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Paying For Performance
  PAYING FOR PERFORMANCE by Carol Hammes Half the agencies responding to our recent Agency Compensation Survey reported paying CSRs additional compensation to reward them for their sales performance. And almost all the firms with non-owner producers compensate them based in some way on their individual production. One-fourth of the agencies have also established employee bonus programs that are primarily based on agency performance. In many insurance agencies, these sales incentives and bonuses have replaced either in whole or in part the annual raises that used to be routinely granted to everyone. After struggling through almost a decade of soft market conditions, owners and managers have discovered that an annual increase in compensation can no longer be guaranteed; it must be earned by the growth and profitability of the agency as well as by the performance of each individual employee. Paying for performance is a lot more difficult than applying an inflationary increase to existing salaries. Appropriate standards must be set and the achievement of those goals must be measured objectively. If the employees perceive that the program is not structured correctly or that it is not being administered fairly, the result will actually be a decline in productivity. All the principals must be committed to the incentive plan and must be willing to follow the rules, regardless of how it turns out. If the employees who have been with the agency for the longest period of time get the smallest bonuses after the computations have been made, so be it. Chances are that their salaries are probably higher than they should be by this time anyway, after all those years of automatic increases. There are literally hundreds of different ways to establish the bonus pools and to divide up the available dollars among employees. One of the main determinants of the type of program to be implemented should be the overall strategic plan. If the agency is trying to grow rapidly, the incentives should be directed towards new business written. If maintaining high levels of service for existing customers is your primary objective, then retention should be the focus of the plan. In agencies where company relations are paramount and loss ratios considered to be a true measure of success, bonus programs should emphasize contingents and growth bonuses. Incentives should be weighted toward encouraging employees to do what needs to be done to obtain and service the type of business that the agency principals have identified to be the most profitable and consistent with the agency's business plan. To a certain extent, the program must also take into account the orientation and needs of the individual employees. Some people are willing to take more risk in return for a potentially greater reward. Others would prefer the security of a guaranteed paycheck even if it is less than they could make otherwise. Extra time off may be more valuable to working parents than an additional week's pay. Older employees may be more appreciative of ways to put money away for retirement. People who are living on tight budgets without room for entertainment might prefer a dinner out or a weekend trip over receiving a bonus that they feel compelled to use to pay off the washer. Before setting up a new incentive program or revising an old one, it pays to know your agency and your employees.Agency Bonus Programs We were truly amazed at the creativity shown in some of the bonus programs reported to us in the recent compensation survey. Some combined a number of factors such as growth, profitability, total revenues, and contingents in such complex formulas that we wonder how effectively they could be administered. Others were still so dependent upon the discretion of the owners or the existing salary level that they probably should not even be called incentive plans. If your existing program is working to improve morale and to increase productivity levels, leave it alone for now. Just be ready to make some changes when (and if) the results start being less than satisfactory. The following are the major criteria used by agencies around the country to create the bonus pools. How these dollars are then distributed among the employees does not lend itself to generalization, but most often it is either based on some objective performance standards that are part of the employee evaluation system or divided equally among the employees, with or without some weighting for years of service. Criteria for Bonus Pool % of Agencies Percent of Agency Profit 25% Percent of Contingent Income Received 15% Percent of Growth Over Prior Period 11% Pool Created at Owners' Discretion 11% Combination of Growth and Profit 9% Percent of Total Salaries 8% Christmas Bonus-Usually Discretionary 8% Percent of Agency Revenues 3% Other Criteria 10% As more agencies are setting up production units and profit centers, the bonus systems are becoming more oriented to group efforts by the individual teams or by the department as a whole (with or without the inclusion of the manager/supervisor). Several different bonus pools may be created, with some agency employees receiving much larger bonuses than others simply by virtue of their being associated with a more successful group effort. The ultimate in profit center compensation is to allocate a certain percentage of gross commissions to a team and have them divide up the dollars as they see fit. A simple way to do this is to give the team 50% of the commissions they bring in, with around 30% allocated to producers and 20% for service personnel. The more new business the producers bring in, the better the placement efforts, the higher the retention