In the over 40 years of agency analysis, we have seen hundreds of different compensation methods based in some way on salary, draw and commission. Regardless of the method by which a producer is compensated, an often overlooked criterion in compensating producers is to identify the activity requirements that a producer would have to maintain to achieve the desired or proposed compensation level. A subsequent need is for both agent or broker and producer to be able to easily measure that activity and report the results toward the validation levels.
Achieving these two goals (concentrating on activity that would normally result in expected revenue generation — and — a measurement tool that is live and on-going through the year) is the purpose of this simple, but comprehensive Producer Validation and Management Program that Agency Consulting Group, Inc. designed several years ago and updated regularly to the current year.
Most producers need and want a regular source of income even though they know that their income ultimately depends on their commission production each year. As long as the actual sales activity and revenue follows the producer’s historical or expected success levels, the validated activity will result in sufficient revenue production to support the desired compensation levels. In other words, if the agent or broker is paying the producer a salary or draw, that salary or draw remains constant and consistent as long as the producer’s activity level meets the validation schedule. That activity level should result in sufficient commissions and fees to properly pay that annualized compensation on which the draw or salary is based.
HERE’S HOW IT WORKS
First we, identify the activity level needed for the producer to achieve the sales goals that would properly compensate him or her over the course of a year. We now have three sections of the Producer Validation and Management Program ( NewRen, BaseGrowth, and NewProducer representing different versions of the Producer Validation Schedule. The difference is that the first section (NewRen) uses the common practice of paying producers on a New and Renewal schedule while the second (BaseGrowth) uses the advanced technique of paying producers for base and growth. Base is the revenue levels the producer achieved in the prior year and growth commissions are generated in the current year beyond the base level in the prior year. For a more detailed explanation of Base and Growth compensation, you can read our article on Growth Loaded Compensation. The third tab (NewProducer) represents how to pay producers new to the industry or to the agency with no pre-existing book of business. This NewProducer tab presupposes the agency sponsoring the producer for a period up to three years during which the producer generates sufficient business (new and renewal) to pay back the agency’s investment in the producer and generate a fair profit to the agency.
We are aware that every agency has differences in their compensation plans that are unique to each agency. If desired, Agency Consulting Group will create a customized version of the Producer Validation and Management Program specifically for your agency to meet the existing or proposed compensation method (at time-specific additional cost).
As you and each producer complete a Validation Schedule in the version appropriate for your agency, it will illustrate several things:
– Is the producer’s historical performance and activity reasonable to expect the level of compensation desired?
– What is the level of activity necessary for inexperienced or new producers based on YOUR projections of their potential Hit Rate and their potential Proposal Rate? For experienced producers, these rates are defined by their own personal production experience.
– The average size of account new producers need to pursue or an experienced producer’s historical average.
This Validation Schedule is the key to the program because it provides a “Reality Test” to determine whether it is reasonable for the producer to expect to achieve his or her desired compensation based on their experience or expected activity levels. Expectations of compensation must be modified to more realistic figures if the current expectations of compensation or activity are unrealistic. Otherwise, both the producer and the manager understand that his or her compensation or expectation of compensation cannot be reasonably reached based on the experience or level of activity that is projected and will be measured during the year by this program.
The final display represents a tracking device that identifies the activities that would lead to sales (mgtrep1 and mgtrep2). This measures how close the producer is to achieving the activity requirements and sales results that would define his or her success in a year. The two Management Reports accomplish that end in 6 month increments.
In our linked example for NewRen compensation, the producer desires a $60,000 annual compensation. The agency would provide an initial compensation level of $50,000 as the producer builds the sales volume toward the validation level required to earn the $60,000. In this scenario, the producer produced $150,000 of renewable commissions and fees in the prior year, and the renewals of those accounts will “credit” $135,000 after an expected retention loss of 10% due to lost business, soft market, etc. toward his or her compensation in the current year. His or her Renewal Commission rate is 25% (for this example). New Business commission rate is 40% (for this example).
