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Producer Relations
PRODUCER RELATIONS by Carol Hammes Despite tough market conditions and economic recessions, some insurance agencies are thriving. While the average agency has grown at an annual rate of 3% over the past several years, these super agencies are continuing to grow at compound rates in excess of 10% with profit margins at levels that most agents only dream about. In our consulting work and in the research for this newsletter, we are constantly on the lookout for those qualities that are common to the better agencies so that we can pass the information along. Over the last several years it has become increasingly evident to us that one of the keys to operating a successful agency in today's marketplace is to make a clean break with the past. You literally have to start over from scratch, rethinking every aspect of the organization and re-tuning it to run under a new and sometimes very different set of rules. Take the concept of loyalty, for instance. Once upon a time (not so very long ago) it actually meant something to have had a long-term contract with an insurance company, insureds stuck with the agency despite price variations, and employees put more value on security and longevity of employment than they did titles and advancement opportunities. Sales and management techniques that helped you establish and maintain relationships 10 or 20 years ago are of little use today. The agencies that are doing well are lead by people who have been able to change their attitudes and their way of doing things. No longer do they rely upon loyalty to carry them through. They actively pursue and nurture those relationships that they have identified to be the most beneficial to their agency's future. One of the most critical and yet tenuous relationships is with the salespeople. Successful agency managers spend more time with producer relations than they ever did before. We suggest developing new ideas and strategies for beginning a relationship with producers. These changes can also benefit your relationship with existing producers. Pretend as though they are new to the agency. Evaluate their technical, sales, organizational, and time management skills and develop a training program to fill in the gaps. The evaluation is actually a lot easier to do with existing employees than it is with new hires because you have been able to observe their work habits and knowledge first hand. When setting goals and detailing the action plan, however, your personal experience with the person may be a hindrance. You may be tempted to gear the objective to what they have been able to accomplish in the past. Forget about what has (or has not) happened and focus the goal setting on what you would expect a new employee with the same level of education and experience to accomplish. This process will provide both the agency and the producer with the opportunity to make a fresh start. The agency's lackadaisical approach to sales management may have been a major cause of the producer's failure to produce as well as you both had hoped. By providing the direction and guidance now, you may be able to salvage this person's potential and turn him or her into a more valuable member of the team. At the very least, you will be setting up a program that will allow you to fairly and legally rid the agency of costly dead wood. An integral part of the new relationship with the producers will be the agency's specific definition of what it wants producers to sell since it makes sense to have them concentrate on accounts that they have a good chance of attracting and retaining. This means that you have to review the current appetites of the major carriers and decide whether the producer should be a generalist or whether he or she should specialize in a certain type or size of account or in a particular line of business. It is important to consider the producer's own experience and desires, but the final decision should be driven by the availability of competitive products and services from major markets and the agency's overall business plan. Agency management also has to decide what each individual producer is expected to sell to the identified accounts. Options include: new coverages to new account; new coverages to existing accounts originated by the producer; new coverages to accounts assigned to the producer; renewal coverages to accounts originated by the producer; renewal coverages to accounts assigned to him/her; all of the above. Another key element of the new relationship will be to clearly define the producer's role in the sales and servicing of these targeted accounts vis a vis the agency support staff. Prior to the time that agencies implemented sophisticated computer systems and hired expensive technical staffs, producers were responsible for all aspects of the sales and service effort. In most agencies this is no longer the case. But the change in duties may not have been clearly communicated to everyone concerned. This confusion results in personnel problems between the producers and the support people. It is also at the heart of the never-ending battle over producer compensation. Salespeople who have been around for a number of years remember when they were paid 45% or even 50% on new and renewal personal and commercial lines accounts. They therefore feel that they are being cheated if the agency reduces those percentages or stops paying for renewals on personal lines or the smaller commercial accounts. In 'starting over' with all of the producers, agency owners can spell out in detail the level of support that is being provided by the agency and how that back-up gives the producer the opportunity to relinquish non-productive tasks so that he or she can truly have more time to sell. Does the agency provide personnel and/or computers that handle all (or some) of the marketing and placement, loss control and risk management activities, telemarketing/direct mail leads or appointments, completion of applications and checklists, calculating of new or renewal quotes, preparation of proposals and correspondence, tracking of sales activity, etc.? What exactly is the producer's role in prospecting, selling, and servicing accounts in your agency? Communicate these duties verbally and through the use of written job descriptions for the producers as well as for the support and service positions. Compensation and Motivation The compensation plan is a critical part of the agency's relationship with its salespeople. No matter how well the role is defined, the producer has to believe that the level of compensation is fair for what he or she is being asked to do. What you pay must be based upon what the agency is expecting from the salesperson and what services and other support the agency is providing to assist him or her in performing the job that has been defined. This is why the compensation will differ from one agency to the next and in many cases from one producer to the next within the same agency. In situations where the agency provides a high level of support, the producer's percentage will have to be 10 to 15 points less than it is in an agency where the salespeople handle everything. Likewise, in agencies where there is little or no 'house' business to cover basic overhead, the percentage that goes to the producers will have to be lower. To determine what is fair compensation to the sales force in your agency, subtract your targeted profit margin and the cost of operations from agency revenues. What's left over will be the amount that you can afford to pay to the producers. Agencies that