rate, the more money everybody makes.CSR Production Incentives Most agencies (and state insurance departments) now expect CSRs to be licensed. As a result, the job description has been extended from strictly servicing existing policies to selling additional coverages and often to writing new business as well. While the primary focus of the CSR sales effort has been in personal lines over the past decade, it is now being expanded to commercial service reps, particularly those handling the smaller accounts with little or no producer involvement. Even though some agency managers believe that handling the sales function is part of the basic job duties and is therefore covered by the salary that is being paid, around half this country's agencies give CSRs additional incentives for selling. The majority of the programs (used by 55% of the agencies responding to our recent survey) pay the CSR a percentage of the new business commissions received. The following are the most popular percentages in order of preference: 50%; 25%; 20%; 30%; 40%; 10%; 60%. Another 23% of the agencies pay the CSRs a flat amount per policy written that ranges anywhere from $5 to $500, depending upon the type and size of the account. New and renewal commissions at the regular producer scale are paid by 6% of the agencies, another 4% of the agencies have bonus programs based upon exceeding certain production goals, and 3% pay for life/health production only. It is interesting that only 3% of the agencies surveyed pay the service reps for obtaining X-dates, something that is clearly considered by most firms to be part of the basic CSR job description and covered by their salary. Putting too much individual emphasis on new sales can be detrimental to the overall service effort and team spirit in the agency or department. This is why 5% of the agencies responding to the survey reported having incentives based upon the growth of the book handled by the CSR, rewarding retention as well as new sales. Several agencies actually pay the CSRs totally on the books they handle with the salary being based on a percentage of the commissions (22% to 25%) or a percentage of the premiums (3% to 4%). The following is a sampling of some of the more innovative incentive programs described in the surveys: 20% of first-year commissions, with half going to the CSR and half to a pool to be divided among all CSRs in the department a dinner out for a new policy sold an hour of paid time off for a new policy sold 1% of new premiums divided by the number of employees in the department 100% of the first renewal commissions point system based on new and lost accounts flat fee based on gross number of policies written higher salary for larger policy count handled Producer CompensationThe average agency is now paying between 30% and 33% of total revenues to owners and other salespeople in salaries, commissions and bonuses. In addition to this direct compensation, most agencies also pay for the payroll taxes, education, and group insurance expenses of the producers and owners, half of them cover travel and entertainment expenses, and half either provide a car or an automobile allowance. These expenses take up another 9% to 11% of revenues, putting the total cost of the sales and top management functions at between 39% and 44% of the agency's revenues. The top management compensation will be about 5% of revenues, so the funding of the sales effort alone generally nets out at 34% to 39% of total agency revenues. In most firms, about 10% of the revenues are generated from contingents, interest, and income other than commissions generated by producer sales. The sales function (including payroll taxes/expenses) therefore takes between 38% and 43% of the average agency's total commission income. After removing the cost of payroll taxes, group insurance, travel, education, and other sales expenses, the percentage of gross commissions paid to producers runs between 27% and 33%, with the lower percentages going to the salespeople in agencies that provide sales center and marketing support. Many agencies are now paying this percentage to producers on a split basis, with front loading for new business. The national new/renewal averages are: Small Rural Urban New Renewal New Renewal Personal Lines 44% 24% 40% 24% Commercial Lines 45% 28% 43% 32% Group 49% 29% 49% 37% With the advent of more sophisticated automated systems, it has now become possible to further define the type and size of accounts being written so that the producers can be encouraged to solicit and service the kind of business that the agency wants to write. The most common way of doing this is to pay a lower percentage for smaller commercial accounts and a higher percentage for the larger ones. Another approach is to pay a lower commission rate on smaller total books of business and a higher rate on larger books. Examples of two popular compensation programs are: PROGRAM ONE P&C/Group Account Size New Renewal Commissions Under $500 30% 10% Commissions $500 - $2,500 35% 15% Commissions $2,500 - $10,000 40% 25% Commissions Over $10,000 45% 40% PROGRAM TWO P&C/Group Book Size Commis. Auto/Exp Commissions Under $100,000 30% $250/mo Commissions $100,000 - $250,000 33% $350/mo Commissions $250,000 - $500,000 0 && menu.element.children()[0].hasChildNodes() && isOpen){ e.currentTarget.value = menu.element.children()[0].lastChild.innerHTML; } } }); // Each rendered element of target dropdown list // has category integer set as "value" attribute. // Selected item has "selected" attribute set to value "selected". // Example: Articles function getSelectedCategory() { return $('#' + 'ctl00_ctl00_ctl01_ctl00_cp_cp_cp_cp_ctlSearchBox_ddlCategories').find("option[selected='selected']").val(); } }