Two target validation schedules are defined, a MINIMUM SALES GOAL Schedule and a TARGET SALES GOAL Schedule. The Minimum Sales Goal defines the level of sales in gross commission income required in order to support the Initial Salary or Draw. The Target Sales Goal defines the level of sales required to support the producer’s desired compensation in the year. The producer receives a copy of the Target Sales Goal as the activity target and the monitor of results. The agency manager retains the Minimum Sales Goal to define the “window” between acceptable performance and the desired results.
For experienced producers, the agency or brokerage uses the producer’s historical Proposal to Sales ratio and Sales Call to Proposal ratio in the appropriate source cells which are defined in the worksheet by a bold border. For new producers, the agency or brokerage should evolve the “expected” ratios based on the agency’s or brokerage’s experience.
The goals defined in the Validation Schedule are the Sales Call Target, and the Proposal, Sales, Weekly Annualized Premium and Weekly Annualized Commissions expected. The Sales Call Target defines the activity level necessary for the producer to achieve his or her desired compensation levels based on his or her own history, or, if they have no history, based on the agency’s or brokerage’s expectations of performance toward which the producer is being trained.
The second Validation tab is for the more advanced way of paying producers, the Base and Growth model. On this page, the producer is compensated at the rate of 25% for achieving the revenue level attained in the prior year, regardless of whether the source of annualized revenue is new or renewal. He or she is compensated at the higher, growth commission rate for all revenues generated above the base level during the year (40% in this example). The new total revenue generated becomes the producer’s base in the following year. This form of compensation requires the producer to achieve growth each year and keeps the agency from paying traditionally, higher NB commission levels when the producer’s gross commission income has actually deteriorated from retention losses and/or market conditions. The producer’s goal is to get to the prior year level of gross commission from renewals, policy changes, audits, and new business as early in the year as possible in order to trigger his or her “growth” level compensation for the rest of the year.
The third tab NewProducer was created to support brand new producers or experienced producers coming to you with no sustainable book of business from which to grow. The agency will have to support those producers as they grow a book of business. The evidence that they will succeed or not is defined by their ACTIVITY LEVELS, the key indicator being built by this Validation Program. Based on your expectation of a) account size they should sell, b) average commission for those accounts, c) Sales Rate (Sales made to Proposals generated) ratio, d) Proposal Rate (Proposals to Sales Calls), and Sales Call average (how many sales calls is the producer expected to make on a prospect before reaching the Proposal stage) the Validation Program will create the average weekly numbers (Sales Calls, Proposals, Sales, Premium (annualized) and Commission) that will validate the salary or draw being offered the producer. If those numbers lag consistently, the producer will likely NOT achieve sufficient sales to support their compensation in any of the first three years.
The next pages of the program (Mgtrep) each reflect six months of activity and results of the producer’s activity. The producer, enters the data each week to reflect the number of sales calls made, the number of proposals and sales and the annualized premiums and Commission including annualized fees that will be attained by the sales made that week. The program collates the Year-To-Date results and provides the agency or brokerage and the producer with the calculation of percentage to Goal on each category measured.
All pages in the Producer Validation and Management Program are printable with one-touch. Simply go to that page and hit your computer’s “print” button.
Agency Consulting Group, Inc.’s Producer Compensation Program is a more advanced product and service that include the creation of a program tailored to your agency to maximize your producers’ effectiveness to grow your agency. It includes the Producer Validation and Management Program but also defines the positive and negative changes in the producer’s compensation by his or her success or failure to achieve the activity levels required by the program. This advanced program is for agencies that use our Self-Terminating Producer Agreement that rewards producers for growth and penalizes them for activity levels below which it is not probable that they will accomplish their pre-set compensation levels. To speak to us about Producer Compensation as it applies to your specific agency please call us at (800) 779-2430.
Many agents and brokers can and have created their own internal programs to manage validation and record-keeping. However, our program has been in use for many years and is time-tested. We also upgrade it regularly as changes are implemented in the compensation systems.
If you have questions about compensations programs for producers or non-production staff in your agency, or if you would like more detailed information about the Asset Protection Model of Relationship sales, please call (800) 779-2430 and ask for David.