Producer Compensation- 2008

The concept of fair and motivating producer compensation still eludes most agents who have found themselves over-compensating producers who are not generating the growth needed by the agency. The producers have generated a sufficiently large book of business that:

a) They are earning a compensation level that they consider comfortable -or-

b) They spend most of their time with their existing client base and have little time left for new business -or-

c) They don’t have to hustle for new business any longer, letting whatever flow of referrals support replacement of lost business.

We have forgotten that the primary purpose of compensation programs is to fairly compensate producers for their productivity AND TO CONTINUE TO MOTIVATE THEM TO GROW the agency’s book of business.

The Million Dollar Question is, “How do we provide a fair compensation for producers that influences and motivates them to continue to grow the books of business that they produce for us and that supports their financial needs?”

The short answer is to provide the “carrot” of proportionately growing earnings tied to the growth of the books of business for which the producer is responsible. The rest of the answer is to also provide a “stick” that penalizes producers for stagnation and declining books of business.

The average producer in the P&C industry in the U.S. earns between 30% and 35% of the commission dollar. New and smaller producers earn less and some producers still earn more. Some higher compensation programs are warranted by the economies of scale evolved by larger produced books of business. But most high level compensation plans are not warranted and result from producers sharply negotiating with agency owners who feel that they don’t have a choice. Remember, once you have negotiated high commission rates for producers without a just return to the agency through continuing growth it is nearly impossible to go back. You will lose producers who refuse to return to logical and profit-generating compensation plans.

Producers with little experience or books of business

Young producers with little or no books of business should be paid the minimum required to support their families until they generate sufficient books of business to properly support themselves. It is important to cover the producer’s family expenses because the pressure of insufficient compensation to meet expenses will translate to desperation when they face sales proposals. We all know that the client can sense desperation and will refuse otherwise adequate proposals if they feel the producer is pressuring the client.

Producers on stable compensation to pay for their expenses should be expected to generate one times their earnings in their first year, two times their earnings in their second year and three times their earnings by the end of their third year. At that point they fit into the commissioned compensation program that pays 30% to 33% of revenue to the producers.

Tiered Compensation

Experienced producers still need incentives and goals. These are derived from the specific agency budgets that determine when a producer’s book of business has achieved the economies of scale to make higher profits for the agency. We typically analyze an agency’s financials and create three or more TIERS of production each of which is substantially more profitable for the agency. At each tier the producer’s compensation is increased in increments of 3% to 5%, and since the book has achieved the needed economies of scale, the increase IS FROM THE PRODUCER’S FIRST DOLLAR. This is a great incentive for the producer to grow his/her book of business. Some agencies have doubled the number of tiers and increased the producer’s compensation a smaller amount at each level to provide between six and ten levels of commission increase based on the producer’s growth and success. Of course, rules and exceptions exist such as when a producer’s book of business decreases through a tier, and those are taken into account within the tiered compensation program.

Taking Down Roadblocks

Roadblock 1: We’re too busy to sell new business

The first roadblock to producers increasing their books of business is that they claim to be too busy taking care of their current client base. For most producers, this roadblock is an excuse, not a reason. They claim to be too busy because they put themselves in the position to service and administer to the client instead of being the Relationship Manager. The answer is to keep the clients satisfied without the time currently spent by the producer, leaving the producer free to generate more new business. The producer maintains the responsibility of relationship management. That includes generating new business through active referrals from every strong client relationship. But the agency should use an Account Executive to assume the daily control of the larger client (including several client visits each year for service and administration). Smaller clients should be serviced by CSRs who maintain regular contact with the clients by phone. While it is certainly more comfortable for producers to visit smaller clients, it is not cost justified. Producers can still make themselves available for special situations without spending an inordinate amount of time during the year with clients whose commissions don’t justify the attention.

Account Executives are a class of employee who manage a book of business, including building and maintaining relationships through customer visits, but do not SELL new accounts as a normal part of their job. Account Executives are very valuable to an agency because they can take the service load off the producers permitting them to continue to generate new business as the cornerstone of their jobs with the agency. The industry has begun adopting Account Executives from the ranks of CSRs who mature into customer relationship efforts, from insurance company employees who are technically competent but have never mastered sales skills, and from their own producer ranks when it becomes apparent that the producers are no longer writing new business as the primary part of their employment relationship with the agency.

Account Executives typically earn 15%-25% of the book of business that they manage based on the complexity of the accounts being serviced, pegged to that rate by the incentive to assume more clients, to retain as much as they can, and to cross-sell vigorously to enhance the revenue base of their book of business without increasing the number of clients serviced. As a point of comparison, CSRs may earn 5% – 15% of the books of business that they service.