provide the 'standard' level of support, have about 20% of their revenues from house business, and those that want a 15% profit margin will find that the overall percentage that they can pay to producers will be in a range from 27% to 33% of commissions. The level of employee benefits and travel/entertainment/auto expenses provided will dictate whether you are at the high or low end of this range. Remember, there are always valid exceptions to every guideline. Most of the more effective producer compensation plans that we have seen contain three distinct elements: a basic living allowance in the form of a salary or draw; incentive pay based upon some formula related to performance; and a piece of the future such as 401(k) contributions, profit sharing, ESOP, vesting, partnership, or ownership of business. If the primary thrust of the job is to service existing business, the incentive portion may simply be the opportunity for a raise in the salary. If the producer is strictly sales-oriented, the incentive portion may make up virtually all of the compensation. If the agency wants to emphasize new sales, the incentive should be weighted in that direction. When you have determined what you can afford and how you want to pay the sales people, it is very important to show them exactly how the plan will work if they meet the goals that have been established. Anything that you can do to eliminate the potential for misunderstanding will definitely improve the results that you get as well as the overall working relationship with producers. An effective compensation plan allows the producer a draw against the formula of 40% on new commercial commissions and 25% on renewal. We recommend that the draw be based upon 90% of what the formula produced the prior year to avoid having the producer 'owe' the agency some of the draw if several large accounts are lost during the year. The balance that the formula produces during the current year would then be paid as a bonus twice a year. Initially, the draw should be based upon what the formula would pay after the second year of production when you expect the producer to validate. More experienced producers that might have $175,000 in commissions at the end of year two could therefore be paid a draw of $50,000 whereas a person new to the industry might be only paid a draw of $20,000 assuming much lower production goals. One option is to set the initial compensation draw at $25,000. Note that the producer must 'make up' the production deficit before receiving the full formula commission percentage. Our formula shows compensation of $33,925 due the producer in year two (based upon 90% renewal retention rate: $40,500 x 25% = $10,125; $59,500 x 40% = $23,800; $10,125 + $23,800 = $33,925) but the producer had to cover the $7,000 deficit from year one so the amount he or she received out of the basic commission formula was only $1,925. The compensation plan we propose provides for an extra bonus amount that is based upon the producer exceeding the expected production goals. This agency will pay the producer 50% of all commissions received in excess of the goal. In the second year this producer had a goal of $95,000 and actually brought $100,000 of commissions into the agency. A bonus of $2,2500 (50% of the $5,000 excess) was paid at the end of the year. In the third year, the goal was exceeded by $10,000 and the bonus was $5,000. This extra incentive gives them a reason to push a little harder and still provides the agency with the basic income necessary to cover expenses. To address the future needs of the producer you should include a deferred compensation program that allows him or her to vest in the value of the accounts that have been produced. In this particular program the producer will accrue value beginning with the third year of employment. The vesting might be 10% a year up to a maximum of 50%. The value of the deferred compensation is the vested portion of 'one times' the annual commissions. This deferred compensation will be payable to the producer over three years after termination of employment as long as he or she honors the agency's non-piracy restrictions. At the agency's option, the vested value may also be converted to agency stock at some point in the future. There are many variations of this basic type of producer compensation plan. The basic percentage can be adjusted to accommodate different business plans. Some examples include: 45/20 in agencies where new business is being emphasized and where the support staff handles more of the renewal activities 45/15/5/0 for small commercial accounts with little growth potential 50/0 for personal lines accounts in agencies with professional CSRs handling servicing 30/30 on larger commercial accounts where a higher level of producer involvement is necessary for servicing and renewal sales 35/35 on jumbo accounts The incentive bonus can be based upon a percentage of the excess over the goal as we have done in this action plan or it can be an increase in the base percentage if the book exceeds a certain size. For example, in year two instead of paying 50% of the excess $5,000 in produced commissions over the goal, the base percentage for new production could be increased to 45% from 40%. By exceeding the $95,000 goal, the producer would have the 45% factor applied against the $59,000 in new commissions rather than 40%. This revised formula would result in additional commissions paid to the producer of $2,975 instead of the $2,500 bonus. Some agencies set up a number of different commission rates for different sized books of business, but you have to make sure that the computer system can handle this effectively or the administrative costs become prohibitive. Another way of rewarding producers when they hit certain production levels is to give them a new title, an increase in the car allowance or expense budget, a larger office, a dedicated CSR, etc. Sometime these types of recognition will provide more incentive than simply increasing the bonus or commission percentage. When developing a producer relationship you need to remember that money is not the only motivator and that each person has his or her own needs. The more you do to meet them, the more successful the relationship will be. The total compensation and motivational program must be individualized for each producer but it is also important to tie the fortunes of the salespeople to each other and to the success of the agency. This is where the sales contests come into play. Have a number of different programs going at once, some that are monthly, some quarterly, and at least one that is an annual contest. Rewards can range from a traveling trophy, a weekend in a nearby city, the right to go on an insurance company bonus trip, a 4 or 7 day cruise or ski trip, a monetary bonus. Criteria for 'winning' can be the producer (or team) with: the largest percentage of growth; the highest commission dollar increase; the highest number of new accounts written; the best hit ratio of written/quoted; or any other measurable item related to sales activities. There are four basic rules to follow if you want to conduct a successful promotional campaign. The rewards have to be meaningful, the goals must be attainable, the administration of the rules must be fair, and the participants must be kept informed of their progress vis a vis the progress of the other producers. More often than not, one of these items has been overlooked and the contest fails to provide the motivation that you had hoped for. This article was reprinted with permission from Carol Hammes, editor of the Middleton Letter.

