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Merge Or Acquire With Caution
Six reasons why mergers and acquisitions fail. Few business transactions pack the high-stakes potential of a merger or acquisition. Done well, the deal can help an agency attain new levels of prosperity. Done poorly, it can be crippling. Over the years we've helped scores of agents deal with the impact of mergers and acquisitions, and in the process we've learned a lot about what works and what doesn't. Unfortunately, too many agents call us after the deal is done and it isn't working out. That's a shame, because many difficulties might have been prevented with a little planning and discipline. In fact, studies of real-world mergers and acquisitions consistently report that the vast majority fail to achieve their stated goals in the first five years of the combined operation. We find that some combination of the following six pitfalls usually leads to post-transaction difficulties for agencies and their owners: PITFALL NO. 1: BUYING AN AGENCY THAT DOESN'T FIT Know your objectives for combining two organizations. Is it a merger, an acquisition of an entire organization, or a purchase of a book of business? Everything about the target organization-staff, location, markets, systems, book of business, philosophy-must be evaluated to see how it will mesh with your existing business to create a new, stronger organization than either would be separately. That requires knowing your own agency well. Ask yourself: What are my business reasons for exploring a merger or an acquisition? Some potential answers are: Survival Financial stability Growth Competitive strength Geographic reach Perpetuation Improved leverage with carriers To be a consolidator Then learn everything you can about the target organization. An agent without a game plan or clear objectives is vulnerable to buying for all the wrong reasons-because it's available, because it sounds like a good deal, because friends think it's a good deal, because everybody else is doing it. A merger or acquisition can be a highly emotional decision. That's understandable, but don't let it lead you into a bad situation. PITFALL NO. 2: TAKING THE SELLER'S STATED POSITION AT FACE VALUE Let's say you come across an acquisition opportunity and the owner says, 'I'm selling because I'm tired of being in the business.' That's plausible-but what if the seller isn't divulging all the facts? What if the agency is on the verge of losing an important market? What if key clients are vulnerable or moving their business? What if a top producer is threatening to walk? The sooner you understand the seller's underlying reasons and motivation, the less time, energy, and possibly money you'll waste on a flimsy deal. Also, you should learn the seller's motives before you become emotionally tied to the purchase. At some point every buyer gets emotionally invested in the deal. That's not all bad-it's difficult to muster the energy to make a merger or acquisition work without a certain amount of enthusiasm. A smart businessperson knows his or her flinch point. If it becomes evident that something's not right, you must be prepared to pull the plug on the deal. This can be difficult-once lawyers and accountants are involved, an atmosphere of inevitability settles in and both sides begin to feel committed. Remember, though-no deal is done until you write the check. PITFALL NO. 3: LACK OF VALUE CREATION FOR BOTH BUYER AND SELLER Most deals in which one party 'wins' and the other 'loses' aren't very good. The objective should be to create a win for both parties. In a merger, both sides will need to work closely in the future-any kind of ill will could hinder success. For example, many times we've seen the seller dictate price and terms that cause the next generation of owners to virtually starve to death. By the same token, sometimes the buyer drives such a hard bargain the seller has to dip into retirement funds to pay taxes on the transaction. It's important in an insurance agency acquisition to remember that you're often buying a mostly intangible asset-a book of business and client relationships. You could pay a high price if the seller feels mistreated and retaliates or bad-mouths you in the community. Public opinion is a highly valued commodity for an agent. You don't want existing clients to develop the perception that you were less than honorable with their longtime insurance advisor. This doesn't mean you shouldn't protect yourself. You don't want to pay more than is appropriate or settle for unfavorable terms. But if you have a seller over a barrel, it's in your best interest to leave him or her some dignity and a reason to feel good about selling. Suppose you find an agency that needs to sell because it's being cancelled by a key carrier. You can maximize the deal by paying a bottom-dollar price, closing the office, and firing the entire staff. You might come out miles ahead in the long run, though, if you can afford to keep the good employees or structure the