ACG - Agency Consulting Group

The PIPELINE

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

IS INCENTIVE COMPENSATION REALLY FOR YOUR AGENCY??

Times are tough. Customers are questioning every policy and premium dollar spent. Companies are still trying to get you to generate more premiums but are not willing to be as flexible as they had been in the past. Renewals are sometimes soft and sometimes priced so high that you are afraid of competition, even on your best accounts.

And your employees, valued and hard working, are still expecting you to “treat them right” even though both your commission income and your bottom line continue to be stressed.

Now you read about Al Diamond’s innovation to agency compensation through something called “incentive” compensation and you ask yourself, “Why even bother reading this? I can’t afford the raises and bonuses I’m forced to give my employees now. Won’t this “Incentive Compensation” cost me even more money and give me less control over what I pay my employees??”

The answer is a resounding NO. Incentive compensation teaches basic business philosophies to all employees and convinces them that they can’t make more money when you don’t make more money. It puts the employees’ compensation firmly in their own hands, but the hitch is that they MUST become more productive for the agency in order to generate any more income for themselves.

Ho do you define Productive? Productivity in Incentive Compensation is measured in two ways:

Increased profits to the agency and

Increased productivity based on the unique productivity measures of each job.

Every job in an agency has a measure of productivity. For some such as Customer Service, it is the size of the book of business that each person manages. For others like the Receptionist, productivity is the number of customers that he or she can handle without the need for additional help. Every job has a measure of productivity. It should make sense to anyone that the more productive you are, the more valuable you become to your employer. All we need to do is define the current productivity for the person in the job against the current value of the job and structure a measurement tool that the employee can measure that will define whether or not he is becoming more productive. The job of the manager is to provide each employee tools to make him or her more productive in their jobs.

Over time, we can convince even the most skeptical agency owners that if your employees are ever more productive, you will generate more net income to the bottom line. However, most agents want a more tangible measure of success than overall productivity of their staff. It makes sense that if their staff’s revenue per employee is $95,000 in one year and $110,000 the next that they have become 15.8% more productive, but they want to see tangible evidence of more dollars to the bottom line to justify paying more to the employees.

To justify Incentive Compensation deriving from growing productivity, we have devised profitability measurements on both the agency and department basis. Since personnel costs are the largest and most fluid cost in most agencies, it makes sense that if your revenue goes up 15.8% that you won’t expend all of the extra money on expenses.

The general average expense to agencies for direct compensation to non-producer, non-executive employees hovers around 20%. That means that if you generate $1,000,000 in gross income (all income), you expect to expend $200,000 for direct office compensation. If you grow to $1,150,000 in the following year, you will not expend an additional $150,000 in expenses. Most likely, you will give a raise to your employees and will probably not have to add an employee to service the additional revenues. The average annual raise given to agency employees over the past 25 years has been 5%. That raise has been given in most agencies as a blanket raise regardless of quality of work or quality of employee. If you think about it, that kind of blanket raise, devalues the best employees efforts while supporting the mediocre employees who see themselves getting exactly the same increase for minimal effort.

Under this example, you now are paying $210,000 for $1,150,000, or 18.3% -- below the national average for compensating employees. If you just take an 8% growth and 5% raise for ten years for a $1,000,000 agency who has paid its employees 20% of revenue for their services, at the end of 10 years, the compensation amount is down to 15%.

This leads to a problem called COMPRESSION in which giving minimal raises, whether the agency could afford them or not, results in the current market value of new employees exceeding the amount paid to your existing (and valued) staff. 15% is the break point at which competitors can pick off your best employees with offers of compensation that remains in the 20% of revenue range. A $35,000 employee would go to from 3.5% of an agency’s revenue to 2.6% over 10 years in our example and a competitor could offer your employee as much as $18,500 more than you pay and still keep their agency at the same 20% of income level that you experienced 10 years previously.

The resolution to this problem is Incentive Compensation in which staffing compensation relates to agency revenue and agency profitability and in which we educate the staff to understand that their compensation must be based on productivity and profit enhancements to the agency. During the transition to the ICP, the employees are taught how to generate growth, maintain high retention and advance the measures of retention that define their value to the agency. They maintain their own measurements of success, thereby eliminating any unpleasant surprises if their efforts do not result in the productivity gains that they desired.

Compensation in an agency must be related both growth and profit. The ICP provides the tool to teach these facts to the employees, to incent the productive employees and to hold non-productive employees accountable for their results. Many of us do this anyway over time, but we do it with emotional outbursts and terminations. Handling compensation issues objectively, rationally and unemotionally will pay more to your most productive employees while motivating less productive employees to become more productive or educating those less productive employees that they will not achieve the same compensation levels as their profitable and productive counterparts.

Call us at 800-779-2430 to discuss your particular situation and to determine if an ICP is right for your agency.