ACG - Agency Consulting Group

The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

Compensating Owners

How do you compensate yourselves?

I take whatever is left over...

I pay myself a commission on all business sold...

I pay myself a commission on “my” book of business...

I pay myself a salary for management and a commission...

I pay myself a salary each year...

We (my partners and I) take the same base salary plus....

As you can tell, we have experienced about as many ways of paying owners as there are owners of insurance agencies. But it appears that the successful agencies (defined as continuously growing and consistently profitable) have figured out the formula for owner compensation that incentivizes owners, but not at the cost of growth and profit.

The key to owner compensation is that the owner(s) must “EARN” their compensation.

This means that the last 20 years (or 30 or 40) of dedicated service, working their fingers to the bone, working long hours when the employees have all gone to their home and hearths, working nights and weekends, taking less when in down years --- doesn’t give the owners the right to take more than they earn today (or tomorrow). The owners of successful agencies (as def above) realize that their compensation is earned one year at a time (or one day at a time over 365 days). The upside is that they build a business that has an intrinsic value in excess of their normal compensation – one that will pay them at retirement or ownership transition or add to the value of the estate if they should pass on. The downside is that, while employees happily believe that their compensation is stable at worst, an owner’s compensation reacts to conditions that are both controllable and uncontrollable. If accounts are lost and revenues decrease, the owner(s) must reduce their compensation accordingly to permit the agency to continue to operate. If, on the other hand, revenues balloon but not as the result of increased production, retention and efficiencies of the owners, profits will accrue beyond owners compensation that should not be distributed (that is the ‘seed money’ for future growth and profit).

The best way of paying owners who are producers is a combination of salary for management responsibilities and commission for production. However, salary is determined by time used, not by management responsibilities. For instance, an agency owner can call himself the Operations Manager, but if he spends most of his time with clients and prospects, his time allocation is to production (and he is probably not performing as well as a full-time Ops Manager would in that role). However, if he knows that he spends 25% of his time managing the operations and 75% in production-related efforts, then we can begin allocating his compensation appropriately.

Begin the compensation allocation by defining how much it would take to hire a full time person in the non-production role being occupied by the owner. Then we take the percentage of time being used by the owner in that capacity and multiplying the full-time cost of a manager by the percentage of time utilized in that role. For instance, if it would cost $100,000 to hire an Ops Manager (or Financial Manager, or Sales Manager) and the owner devotes 25% of his/her time in that role, we allocate $25,000 of salary to the owner. The rest of his/her money is derived from production – in the same commission rates that other producers would be paid for similar levels of production.

This brings us to the fallacy prevalent that agency owners must be the highest paid employees of the agency. We have encountered many agencies that have high-level producers who earn more than the owners earn. The owners have no problem with that since every dollar devoted to the agency by those producers accrue additional value to the agency (as long as the ownership of accounts is established). We have also seen a growing number of agencies in which the owner is still in control, but has scaled back his/her time and efforts on behalf of the agency. Compensation should follow the productivity of the individual, even of owners. If the owner only earns $100,000 per year between REAL management time spent and production (and retention) of a book of business, then that is all (s)he deserves in compensation. Additional monies may come to the owner through dividends or through profit distribution in an ‘S’ Corp (on which taxes are due, but are not required to be taken out of the company). But the owner is true to his/her “EARNINGS CAPABILITIES”.

In agencies that pay owners (and all others – see our Incentive Compensation Program on our website, www.agencyconsulting.com ) based on productivity to the agency, the agency has funding available for marketing, for technology advances, for new producers and other growth initiatives. Value is boosted by Tangible Net Worth and both succession and perpetuation planning is much easier to accomplish. And, most importantly, other agency principals, producers, managers and employees don’t see the owner as being R.I.P. (Retired In Place – see article in this Issue), lowering morale and productivity of all other employees.