Incentive Compensation appears to have become a “hot” topic since we introduced ICP (Incentive Compensation Programs) to the agency industry several years ago. During the soft market an ICP was a self-defense mechanism for many agents who found their revenue base eroding while their employees continued to expect salary increases. From the employees’ standpoint, they were working hard and deserved more money. From the agent’s standpoint, he was generating less revenue, but was expected to pay more each year in salaries. This proved to be a vicious circle, the result of which was that most agents continued to grant salary increases and permitted their profits and personal incomes to erode each year.
During the soft market, an ICP educated the employees of a business to the fact that they can expect to profit only when the business for which they work also grows and profits. In a receding marketplace, if most businesses shrink (i.e. the reaction to continuous rate decreases for 15 years) and employees find themselves without raises for a number of years as a result of this poor market, they will also find it hard to find suitable alternative employment in an industry that is suffering along with his/her employer. But most employees simply didn’t understand the economics of an agency.
In many cases, the employees were simply not told of the agency’s results. The agent was fearful that if he told the employees that times were tough they would a) leave for greener pastures or b) tell his companies and clients that the agency was suffering bad times. The agent was embarrassed even though the entire industry was suffering the same results as his agency. Hopefully, most of those agents are now gone. It is as important for the employees to know the agency’s performance as it is for the owner to know its performance. After all, the employees are making a career out of the agency. Their greatest fear is that the agent will decide to sell without telling them. The fear of the unknown is always worse than any reality. In reality, when agents told their employees about their situation, the employees pulled together and tried to help the agency solve its problems.
One of those problems was the compensation issue in tough times. Those agents entering ICP’s during the soft market found that their employees understood the need to “tighten their belts” (as long as the owner tightened his as well). Once they understood the relationship between their compensation and productivity and profitability of the agency. Many agents simply didn’t believe that their employees would either understand or care about the need for the agency to grow and profit. However, in most cases, the employees surprised the owners, and both understood the issues and pulled together to enhance the agency’s growth and bottom line. In almost every case of an ICP in an agency during the soft market, the agency outperformed the market by both growing more than expected and controlling costs better than expected.
As we all know, the soft market is over. Now agencies are calling for Incentive Compensation Programs to reward employees and to keep the strongest performers in their agencies, and, while the circumstances are different than in the soft market, the ICP in a hard market is a tool to both reward and motivate your strong employees.
GROWTH AND PRODUCTIVITY
Every agency feels the need to grow. However, growth alone does not define productivity or profitability. Productivity is measured most simply as Revenue per Employee. There are statistics that we gather every year to define the “averages”, but, frankly, the “average” shouldn’t matter to you unless you strive to be Average. What matters are your own historical productivity and the improvements that you score each year. Productivity alone does not equate to growth. If you permanently lose an employee and maintain the same number of clients and revenue with the remaining employees, you have increased productivity, but NO ONE HAS EVER SHRUNK TO GREATNESS. So productivity must be accompanied by growth to accomplish the main task of making money and increasing the value of the business.
We have analyzed many an agency whose growth rate is good, but can’t meet payroll or its carrier statements. The agencies that are in deep financial trouble almost have to grow since they count on growth dollars to pay last month’s bills. They have over-extended themselves and constant growth is their only roadblock to bankruptcy. These agents constantly feel like hamsters in a cage. They go fast and put a lot of mileage on their wheels, but they never make any progress. If your operations are too expensive for your agency’s revenue the best solution is to call us and allow us to overhaul your financial and administrative operations. Please DO NOT implement any type of Incentive Compensation Program in the hope that you will not have to pay as much in an objective compensation program as you feel obligated to pay in a subjective salary review because the profitability is not there. Not only will the ICP fail, but also you will likely lose your best performing employees (mediocrity always seems to hang around). Solve your profit problem first – then install an ICP.
ICP – WHERE IT FITS AND HOW IT WORKS
An ICP fits best in an agency that is profitable, but has a need to grow and would like to see its employees participate in both creating the growth and enjoying its rewards. Of course that sounds like most agencies at first blush, but there are a lot of “IF’s”.
· An ICP will work IF the owner either is or wants to build a participative management agency. A participative management agency is not a democracy. It is a business in which all employees share in the creative process of business development.
· An ICP will work IF employees feel that their input is valued and that their ideas will be acted upon.
· An ICP will work IF the employees can actually track their progress toward salary increases on a month-by-month basis.
· An ICP will work IF the owner desires to replace a subjective salary administration program with one that is highly objective.
The ICP begins with the owner identifying the “Strike Points” of the program. The first Strike Points are the target profit level at which the ICP will pay the full salary advance earned and the minimum profit level below which no raises will be earned. In some agencies the minimum profit level under which raises are not given is zero. In other agencies, debt requires a minimum profit level before a return can be earned by the owners. That level becomes the Minimum Profit Level for the ICP. The target profit defines the profit margin at which the owners achieve a fair return on their investment. The second Strike Points are the growth goal at which the entire salary advance is given. This is the minimum growth under which only a pro-rata portion of the advance is given. If neither Strike Point is achieved, no raises are given. If either Strike Point is achieved then the percentage of the full salary increase given will be a pro-rata percentage of the under-achieved Strike Point. For instance if the growth rate were achieved and the profit margin was 80% of the target, the employee only earns 80% of the raise.
If an agency does not have defined jobs easily measurable in terms of revenue per employee changes, the Strike Points, themselves, determine the qualifications of the employees for raises. For instance, small agencies have a number of employees, all of whom interact and perform the same varied functions for all customers. The strike points are the only qualifiers needed for the ICP. The agency owner selects a percentage of the growth that is available for raises (hint: take your compensation and divide it by your total revenue to come up with a good guesstimate of the required percentage). If the owner selects 20%, then 20% of the growth is devoted to raises next year (as long as the profit is above the target profit level). The percentage of raises earned by each employee is equivalent to his/her compensation as it relates to the total agency compensation last year. For instance, if an employee earned $40,000 and the employee paid $500,000 in compensation last year, (s)he will earn a raise equivalent to 8% of the available raise fund as defined by 20% of growth (assuming growth in excess of target range and profit in excess of target range).
If employees have defined jobs from which productivity can be calculated (i.e. CSRs who may be responsible for a book of business), then the gauge of the Incentive Compensation Program for them is the increase in their specific productivity factor (i.e. revenue size of the book of business for which they are responsible) along with department growth and profitability factors. In other words, their compensation grows by a factor of their productivity growth (i.e. if productivity grows by 12%, so does compensation) as long as the department growth and profit meet their Strike Points.
The ICP, whether simply calculated on agency growth and profit or refined to individual productivity, only pays a portion of growth to compensation. There is more than enough left to pay all other extended expenses AND profit the agency, as well. Agents are using this to partner their employees into the continued growth, productivity, and profit of the agency, raising the enthusiasm of employees since they themselves calculate their own raises each year. However, an ICP does not replace employee evaluations. The ICP assumes that the employee is performing strongly enough to remain in the agency. If so, the employee, not the manager or owner, determines his/her own compensation by virtue of individual or group productivity and performance.