Motivation: Module Iii-E
INTRODUCTION Motivation is tied closely to compensation, but the two are very different. Compensation is simply one form of motivation. There are many forms, all of which should accomplish one thing: encourage producers to sell and make them feel good about what they're doing and where they're doing it. A good motivational environment will help both Life and P/C producers. You should have a motivational atmosphere for your CSRs, as well. You should maintain a high recognition level in which all agency members can participate. Every producer wants to succeed. Your job, then, is to make sure each does succeed, through motivation and recognition. By providing continuous recognition programs that inspire and motivate agency employees, you will create a more successful agency environment. Your own attitude is the most important part of motivating staff. You must promote enthusiasm and belief for others to be enthusiastic and believe. ELEMENTS OF MOTIVATION To begin your motivational campaign, you need several basic elements: 1. You must be available to producers. Both new and experienced producers should be able to come to you for any reason-business and personal. All producers should feel that you are genuinely interested in them as individuals. Whenever one has a complaint, misunderstanding, or any problem, he or she should feel comfortable coming to you and talking about it. By maintaining an open-door policy, producers will feel that you are approachable, and you can build and maintain close relationships with your producers. You should also schedule regular personal conferences with your producers. Use the time to go over their goals, concerns, progress, and the things they want to accomplish. You can combine this with your weekly sales review, but it would be better to make this a separate, more informal meeting. This is the single most important part of good agency motivation. Your personal interest in each producer provides inspiration, motivation, and a morale boost-and all it takes is time and caring. 2. Regular sales meetings give you the opportunity to recognize producers. By gathering all the producers together, you are providing a forum for personal feedback and recognition of the high achievers from the past week or month. The recognized producers get both immediate feedback from you and the recognition of their peers. MOTIVATIONAL EVENTS In addition to the above, there are a number of events and activities that can motivate your people. The following suggestions will help you build and maintain team spirit in your agency. Annual Meeting-At the beginning of each year, hold an all-agency meeting. Use this to review the agency's performance of the past year and recognize past top performers. Include other agency staff, as well as producers, in this recognition. For example, your receptionist may have helped other staff in addition to regular duties. Or a CSR may have been exceptionally motivational to other staff members. You can use charts and graphs to show how the agency performed over the past year. Build agency pride and team spirit. You may invite an outside guest with experience in key agency areas who can reinforce your agency's results and plans. The objective of this meeting is to inform, instruct, and inspire. Inform: Explain to staff the outlook for your agency in the new year, along with any new programs you may have in mind. Share your one-year and five-year plans here, as well as any upcoming seminars, meetings, or conventions you may wish staff to attend. Explain to staff the outlook for your agency in the new year, along with any new programs you may have in mind. Share your one-year and five-year plans here, as well as any upcoming seminars, meetings, or conventions you may wish staff to attend. Instruct: Share with them a sales procedure that will benefit them, or invite an outside speaker. Share something with them that will make their job easier or more effective. Share with them a sales procedure that will benefit them, or invite an outside speaker. Share something with them that will make their job easier or more effective. Inspire: Paint a picture of what the agency can become. Outline its potential and the benefits to producers and staff. Explain the ways you are going to recognize and reward top performers throughout the year. Then, recognize each staff member for a particular accomplishment. Paint a picture of what the agency can become. Outline its potential and the benefits to producers and staff. Explain the ways you are going to recognize and reward top performers throughout the year. Then, recognize each staff member for a particular accomplishment. Everyone must be positively recognized. Consider concluding the meeting with a lunch or dinner, and have the top agent of the year and top agency staff member of the year speak. Make sure you end the meeting on a high note. Annual Black-Tie Dinner-Another motivational event is a formal dinner held every year, either at year-end or in January. You can invite all agency members and their spouses and present awards to all your production leaders for the year, including special recognition for your top associates. You may include the spouses by presenting them with special mementos of the evening. Make sure the memento is nongender-specific. This should be a big event, so plan it carefully to reflect the occasion. Also, you may invite area and industry leaders to provide added recognition to your agency members. Sports Outing-Why not organize a softball team and compete with other local businesses? Or, have a combination family picnic and games. Educational Conference-A yearly educational conference, held at a prestigious location, is another great motivating event. You can require producers and other agency members to meet certain qualifications in order to attend-remember to include spouses. Holiday Party-You can hold a holiday party for the entire staff and make it an "Open House." Again, make sure top producers are recognized. Have important clients, professionals with whom you work, centers of influence, and other community leaders attend and use this occasion to display your agency and staff. -Another motivational event is a formal dinner held every year, either at year-end or in January. You can invite all agency members and their spouses and present awards to all your production leaders for the year, including special recognition for your top associates. You may include the spouses by presenting them with special mementos of the evening. Make sure the memento is nongender-specific. This should be a big event, so plan it carefully to reflect the occasion. Also, you may invite area and industry leaders to provide added recognition to your agency members. -Why