payments around a management contract so the seller can stay active for awhile as a producer. As a prudent businessperson, you want to cut the best deal possible. That's smart. But keep in mind that you're buying a book of business, which is a set of clients. If they don't renew, or if they follow key employees down the street, you may have purchased nothing. PITFALL NO. 4: POOR OR INCOMPLETE DUE DILIGENCE Due diligence, simply put, is getting all the information you can about what you're buying. When it comes to gathering (or disseminating) sensitive proprietary information, there's a formal and disciplined process that should be followed to protect both parties. First, a confidentiality agreement with injunctive relief and liquidated damages clauses is a must. This helps assure that the buyer won't use the information the seller provides to gain a competitive advantage. The liquidated damages clause gives the agreement teeth by specifying monetary damages at a reasonably punitive level if the buyer breaks the confidentiality agreement. A confidentiality agreement is mainly for the seller's protection. It encourages the full good-faith disclosure by the seller that's necessary for the buyer to make decisions. In a merger, a two-way confidentiality agreement provides similar benefits. A letter of intent also should be signed early on. This protects the seller from dealing with a less-than-serious buyer and protects the buyer by taking the agency off the market during negotiations. Once the due-diligence process starts in earnest, the buyer is looking for as much information as possible about the agency's legal, financial, contractual, management, employment, and operational situation. PITFALL NO. 5: PAYING TOO MUCH Buyers sometimes pay too much because the transaction is structured badly. Understanding the impact on the seller's taxes may provide the incentive to structure terms to both parties' advantage. For example, for a seller who wants income for 10 years, receiving annual checks for one-tenth of the purchase price could have costly implications. Will this give the seller enough to pay the tax bill when it's due? If not, will the buyer have to pay more for? Can the price be reduced by taking the tax consequences into consideration? Buyers also pay too much when they don't factor in additional costs. Suppose an agent finds a great deal on a $150,000 book of business and agrees to make three annual payments of $50,000. Now suppose the agent also keeps a producer and agrees to pay a salary based on renewals. Even if the producer writes a ton of new business, the buyer probably overpaid. Work with your financial advisors to structure such a transaction to keep the ultimate price in line and still satisfy the seller. Another reason some buyers pay too much is poor valuation methods. We see too many agents overpay because they use a simple multiples-of-commission formula instead of insisting on an independent, third-party valuation using standard financial methods. Many times agents pay too much because of poor due diligence and don't get the expected value. You may buy a book of business because it contains a lot of underdeveloped accounts you plan to leverage. But maybe there's a good reason those accounts are languishing-and if they can't be maximized, the buyer probably overpaid for the book. PITFALL NO. 6: POOR INTEGRATION Agents by nature enjoy playing the game more than polishing the trophy. This instinct serves them well in sales, but it can be detrimental when it comes to buying or merging with another agency. Whether it's simply a book of business or an entire agency staff, integrating a newly acquired entity with an existing one takes effective management. Differences in such things as organizational cultures, operations, procedures, and computer systems can lead to friction and possible meltdowns. Poor integration is one of the leading causes of failed mergers. To avoid difficulties, analyze potential problems before making a down payment on an agency and be sure they can be overcome. Then have a plan for making it happen. Unrealistic expectations can lead to costly mistakes, so be as clear-headed as possible. Afterwards, stay on top of the details and take good care of new and old employees alike. The last thing you can afford is to lose key employees just when you need them most. Mergers and acquisitions are an integral part of business today. Surprises always pop up. Smart business people anticipate or avoid the pitfalls and are more likely to pull off a successful acquisition or merger. A BUYER'S GUIDE TO SUCCESS Know what you want out of the deal. Keep your emotions under control. Learn the seller's motive. Gather all the information possible. Get a third-party valuation. Consult an attorney. Consult a tax accountant. Strive for a win-win deal. Look for potential integration problems. Address staff concerns up front. Don't be afraid to pull out.

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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.