Minding Your Business: Producer Compensation – What’s New Today?

Designing a good and motivating producer compensation model does not need to be a mystery. The bottom line is to pay what can you afford to pay, for what you are providing the producers, and be in line with the important competition.

Total compensation for any insurance agency is always the largest expense category. For the typical agency, total compensation (producer and employee compensation — plus benefits and taxes) ranges from 50 percent to 75 percent of total revenue. If the employee compensation is too high, the agency will lose money. If the compensation is too low, then the agency could lose the producers and employees, and service may suffer.

How to Calculate

The way to calculate what you can afford to pay is to take total gross agency commission and fee revenue. Then subtract all necessary ongoing expenses except producer compensation and any owner compensation or bonuses. It is not recommended to include contingents, becaue these should be considered bonus income.

The next step is to take out an expected fair rate of return on the business for the owners. This typically ranges between 10 percent to 20 percent of revenue. This “expense” is the cushion for affordability of producers. If the agency needs a producer, then the owners might need to dip into their profits to make it happen — at least until they validate.

Today, an average firm that properly manages expenses can typically afford to pay commercial lines producers 25 percent to 35 percent commission for renewal business. This assumes that the owners want to realize a 10 percent to 20 percent pre-tax profit. Keep in mind that if the owner is a producer, their producer compensation is the same 25 percent to 35 percent commission and is in addition to the profits of the firm. Owners should also receive management compensation, if they are performing that role.

The range of 25 percent to 35 percent varies based on whether (and how much) the employer pays for certain expenses, resulting from the producer’s employment and activities. These expenses include employee benefits such as health and related insurances, payroll taxes and retirement plans.

Producer Expense Caps

The producer expenses often include business development expenses, such as travel and entertainment, auto and club dues, and cell phones. The best way to properly manage and reward producer business development expenses is to give them about 3 percent to 4 percent of their book of business for these expenses (which are perquisites for the producer). This percentage becomes an expense cap for the year, with monthly expense reports still being submitted.

Pay More for New to Grow

New business can be paid at a higher rate, because the calculations assume expenses are mostly paid out of renewal income. Of course, there are expenses associated with writing new business related to marketing and staff time putting the new account together.

Particularly in agencies that want to grow, a higher percentage is often paid to encourage producers to write new business, such as 40 percent to 50 percent. This would assume that the owners are giving up some of their profit the first year!

Some real aggressive agencies are paying an additional incentive to those producers that exceed their new business growth goals. Some firms today will expect experienced producers to write between $50,000 to $100,000 in new commission per year. This depends on the size of their current book, where the agency is located, etc. If the producer exceeds whatever his or her goal is, the agency may provide an additional bonus of maybe 5 percent commission. This becomes retroactive on all new business written for the year!

Who is Doing the Work?

Another key compensation concept is to “pay based on who is doing the job.” Agencies differ on whose job things should be. For example, who should handle policy checking? In some agencies, this role would be that of the producer, but in others the role is that of the customer service representative (CSR) or marketing department, if one exists.

Many firms are delegating their small accounts to CSRs to sell and service. Thus, many firms pay producers less commission or even zero commission for small commercial accounts. Small is usually defined as accounts that are business owner package policies or small monoline accounts.

The definition of small also depends on the firm’s book of business and are usually defined as accounts generating $500 to $2,500 in commission or less. Where the agency is located and what is available to write in the area, can often determine what is the dollar amount cut-off.

What about Personal Lines?

The trend today is to not pay commercial lines producers who also refer personal lines accounts to the PL department, because the CSRs are typically doing all the work. A first-year commission for CL producers for VIP personal lines package policies may be warranted to encourage them to generate the leads on these much larger PL accounts.

Payment Methods

The method of paying producers should not make a difference in determining what is a fair amount for compensation. Salaries or draws against commission should be considered only as a convenience for producers, because the timing of renewals can produce some lean months. They should be set based on the firm’s renewal commission and use a book that is somewhat smaller, because of possible attrition. Once the draw or salary is met, new commissions should be paid to the producer at least quarterly, to keep them motivated to write new business.

Grandfathering the existing compensation plan for a period of time (or indefinitely) for accounts already on the books, is one way to introduce a new compensation plan and to avoid an immediate impact on producer incomes.

Summary

Compensation for owners and producers is never an easy issue to address. There is no single solution. Each agency needs to blend the right ingredients for an effective compensation plan to attract and retain good producers. Being creative and trying new things (which may include some of the ideas in this article) may be the healthy change the agency needs to be competitive and become more profitable.

Topics Profit Loss Talent