not organize a softball team and compete with other local businesses? Or, have a combination family picnic and games. -A yearly educational conference, held at a prestigious location, is another great motivating event. You can require producers and other agency members to meet certain qualifications in order to attend-remember to include spouses. -You can hold a holiday party for the entire staff and make it an "Open House." Again, make sure top producers are recognized. Have important clients, professionals with whom you work, centers of influence, and other community leaders attend and use this occasion to display your agency and staff. MOTIVATIONAL GROUPS In addition to events, membership in certain groups should be created as motivational tools. While some groups can have other purposes, membership should be primarily motivational. The following special groups can be established in your agency: Senior Sales Consultants-Select a few experienced producers from your agency and form a group of senior sales consultants. These producers should have specialties in certain markets, such as Group insurance, P/C Lines, pension plans, and so on. You can encourage their specialization by arranging for them to write articles for national publications. Help them organize a presentation that can be given to industry and community groups, as well as in your agency meetings. Also, have other agency members work with these consultants whenever they have prospects in one of their key areas. This group fulfills a two-fold purpose: It recognizes the individuals and it provides them an opportunity to continue their involvement in the area. Agency Advisory Board-An advisory board of producers who have been in your agency for a specific period can be created. You can hold lunches for all board members, and honor each new member upon joining this group on his or her specific qualifying anniversary. You may want to honor producers on each subsequent fifth year on the board, as well. Quarterly Round Table-Inspire and motivate agency members by forming a quarterly round table of leaders. You can set a standard of production that must be met in order to qualify for the round table. In addition to providing recognition, these special groups help upgrade your sales staff and improve the quality of business produced in your agency. -Select a few experienced producers from your agency and form a group of senior sales consultants. These producers should have specialties in certain markets, such as Group insurance, P/C Lines, pension plans, and so on. You can encourage their specialization by arranging for them to write articles for national publications. Help them organize a presentation that can be given to industry and community groups, as well as in your agency meetings. Also, have other agency members work with these consultants whenever they have prospects in one of their key areas. This group fulfills a two-fold purpose: It recognizes the individuals and it provides them an opportunity to continue their involvement in the area. -An advisory board of producers who have been in your agency for a specific period can be created. You can hold lunches for all board members, and honor each new member upon joining this group on his or her specific qualifying anniversary. You may want to honor producers on each subsequent fifth year on the board, as well. -Inspire and motivate agency members by forming a quarterly round table of leaders. You can set a standard of production that must be met in order to qualify for the round table. In addition to providing recognition, these special groups help upgrade your sales staff and improve the quality of business produced in your agency. OTHER FORMS OF RECOGNITION In addition to meetings and groups, there are a number of other ways to provide recognition to agency members: Wall of Fame-Those producers who have met and passed set production goals should have their framed portraits displayed on an agency wall. The producer could be presented with a plaque with his or her name and the agency insignia. Announcement letters can be mailed to 100 of the producer's select clients informing them of the selection and honor. To make it on the "Wall of Fame," a producer should have: met specific production goals, completed specific educational courses, met a specific percentage increase over previous year's production, and been recognized as a top performer an established period of times consecutively. Agent-of-the-Month Award-You can assign points based on production or base the award on the producer's premium volume as a qualification for the Agent-of-the-Month award. See the "Life Production" graph at the end of this section. In order to qualify, the producer must meet a minimum of, for example, $5,000 of annualized first-year commissions during the particular month. Send a press release and a photograph of the agent to local newspapers. Make copies of the newspaper article and send them to the producer's top 50 or 100 clients. Agency Dedicator Program-This program provides recognition each month to those producers who, during the month, produce $5,000 in annualized first-year commissions. You can present an engraved trophy to each agent who qualified as a "dedicator"eight times or more in one year. New Producer Club-Organize a special club for trainee producers. If the trainee pays for 12 cases or more in a month, the producer and spouse will be your guests for a gourmet dinner. This also helps the new producer's spouse get better acquainted and feel a part of the agency. Lead-Day Participants-You can choose to assign qualified producers a "lead day." This means you give the recognized agent all of the phone and paper leads received on that specific day. This provides both recognition and the opportunity to develop more business. To qualify, the producer should be a member of the National Association of Life Under-writers and a Million Dollar Round Table (MDRT) performer or be on track for MDRT qualification, as well as be a top recognized agency producer. Monthly Publication-An in-house publication can be put together and distributed at the beginning of each month. In it, recognize the top agency performers from the past month. Depending on the size of your agency, you can include photographs of agency members. Also, you may include sales ideas, general information items, and other articles contributing to self-improvement and education. Bulletins-On an as-needed basis, you can distribute single-page bulletins that are colorcoded as to purpose. For example, white could mean general information; yellow, recognition; green, production; and blue, motivational. Give these to your sales force throughout each month. Personal Letters and Cards-Mail anniversary and birthday