Measure productivity in terms of Revenue per Employee assumes that growth in that measure alone is a valid indicator of productivity advances. Agency Consulting Group, Inc. uses three integral measures of productivity and suggests that insurance agencies measure productivity similarly. Revenue per Employee measures “raw” productivity reflecting growing revenues. But, assuming that overhead remains relatively static, the personnel costs associated with that growing Revenue per Employee may quickly erode the growth to your bottom line. So Compensation per Employee is a second indicator of agency productivity. Finally, the bottom line is agency PROFIT! Spread measures the contribution to profit on a ‘per employee’ basis every year. If that trend increases while Rev/Employee also rises it forms the best case scenario for your agency’s health.
1. Revenue Per Employee – measures productivity based on agency Net Revenue after paying brokers for non-owned business placed through the agency and number of employees. This would be valid as a point of comparison if premiums and commissions were the same across the country and if employees were generally paid at the same rate. Unfortunately, none of these assumptions are true. Premiums vary by region and population concentration. Commission rates, that used to be fairly standard, are now showing signs of flexibility based on the profitability of a region. And we all know that the cost of employees varies tremendously between the urban areas and rural areas. So while Revenue per Employee may be a valid gauge of specific agency performance, it should not be used as a raw comparative calculator against a peer group.
2. Compensation per Employee – measures the changes in cost of living, personnel compression issues, and availability of skilled labor. Besides the efficiencies being generated by automation and automated marketing, compensation is the largest and most stable growing cost of an agency.
3. Spread – is the difference between Revenue per Employee and Compensation per Employee. Spread measures the non-compensation expense dollars available to an agency to spend on overhead and profit. Spread is the best general measure of productivity since agencies must pay for employees and only have control over their overhead costs to generate profits.
Revenue per Employee is a good gauge of year-to-year productivity gains in a specific agency. Compensation per Employee must be measured against revenue per employee to assess whether the agency is gaining ground, just supporting increased personnel costs, or losing ground in the race for fair profits. Spread is the best gauge of your agency’s contribution to profit per employee and its progression. Consider maintaining these three measures every year to properly measure your agency’s progress.