Once you’ve determined how much you can afford to pay, you’ll need to begin structuring the plan to fit your agency goals. Financial rewards are delivered to producers primarily through one of the following compensation methods:
1. Salary: A specified amount, usually guaranteed to be paid weekly or monthly, and usually adjusted annually based on performance. Salaries are set on a discretionary basis, based upon the amount of business produced and retained in the previous year, or based upon a formal set of salary grades and ranges that relate to other jobs in the agency.
2. Commission: A percentage paid per unit of production. Commissions might be paid on total premium produced, new business, renewal business, or net increase in total premiums written from a previous period. The rate of commission should depend upon the task for which the commission is being paid. If it is paid, for example, as a finder’ s fee on a Personal Lines account, the amount might be l0% to 20%, whereas if it is paid for prospecting or developing a piece of Commercial business, the rate might be 35% to 50%.
3. Bonus: A lump-sum amount paid for achieving specific goals or objectives, either individual or group. A bonus can be designated as a percentage of a dollar goal or pegged as a dollar to be paid for specific accomplishments. Bonus payments can be formulized if you know in advance the basis on which the bonus will be paid; or they can be discretionary, being paid at the discretion of management. Bonus payments can be awarded for reaching the production goals set for the year, for overall agency or individual growth during a given period of time, for achieving an insurance designation such as CPCU, and many other achievements. Bonus payments allow considerable flexibility for management to designate awards for those special accomplishments that are particularly supportive of agency goals and plans.
4. Equity ownership: Asset value as a result of sales efforts. Whether it is a vesting formula leading to a buy-sell action, or a deferred-compensation plan, producers should have the opportunity to build this value on their book of business. This is particularly true if your benefits program doesn’t offer a strong retirement plan, such as a profit-sharing program or an Employee Stock Ownership Plan.
So, first you must determine what producers are paid to do; hence, the detailed job description. Next, determine how they should be paid for doing their duties, creating a mix of salary, commission, bonus, and equity that suits your agency. The materials and forms on the following pages will help you do just this.
A WORD ON PERKS AND INCENTIVES
In a survey called “People, Performance, and Pay,” the American Compensation Association found that 56% of 657 companies used non-cash incentives to motivate their salespeople. The majority said they used non-cash rewards for:
l. their “trophy value” - since employees are much more likely to show off a new car, a TV set, or photos from a trip than a large cash amount - and...
2. their staying power-since the winner will look at the prize for some time to come and remember how and from whom it was earned.
In addition to producers’ compensation packages, there may be time when additional compensation is in order to motivate your sales staff to meet a short-term goal. Most compensation experts agree that sales contests are a good way to motivate people toward that little extra effort, provided several guidelines are adhered to. These guidelines ensure that such a contest promotes healthy, not destructive, competition.
l. First, there should never be just one winner. Establish tiered prizes so that several people have a chance, or else many people’s extra efforts will be ignored.
2. Publicize the rules clearly, so that everyone understands them.
3. Publicize the results as they come in, so that everyone knows how they stack up as the contest progresses, and there’s no feeling that the contest was unfair.
Again, it can’t be emphasized strongly enough that there are many “right” ways to compensate your staff. The key is to define attainable goals and determine a method of compensation that rewards your staff for meeting those goals.