cards to all agency employees and their families. For the personal touch, include a hand written note. Special Announcements-When appropriate, send out "flash" notices announcing special personal or business happenings in your agency employees' lives. Births, marriages, promotions, educational achievements, and honors should all be recognized. Contest Winners-Hold sales contests throughout the year. In addition to other recognition, reward each winner with some unusual keepsake. -Those producers who have met and passed set production goals should have their framed portraits displayed on an agency wall. The producer could be presented with a plaque with his or her name and the agency insignia. Announcement letters can be mailed to 100 of the producer's select clients informing them of the selection and honor. To make it on the "Wall of Fame," a producer should have: met specific production goals, completed specific educational courses, met a specific percentage increase over previous year's production, and been recognized as a top performer an established period of times consecutively. -You can assign points based on production or base the award on the producer's premium volume as a qualification for the Agent-of-the-Month award. See the "Life Production" graph at the end of this section. In order to qualify, the producer must meet a minimum of, for example, $5,000 of annualized first-year commissions during the particular month. Send a press release and a photograph of the agent to local newspapers. Make copies of the newspaper article and send them to the producer's top 50 or 100 clients. -This program provides recognition each month to those producers who, during the month, produce $5,000 in annualized first-year commissions. You can present an engraved trophy to each agent who qualified as a "dedicator" eight times or more in one year. -Organize a special club for trainee producers. If the trainee pays for 12 cases or more in a month, the producer and spouse will be your guests for a gourmet dinner. This also helps the new producer's spouse get better acquainted and feel a part of the agency. -You can choose to assign qualified producers a "lead day." This means you give the recognized agent all of the phone and paper leads received on that specific day. This provides both recognition and the opportunity to develop more business. To qualify, the producer should be a member of the National Association of Life Under-writers and a Million Dollar Round Table (MDRT) performer or be on track for MDRT qualification, as well as be a top recognized agency producer. -An in-house publication can be put together and distributed at the beginning of each month. In it, recognize the top agency performers from the past month. Depending on the size of your agency, you can include photographs of agency members. Also, you may include sales ideas, general information items, and other articles contributing to self-improvement and education. -On an as-needed basis, you can distribute single-page bulletins that are colorcoded as to purpose. For example, white could mean general information; yellow, recognition; green, production; and blue, motivational. Give these to your sales force throughout each month. -Mail anniversary and birthday cards to all agency employees and their families. For the personal touch, include a hand written note. -When appropriate, send out "flash" notices announcing special personal or business happenings in your agency employees' lives. Births, marriages, promotions, educational achievements, and honors should all be recognized. -Hold sales contests throughout the year. In addition to other recognition, reward each winner with some unusual keepsake. CONCLUSION Motivation is inspiration, recognition, pride, morale, team spirit-all the intangibles that help make people want to keep doing the best job they can. The presence of an established motivational program in your agency can make the difference between low production, high staff turnover, and failure and record volume, high agency loyalty, and success.

Producer Compensation
  PRODUCER COMPENSATION Producer compensation plans among independent agencies vary 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. Throughout this section, the term 'producer' will be used in the broadest sense. Many titles are given to those who are assigned production responsibilities-salesperson, producer, account executive, professional service representative-these are just a few. If any of these positions require the production or sale of new business to prospects or clients, you may consider these employees producers. Given all the other factors that influence compensation, the underlying motive of management is to pay people what they are worth or less. The producer desires to be paid what he or she is worth or more. These forces tend to cause compensation to seek an equilibrium point. The principles and methods discussed in this section are designed to help agency managers maintain an equitable producer compensation policy and to ultimately obtain sales success. Producers' Duties Many principals want to know the right way to compensate a producer. As previously stated, there is no single right way; there are many right ways, each depending on the results you want for your agency. 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. Compensation for sales must directly reflect the amount of business produced and/or retained. Some agencies pay producers on a salary basis, but the amount paid is not a direct function of the amount of business produced. Such salaries, pegged on a discretionary basis by management, are likely to result in inequities, undermotivated producers, confusion, and resentment. Regardless of the type of compensation-salary, commission, bonus-the method used to determine the amount must be based upon 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. Promote fairness and equity between producers. Competition has its ugly side-and to promote unhealthy competition with a compensation plan that plays favorites is unproductive. The more closely your plan follows a set formula, the less danger exists of this occurring. But there is the possibility that through benefits, perks, and indirect incentives, a producer may feel that his or her worth is not being recognized in comparison to others'. 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. Designing the Plan 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 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 be 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. 'Up-Front' vs. 