The difference in personality between Account Executives and Producers is that AEs are typically more detail-oriented but cannot effectively close sales as well as producers. While AEs are all that is needed for certain smaller, simpler accounts, larger and more competitive accounts require both AE and Producer presence. The AE controls the daily activity on the account and calls in the Producer for the needed Sales ‘Punch’ as needed.

If the agency is already spending a third of the commission dollar on producer costs, an additional 20% for service and administrative staff and 20% to 30% for operating and administrative costs, all that is left is the relatively slim profit margins available in most agencies. Where does it get the money to pay Account Executives?

AE compensation comes from a combination of lower producer compensation from AE serviced accounts and agency contribution to ‘seed’ the producers to grow the agency’s overall book of business. Agencies have been known to lower the producer’s commission by all or part of the AE compensation justifying the reduction by the time that the producer gains to generate more and larger new accounts, most AE workloads are comprised of one or more producers’ smaller but service intensive clients. AE’s are useless as leverage for growth if the producers simply use them as a convenient way to gain more leisure time.

Roadblock 2: Lack of sales activity

Many producers simply don’t spend enough time with prospects to generate sufficient sales to satisfy agency needs. If their problem is not lack of time due to the press of service needs of current clients (see AE section above), either they do not understand the need for sales calls, or they are not motivated enough to remain producers.

You can show any producer the need for sales calls through a formula that translates producer compensation needs into sales, proposals and sales calls needed to accomplish the desired compensation level. Call or e-mail me (800-779-2430 or ) and I’ll send you the template for the calculation.

Once that calculation is complete, you and the producer will know empirically how many sales calls need to be made every month in order for the producer to logically earn the amount he desires every year.

But knowing how many sales calls need to be made doesn’t make the calls.

We have evolved a ‘Pay to Play’ concept for producer compensation that provides producers stable compensation based on both their needs and their historical performance but will penalize producers by reducing compensation if they fail to meet the activity (sales call) requirements that they need to accomplish their sales goals.

If a producer is a proven salesperson, he will make sales if given enough sales opportunities. However, the producer cannot make their revenue goals if they don’t see enough prospects to convert a fair number into sales. The ‘Pay for Play’ concept defines the sales call requirements by a producer’s own personal history. If a producer has successfully sold one account for every four sales calls made historically, the tendency is for the producer to repeat his history. Based on the number of sales needed in a year and the historical number of sales calls required to make a sale, we define the number of sales calls needed by the producer in a year, and down to the number needed in each week, in order for him to make his sales goals.

If the producer fulfills his sales call requirements, we guarantee the stability of his compensation. We assume that he will sell sufficient accounts to justify his compensation. If not, it is up to his manager (the Sales Manager or Agency Principal) to help the producer by visiting prospects with him and observing any faults that may be stopping sales. The manager is to coach and counsel the producer to get him back ‘in the groove’ making sales.

However, if you can’t get the producer to make enough sales calls to yield the right number of sales to fulfill his sales goal based on his own history, there is little a manager can do to motivate the producer. Since we are so loath to release producers who have “retired” from production into a service position, we let the ‘Pay for Play’ program control the producer’s compensation level. If, in the role of producer, the employee fails to meet his sales call requirements for two months in a row, his base compensation is reduced by 10%. And that reduction continues for every two months that the producer does not meet his sales call responsibility.

In order to regain lost income, all the producer needs to do is to make up the sales calls missed. The assumption is, of course, that at appropriate sales call levels, the producer will sell sufficient accounts to justify his compensation and make his goals.

If a producer realizes that his is no longer in the sales profession, he can adjust to Account Management at a lower, but more stable compensation level that acknowledges that his role is to retain a book of business and cross-sell for enhanced revenues. We make a serious mistake assuming that because a group of people have sold insurance in the past, that they remain producers for life. When we feel that we have a staff of producers who aren’t selling, we generally stress ourselves over ways to rehabilitate them. Instead, if we realize that he producers are satisfied and are good at customer retention but have left the sales arena, we will certainly recruit new producers and suffer less stress over “producers” who have left that arena. They can still be valuable employees, supporting their efforts by managing a book of business. However, once a long-distance runner puts on fifty pounds, it is unlikely that we can motivate him to be an Olympian again. We’re better off using him as a coach or recruiter since he certainly knows how to run – but is no longer capable or desirous of running competitively. Treat producers who no longer sell like this. They are not bad people. They have just changed their priorities.