Compensation for employee benefits staff should mirror commercial lines

In our travels as consultants to the insurance industry, we have noticed that one of the more elusive “standards” or “norms” is compensation for employee benefits producers and staff. The difficulty in establishing an “average” is that the plans are all over the map. This is not just for the “inexperienced” property/casualty firms, but also for agencies that specialize in group/employee benefits insurance (an “EB” agency).

In a recent survey Oak & Associates conducted with firms that specialize in handling group benefits, producer compensation varied from 25 percent to 55 percent for new business and 25 percent to 35 percent for renewal commissions. A few firms had newer producers on a salary or salary plus commission basis.

In many EB firms, account executives (AEs) are used. The AE’s responsibilities typically are defined as a blend between a high level CSR and an in-house producer. This way, the sales person focuses on new sales, while the AE handles the servicing and renewal process for existing accounts. AEs were mostly paid on a salary basis, with local rates determining the scale.

Outsourced benefits
For various reasons, it makes a lot of sense for P/C firms to have a group benefits book of business. The first distinction for a P/C firm to make is whether the group benefits business is handled internally or outsourced to a specialist. Either way, group/employee benefits should be handled in a manner similar to commercial lines insurance.

If the EB business is outsourced, then the arrangement should be treated like brokered P/C business. When a P/C agency already has the relationship, they can then work with the outside specialized group benefits producer to propose and close the sale, which helps “round-out” and secure the account.

For this type of referral, when one agency introduces the client to another, the first year commission split should be 50 percent/50 percent for the P/C agency and the EB specialist. Both agencies now get commission dollars they did not get before.

Renewal commission should be allocated based on who is doing the work with some credit for the agency that initiated the account. If the EB agency does most of the work, then the renewal commission split should be around 70 percent/30 percent — EB to PC agency. If the PC producer is instrumental is maintaining the account, then a renewal commission split closer to 50 percent/50 percent will be more appropriate. Although, all terms are negotiable, the key issue is — who is doing the work?

For business that is outsourced, the ideal arrangement should be bilateral, which is to say the P/C and E/B agency should each be referring business to one other. Interestingly and very often, each side has told us that the other party does not equally reciprocate. Although the match up of a P/C agency with an EB agency looks wonderful on paper, the actual results sometimes fail due to ego and (mis)perceptions.

Any arrangement between PC and EB agencies should be formalized with a written agreement. Too often the deal is an incomplete verbal agreement. Commission split arrangements will be the centerpiece of the agreed terms. What must also be clearly stated from the beginning is who owns the accounts. Generally speaking, the agency that has the first relationship should be the one that owns the accounts. Again, the caveat is that everything is negotiable.

In-house benefits
For the scenario where the EB business is generated and maintained in-house, Oak & Associates recommends that employees who handle group benefits be compensated in a manner similar to employees that handle commercial lines. The logic is simply that employee benefits account size, commission dollars and client relationships are all similar to commercial lines. The correlation is not perfect, but it is close enough.

Oak & Associates recommends on medium- to large-sized accounts, commission rates be set at around 40 percent for new business and 30 percent for renewal business commission. Depending on the agency’s goals, producers should not be encouraged to sell smaller accounts by reducing or eliminating commission. Small accounts can be typically sold and handled exclusively by service staff, so there is no need for producer involvement.

Within the same agency, if the P/C producer is directing a lead to the EB producer, the typical producer commission should be split between them. For example, if the agency pays 40 percent for new business, then the P/C producer and EB producer will each get 20 percent commission for the new business. Renewal commissions should go just to the EB producer, unless the P/C producer is significantly involved in keeping and maintaining the account.

Keep in mind any commission split is negotiable and can vary based on how one wants to motivate the parties involved. One agency we worked with let the sales staff determine their own split when business was referred back and forth, which is a true free market approach.

Employee benefits service staff compensation levels seem to be a bit more uniform and tempered by locals market rates. That is to say, firms that focus in P/C insurance tend to pay EB service staff similar to commercial lines CSRs. We agree with this approach. The service staff salary levels at EB agencies also track well with commercial lines CSRs. Account executives will be paid significantly higher than CSRs, assuming their responsibilities are also significantly higher.

A final thought
The addition of an employee benefits book of business makes a lot of sense for many P/C firms. Whether the sales and service is handled internally or outsourced, the compensation structure should be treated the same as commercial lines business. So, round out accounts and add the group benefits line of business!

Bill Schoeffler and Catherine Oak are partners at Glen Ellen, Calif.-based Oak & Associates. The firm specializes in financial and management consulting for independent insurance agents and brokers. They can be reached at 707-935-6565, by e-mail at bill@oakandassociates.com, or visit www.oakandassociates.com.

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