'Out-Back' Dollars The percentage of commission dollar a producer receives may depend upon the amount of equity interest he or she receives. You may think of equity in terms of negotiated dollars out-back versus dollars up-front (commission income) . If you give a larger share of one, you should retain a larger share of the other. This concept can help you to attract talented producers whom you might not otherwise be able to afford. And, it solves another agency issue. In many agencies, principals assume that to perpetuate, they will find good producers, pay them well, and eventually offer them a chance to buy the agency. But in this ' Catch-22 ' situation, if you tell a producer, 'You can buy the agency from me in the future, ' really good producers will build up the agency's business to a point where it's too expensive for them to afford. Allowing producers to earn or acquire a dollar value in the business they produce is a valuable means of compensation and perpetuation. While the commission, commission/draw, or commission/ salary agreement may be attractive, consultants say a good producer will not stay with most agencies without an opportunity to acquire some ownership interest. There are three ways a producer can obtain equity: 1. The producer can earn his or her way in. 2. The producer may have the funds to buy in. 3. The producer may bring a book of business. Because options 2 and 3 are not common, most new producers earn their way in. When? Ideally, a new producer may be so good that he or she begins earning equity from day one-but realistically, many agencies use a one-year or three-year anniversary as the point when some form of equity is offered. Many agency owners get caught up in determining validation schedules for new producers. Creating the Compensation Mix First, determine the agency's total investment, using the 'Producer Compensation Model'. Add new production for the first three years to first-year and second-year renewals, then determine the gross agency commission. At this point, you must decide what share is the agency's and what share will belong to the producer. You can then subtract commission earned by the producer from producer salary over a three-year period and determine the agency's three-year investment. Take a look at the ' Sample Producer Compensation Model' we've figured the total agency investment over a three-year period as $33,326. As you can see, the total production is $463, 500, making the total new and renewal commission $69, 525. If that amount is multiplied by 1.5, we come up with an agency worth of $104,288, meaning that you have spent $33,326 to obtain $104,288 worth of business (assuming that the agency retains ownership). But let's take a look at some other possibilities. What if the agency doesn't retain 100% of the ownership? This can still work out to be a very good arrangement. Subtracting your investment, you're still left with $70,962 net equity value, meaning that, in a 50/ 50 equity arrangement, you and your producer would each end up with about $35,000--and you'd have recovered your investment in three years and have your producer. What if the producer chooses to leave the agency? Assuming you can pay him or her for 50% of net equity over a period of time (and ideally, out of earnings), you've obtained $69,525 of commission income for roughly $68,326 (the total agency investment plus the $35,000 that goes to the producer in a 50/50 arrangement)--you've gotten the book of business at approximately one times gross commissions. And, finally, what if the producer leaves and wants to buy the book of business? For $68,326 for the agency's half of the net equity, plus repayment of the agency's investment cost), he or she will receive $69,525 of business-in effect, buying the agency at one times gross commission. Once you've studied this sample, try applying this formula to your own situation-your agency production goals for the next three years, renewal income, the percentage you hope to retain as profit, and so on. How much will you be paying for this new business? And how much will your agency profit? Producer Evaluation and Review Let's say the producer in this situation wants a raise-he currently makes $24,000 annually. His annual income objective is $30,000 annually. We've calculated agency expenses at 60%, leaving 40% of the commission generated as the producer' s split. If we divide line 1 by line 2, we see that the commission required to meet this objective is $75,000 and that, when this figure is divided by the agency commission rate, the premium required is $625,000. Because our producer is presently generating $505,000, we can easily determine that he needs to produce $l20,000 more premium annually to meet his targeted income. In fact, if we take a look at this producer' s present production, we find that he's overcompensated. Multiply that Net Renewal Premium ($505,000) by the agency commission rate, then multiply that figure by the producer share of commission (40%), and we find that the producer should now be making $20,240. At the bottom of the worksheet, you'll see that we've figured what the annual, monthly, and weekly production in Personal and Commercial Lines should be for this producer to reach his goal. A WORD ON PERKS AND INCENTIVES In a recent 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. OTHER COMPENSATIONS OPTIONS These options have worked for agencies across the country that we've interviewed. Have you considered them? Profit Centers: Under this system, the producer covers his or her operating expenses and profit contribution to the agency, then is able to receive every commission dollar generated above that threshold-with no upper limit. Generally, expense items charged to the producer include: salary or commissions paid; insurance or benefit premiums paid; pension or profit-sharing contributions; Social Security and payroll taxes; auto expenses; travel and entertainment expenses; club dues; bad debts and/or lost agency interest due to poor collections; and office management. Establishing a profit center is usually a four-step process: First, the producer is on straight salary; second, an income level is set, below which the producer won't fall even if results are unprofitable during the year; third, the income floor is taken away-producers' income is based on their production; fourth, producers are allocated their full share of overhead costs, including the full agency profit contribution requirement (usually between 15% and 25%). Employee Stock Ownership Plans: One owner with an ESOP says, 'Employees have a lot at stake. Their very ownership depends upon every individual pulling his oar just as hard as the other person. If you remind them often enough that they're owners, it's the self-fulfilling prophesy . . . they'll remember that and they'll start to conduct themselves accordingly.' 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.

