Incentive Programs Offer Alternative to Traditional Compensation

The insurance agency industry, like most other industries, has struggled with “merit” type compensation programs that attempt to reward employees based on the quality of their work effort. Unfortunately, in the words of one agent, “When we finally get around to giving raises it seems to be who pleases me most recently or who commits blunders most recently that becomes the gauge of how raises are given.”

Incentive-based compensation programs for agencies have been implemented with greater frequency in the last 15 years. The difference between traditional and incentive compensation programs (ICP)—and the reason they have become so popular—is that in the ICP, compensation increases respond solely to productivity increases by the employee, the department and the agency.

The ICP does not preclude evaluations or performance reviews. However, they become what they were supposed to be in the first place: methods of helping the employee develop into the best employee in their current job, while developing a career path that will keep them challenged and ever more valuable to the employer throughout their career.

It is important to understand the philosophy needed to implement an ICP and to understand what it is not.

An ICP is not a bonus program. Actually, it replaces all bonus programs because of the nature, and generosity, of the ICP. The reason we’ve eliminated bonuses, especially repetitive annual bonuses, is that they become “expected” after a few repetitions and you become “trapped” as an employer into continuing them, whether or not you can afford it. Stopping a Christmas, year-end, holiday or other regular bonus becomes a giant disincentive. The desire of agents to be generous when circumstances allow make them a villain when circumstances change.

The philosophy, without which ICP simply does not work, is that employees are responsible for and a party to the enhancement of productivity and profitability, and that they should share, through their compensation, in the productivity of the agency.

In the simplest terms, if an employee manages a $250,000 book of business (i.e., customer service representative) and is able to manage the growth of that book of business to $300,000 without adding further labor and cost to the agency’s operation, they are entitled to a compensation increase. Since the compensation increase will only be a small part of the growth, the agency is able to sponsor its overhead and profit while the productive employees enjoy compensation advances. The manager will continue to evaluate the employee according to the functions and standards of the job description and whether the employee is developing in accordance with growth expectations. But, if the evaluation determines that the employee is good enough to remain employed with the agency, the productivity gains, not a subjective decision, determines the employee’s compensation level.

And, the best part of the process is that employees measure their own progress, while learning the “facts of business life.” When business growth doesn’t occur and productivity slips, raises simply can’t happen. One’s compensation as an employee, similar to the earnings of the owners, is determined by the increased productivity for which you are responsible that sponsors the growth and profit of the agency.

If you choose to convert to an ICP, it would be wise to do so over a three-year period. This is a vast difference in compensation method for most experienced employees. The entrepreneurial spirit created in employees through this kind of program must be taught over time. ICP’s are staged from a simple growth formula in year one to a growth and profit formula in year two, and into the final solution in year three—a combination of growth, profit and productivity that seems to answer all questions and treats the employees and the employer fairly.

The end result of an ICP appears to be agencies that pay their employees 25 percent to 50 percent more than the average for employees in that geographic area, and yield productivity factors 100 percent greater than the average (revenue per employee). Consider conversion to ICP only if you feel that the employees deserve to share in the growth and profit of the agency. Agents who desire to leverage profitability by maintaining compensation levels at lower percentages than growth should not enter into ICP’s.

Al Diamond is the president and founder of Agency Consulting Group Inc., a national consulting firm dedicated to the insurance agency industry. He can be reached at (800) 779-2430, or by e-mail at al@agencyconsulting.com. For more information visit www.agencyconsulting.com.

Topics Agencies Talent