ANOTHER LOOK AT COMPENSATING PRODUCERS WITH A SELF-TERMINATING CONTRACT
At Agency Consulting Group, Inc. we live every day with using our concepts of Producer Compensation, Incentive Compensation and all of our other innovations to the industry. We see them working to incent producers to continue to generate growth and to incent employees to become more productive for their employers. But, we sometimes forget that most agents never get introduced to the Compensation concepts. Those who do will read about them only to return to their daily cycle whether that involves growing the agency, maintaining it, or riding its downward trend. Few agents actually appreciate the Compensation changes that can take place in an agency – until they actually begin the process themselves.
Many agents only read about Base/Growth Compensation for producers (instead of new/renewal compensation that penalizes agencies when new clients terminate), Tiered Compensation programs (paying producers more when they reach higher volume levels than when they are just starting), and Self-Terminating Contracts (that avoid owner intervention when a producer fails to live up to his charter for an agency). But few casual readers remember or understand these concepts by reading them in a magazine or even in our newsletter. The reason that they don’t understand the concepts is because the articles and White Papers define the concept, but don’t ‘tailor’ them to the agent’s specific needs.
I buy my suits and shirts at a small clothing store instead of at the chain stores. Why? The prices are competitive and the service is so much better. The clothier will not PERMIT me to leave the building unless the clothes fit properly. What’s ‘good enough’ to me is not good enough to him. So I purchase my shirt off the rack and the clothier tailors each of the items to me and with great pride, and then allows me to take the items home.
Similarly, we don’t have a problem explaining the special concepts when we are consulting with an agency directly and can introduce them related to that agency’s specific situation. We are in their offices and remain available to them to answer any questions and to tailor the program to the specific agency. No, one size never fits all situations, whether in terms of clothes or in agency management concepts.
We continue to be pressured into writing a book on the subject of ‘Producer Compensation’ and are nearing its conclusion. We will caution everyone who will purchase and read the book that while the principles espoused are sound, they won’t fit your agency unless you tailor it to your specific situation and needs.
Failed Producers Sometimes Keep Agencies From Trying Again...
When discussing Producer Compensation, the greatest self-criticism we hear from agents is the long, expensive delays they suffer before unsuccessful producers are released.
Excuse 1: Every failed producer always has a great deal “cooking” and just around the corner. Every missed sale is attributed to a character flaw of the prospect, carrier problems, agency problems, the economy, the weather and about anything else you can think of besides the fact that the producer couldn’t SELL the client on using the agency’s services. Many producers insinuate themselves into administrative, management and/or service roles to convince the agency owners that they are still a useful component of the agency even though they are not doing the job for which they were hired.
Excuse 2: The next excuse we hear is that it is better to have ‘someone’ in the agency in that role rather than no one. Of course, the truth is the reverse. It costs less to have no one than to have someone draining your assets, your time and that of your staff than to have that person occupying space.
And, of course, the on-going plea of the agency owner is that we couldn’t find anyone better and we don’t want to try to go through that process yet once again.
In fact, why pay tens of thousands of dollars to keep someone who doesn’t grow your agency at least as much as he costs you every year? We have seen many agencies in which the producer generates sufficient income to support his cost. The agent thinks that he is ‘paying for himself’ when, in fact, he costs the agency much more than he brings in in three ways:
1. You pay for the cost of servicing and administering clients through your service staff. The producer’s cost should not be more than 30% of the producer’s gross revenue in order to pay for your overhead and devote some of his efforts to profit.
2. A productive producer spends most of his time with clients and prospects, not in the office. When he’s in the office he is, in all likelihood, consuming your time and that of your staff – time that could be more productive for you and your staff working with the clients and carriers.
3. If a productive producer occupied the space instead of an inactive producer, you would grow much faster. But you will likely NOT hire another producer while the non-productive one is there for fear of duplicating his situation. New people learn from your veterans, whether it is good or bad habits. This is your lost Opportunity Cost.
Agency Consulting Group, Inc.’s Producer Program expects a return from each producer from activity more than from results. In terms of activity, the producer should be making sales calls to generate revenue or contact current customers to try to generate referrals and leads. If your producer is very active, he is living up to his compensation. We would love him to get quick and frequent results through sales. You would like for the producer to build up a comfortable relationship with the customer (See Asset Protection Model of Relationship Selling) to generate commercial line sales. I am suspicious of producers who seem to close sales on the first or second call. I LOVE the money generated, but I’m pretty certain that his relationship is not yet tight with the new client and I’m concerned that we will lose the client to another quote as quickly as we got it (unless the producer devotes after-the-sale time to evolving the relationship further).
So activity defines the success for a producer. If he active but isn’t selling enough to satisfy his financial obligation to the agency (validating his compensation) you have another problem; potential lack of sales training. And the lack of sales training is YOUR problem as his manager, as much as it is his problem. Of course, if you can’t train him to convert prospects into clients, no amount of activity will keep him a producer. But if his qualifications were satisfactory enough to hire him, you are responsible for giving him sufficient training to do the job if he has the personality and energy to be very active.
The definition of a producer is an employee whose responsibility is to develop strong relationships with a growing number of prospects, converting enough prospects into clients to support the producer’s compensation expectations and the agency’s growth and profit goals.
The Hiring Process:
When a producer is hired, we determine:
a) What are his goals, short term and long term, financial and otherwise,
b) What are his target markets, what are the expected revenues generated from average sales,
c) What are the activity validators on a weekly and monthly basis which, if achieved, will likely permit the producer to achieve his sales (and compensation goals).
We negotiate these points with the producer at the outset of his career with the agency and he signs off on a set of goals AND the financial benefits he would achieve from attaining those goals and ramifications if he does NOT achieve the goals (both activity goals in the short term and sales goals in the longer term).
Monitoring and Managing:
We shouldn’t place ourselves in the position of monitoring the producer on a minute-by-minute basis. THE PRODUCER is required to generate Activity Reports to the owner every week in order to substantiate his paycheck. THE PRODUCER, not the owner/manager, monitors his validation goals and achievements and reports it back to you on a regular (weekly) basis.
And, a part of that reporting is the confirmation of his compensation or alteration of it should he surpass his validation and goals OR FALL SHORT OF THEM. Yes, the producer is not assured of his income if he does not attain the activity levels that he has agreed would support his compensation through sales. Not achieving the activity level for a long enough period automatically reduces his compensation to a theoretical level that supports the activity that he CAN achieve.
Consider tying compensation to activity during the year (always with the requirement of meeting sales goals by each year-end) in order for your producers to validate their on-going compensation. The Producer Compensation Program is much more robust than this simplistic article. But this has given you a good idea of how and why to relate compensation to activity in your agency. This works with new producers AND with experienced producers who have a renewal book that helps pay their way. They must still keep up activity or you will find them RIP (Retired In Place) taking a part of their renewal commission without continuing to build your agency’s book of business toward YOUR profit goal.
Call us 800-779-2430 to discuss how a Producer Compensation Program can help you carve that ‘Dead Wood’ into useful tools.