Employee Performance Rewards
 EMPLOYEE PERFORMANCE REWARDS by Carol Hammes More than 14% of all full-time workers in the United States switched jobs this past year. Turnover hits the bottom line of a business very hard, with more than $9,000 in direct costs associated with finding and training a replacement. The indirect costs of recruitment fees, management time, and possible signing bonuses can more than double that amount. Some experts in personnel management estimate that a firm may spend $50,000 or more for the loss and replacement of an employee that makes a salary of more than $30,000. Add this expense to the difficulty in finding good people and most agency managers will find some compelling reasons to do their best to keep the good employees that they have. People aren’t a cost factor that you should try to minimize. Instead, think in terms of investment and continuity. What can you do to develop employees who want to be part of what you’re creating? And how should you reward them for participating in your success? Building a positive agency team involves setting objectives and allowing employees — both individually and collectively — to participate in the spoils for helping the agency accomplish its goals. Management must operate with a results-oriented approach, making decisions only after a careful review of what the agency hopes to accomplish when hiring an employee. Your results will depend on hiring the right person for the right job. You must then communicate the agency’s goals to employees and show them how they can help in accomplishing them individually. Involve producers and staff personnel in procedural decisions that affect their work environment and their job functions. Instill positive motivation by providing personal recognition and professional growth opportunities. The total compensation package must foster team spirit. ADDITIONS TO BASE PRODUCER COMPENSATION In addition to, or as an alternative to, base commission percentages, many agencies establish bonus arrangements tied to performance goals for producers. The average producer has a book of business of around $250,000 in commissions. An agency can set up incentives that reward producers who develop books that are in excess of their average. For example, if a producer has more than $300,000 in total commissions you could award them a bonus equal to 50% of the commissions in excess of that level, an increase in their car allowance, or a higher commission percentage for that year. You can treat accounts that are part of a separate marketing program differently. You can also award extra points or dollars on accounts for which the producer has provided leads that have resulted in employee benefits or Life sales. There are hundreds of possible bonus formulas that you can use to encourage producers to perform at higher levels. Keep the plan relatively simple, however, in order to avoid administrative gridlock. Another reward can be some sort of equity, either in the producer’s book or in the agency itself. The best way to provide equity in the book of business is to set up a deferred compensation plan while still maintaining ownership of expirations with the agency. If the agency’s perpetuation plan calls for bringing producers into ownership of stock or partnership interest, the vested deferred compensation amounts can be traded for equity interest in the agency. When you’re developing a long-term producer relationship remember that money isn’t the only motivator. People have unique needs. The more that the agency can do to meet those needs, the more successful the relationship will be. Perhaps a title is important to someone. They might want a larger office, a dedicated CSR, or an expense allowance. The more you do to meet the needs of individual producers and other employees, the more successful the employment relationship will be. Although you should personalize the total compensation and motivational program for each employee, it’s also important to tie their fortunes to each other — and to the total agency’s success. This is where sales contests can come into play. Hold a number of different but simultaneous contests: some monthly, others quarterly, and at least one that’s annual. Include service and support personnel in the spoils as well. Rewards can range from a traveling trophy or a weekend in a nearby city, to a cruise or a ski trip. Criteria for winning could be the producer or team with the largest percentage or commission growth, the highest number of new accounts, or any other measurable item that can be tied to sales success. Many agencies have instituted sales programs that don’t seem to motivate producers, leading them to decide that contests aren’t a good idea. There are four basic elements for a successful promotional campaign: meaningful rewards, attainable goals, fair administration of rules, and keeping participants informed of their progress in relation to their competitors. If even one of these items is overlooked the contest will fail. PERFORMANCE REWARDS FOR SERVICE/SUPPORT PERSONNEL More than two-thirds of independent agencies base part of their service and support compensation plan on performance. It might be agency results, personal contributions to the agency’s overall effort, or a combination of both. There are hundreds of different programs you can implement. Think through the various aspects carefully and develop a plan with components appropriate for your particular situation. Developing the right program for your agency will involve a bit of research, some tough decision making, and a lot of creativity. Incentives should encourage employees to perform in ways that support the agency’s business plan. If the plan emphasizes new sales, the rewards should direct employees toward this goal. If the plan is to improve service levels to existing customers, the incentive program should direct your team to that end. Perhaps your business plan is to strengthen company relations. A good bonus program would be to reward employees for helping to improve loss ratios. Your program should mirror the management and sales philosophies of the agency. Don’t set up an incentive program that’s based on expanding accounts when the owners and producers won’t allow them the time or the freedom to do so. Another important element of an incentive program is to consider the skill levels and personal needs of your employees. It’s not practical or wise to throw away what you have in order to hire people that are more sales oriented, that have more education, or that have different personalities. If most of your CSRs prefer processing renewals over talking to clients, installing a program in hopes that they’ll generate a significant amount of new business is unrealistic and sure to create major anxiety. With this type of employee a retention-based reward structure might be more effective. Give CSRs who enjoy sales the title of Customer Service Agent and reward them for expanding and selling new accounts. It’s important to keep the agency’s operating budget in mind when setting up incentive programs. The average insurance agency spends 21%-24% of total revenues on office payroll — excluding payroll taxes and other employee benefits. This is up several points from just five years ago. If you already have salaries that are at 25% or more of revenues, your agency might not be able to afford a lucrative performance bonus system. Analyze your current salary levels to see how they compare with the marketplace. Automatic raises might’ve made long-term employees’ salaries higher than they’d get elsewhere and also above what they should be paid for their skill and education level. To give them additional compensation wouldn’t make good business sense. With these people it’ll be necessary to freeze the base salary and only provide bonuses when current performance warrants. For non-sales jobs, it can be difficult to tie compensation to the quantity of business handled. In these cases it’s often necessary to tie bonuses to the agency’s overall performance. For example, if the agency grew 5% last year, then the overall raise or bonus could also be set at 5%. An employee with average performance might get an increase or bonus of 4%-5%, one that’s marginal might get 1%-2%, and one that’s exceptional could get 6%-7%. If base salaries are already appropriate for their experience, education, and level of performance this relatively simple approach of calculating a raise or bonus will generally provide the results you want: rewarding people for the agency’s and for their individual performance over the past year. But if you have a lot of long-term employees, calculating their raise or bonus as a percentage of their already high compensation might not be a good idea. You might shortchange newer and lower paid employees who might’ve outperformed others during the year, because you’ll calculate their raise or bonus from a lower base. This situation can create morale problems and cause top performers to shut down. Instituting a performance point system of calculating raises or bonuses can eliminate the negative effects of setting increases as a percentage of base salary. This can also facilitate tying the increase to overall agency results. In this approach you create a bonus pool based on agency profit, annual growth, or any combination of factors. Some agencies set up the pool based on entire agency results. This is particularly popular with smaller firms. Others create a pool based on the results of a department, specialty line of business, or team. Or you can personalize a bonus program for each employee, again usually as part of the performance evaluation plan. It’s important to set the rules in advance, establish a formula for creating the bonus pool, and a method for dividing it. Be sure to test the calculations against some hypothetical situations before you announce the results to employees. You don’t want to find at the end of the year that you’ve agreed to pay a lot more than you’d anticipated. There are several ways to create an agency or department bonus pool. One or a combination of several might be right for you: Difference between base salaries and a target of 22%-23% of revenues 25% of contingent income Percentage of overall increase in agency, department, or unit commissions or revenues Percentage of total revenues or commissions Percentage of agency profits before owner bonuses If revenues per employee increase over a certain threshold, a percentage of this amount could create the pool After you determine the formula you need to decide how to divide the gross amount among the employees. It’s vitally important that you base this on each employee’s individual contribution to helping the agency attain its goals. The key to this determination will be a performance evaluation that measures the quality, as well as the quantity of the employee’s work during the year. Have a performance evaluation form that allows the manager or supervisor to give numerical ratings to employees on a number of criteria, such as work quality, punctuality, attitude, and team spirit. Each employee would then get a numerical ranking you could use to create "points" for the bonus or raise pool. For example, if the total pool is $20,000 and the total numerical ranking of all employees is 2,000, each bonus point would be worth $10. An employee with 100 points would receive $1,000, while one with 200 points would get $2,000. Contrast this to bonuses based on existing compensation, in which a long-term employee with a bad attitude making $35,000 would get a 5% raise of $1,750 and a hard-working new hire making $20,000 would get only $1,000. This approach will put a damper on the new person’s enthusiasm very quickly. In this new employee marketplace it’s critical to let employees know that they can make more money when the agency does well and when their individual performance contributes to this success. NON-MONETARY INCENTIVES While money is a primary motivator, it’s important not to forget the non-monetary aspects of motivation. Smaller agencies often have good team spirit simply because they have fewer people. Employees in smaller firms tend to have relatively similar values and backgrounds, and they interact closely with each other. Once the agency grows beyond 12-15 people, however, personnel management becomes a much more important and time-consuming function. Managers must spend a significant amount of time reassuring employees that they’re all working towards the same end and that they’ll share in the rewards. Set aside time to have short monthly agency and/or department meetings to discuss specific topics and bring up communication problems or concerns. Take employees’ concerns seriously and fix what’s bothering them or explain why something can’t be done. Buy lunch or throw an impromptu party when your team writes a new large account, reaches a monthly goal, or when everyone pitches in to reduce a temporary backlog. It’s important to recognize that today’s employees have different needs than those who started working during the Depression or even in the Fifties. There are three major issues that an insurance agency must address if it wants to attract and retain good people. First, you must provide room for them to grow, professionally and financially. You want them to look at the insurance industry as a career rather than just a job. Show them that they can achieve their personal goals as part of your organization. Have several different levels of service representative. If they know that they can be promoted with more experience and education they’ll be more inclined to participate in the process and in the growth of the agency. Second, people seem to crave personal recognition. Give your employees positive feedback often and you’ll find that the mutual respect that develops will produce weeks of extra effort on their part. The third motivator for today’s employee is flexible work hours. Parenting has become more complicated. The time needed to get kids to sporting events and to watch them play makes working for an agency that recognizes the importance of this priority very important. With new computer systems that have account information easily retrievable by any service rep, job sharing has become a welcome reality for many agencies and their employees. If flexibility meets their needs, it will help the agency accomplish its goals. The late Carol Hammes, principal of the Middleton Group, was one of the Independent Agency System’s most widely respected management consultants. She will be sorely missed. Reproduced, with permission, from The Middleton Letter.