The Glass Ceilings In The Insurance Agency Industry

Every so often, we like to present a compensation program for your consideration. Here is a producer compensation program designed to reward producers for growth.

Everyone is motivated by money to some extent. For some people, money is the source of security, providing funding for home, food and the necessities of life. For sales people, money is also a way to get THINGS. THINGS form a sort of scorecard and money is the yardstick by which many salespeople measure success. The more money they make, the more THINGS they can have. This is not sarcastic, a derogatory statement nor a value judgment. It is a fact. Money motivates sales people more than people in other types of careers. Yet in sales as in other careers, most participants have a target, called the Comfort Zone, at which they have the THINGS that they desire. From the time they reach the Comfort Zone their goal is to maintain that level of comfort more than to exceed it.

For many years, we have been paying agency producers commission on both new business and renewals. This is not bad, in itself. We would like the producer to be interested both in keeping the business that has been put on the books, as well as writing new business. However, a strange phenomenon took place when the producer generated a large enough book of business to reach his Comfort Zone – he basically retired from sales into a service and maintenance career. Sure, he would sell if referred a client and he would sell if some of his customers left the agency (to make up the lost income and re-achieve the Comfort Zone). But the “Fire in the Belly” was gone. He found the formula to success – renewal commissions.

We entice salespeople into the insurance field with the incentive of continuing growth of income through renewal commissions. Yet we have never properly addressed what happens when the producer reaches his Comfort Zone and is no longer seeking new business to the same degree as previously. This compensation program is designed to challenge producers and keep them going after new business.

Step One: Base and growth commission, instead of new and renewal commission

One major problem in producer compensation in the past has centered about the concept of greater commission for new business than for renewals. We assumed this would be a logical way to incent the producer toward new business. However, if New Business paid 40% and renewals paid 25%, the producer would certainly concentrate on new business (if he had any to generate) – sometimes to the detriment of renewals. Many agency analyses that we have conducted reflected a severe loss of producer generated new business after the first year. Some producers over-promised to get the new business and couldn’t deliver, thereby losing the renewal. Unfortunately, the agency paid high new business commission in expectation of re-capturing the profit due the agency after two or three years of policy renewals.

If, instead of new and renewal commissions, we converted to BASE and GROWTH commissions, this problem would be solved. BASE commission is defined as the total agency commission generated by the producer last year. GROWTH commission is defined as agency commission generated this year IN EXCESS of that generated last year.

Example One: If Bob Producer generated a total of $150,000 of commission last year and $200,000 this year, the first $150,000 would be paid as BASE commission and the next $50,000 would be bonused as GROWTH commission.

Step Two: Level One Bonus for Growth

The current compensation levels most prevalent in our industry pay an average of 30% – 33% of the commission dollar to producers. Currently this is done in a 40% NB, 25% Renewal commission split. We suggest that BASE commission be established at 25% with a Level One Bonus for growth beyond Base of 15%. This means that Bob Producer, above, would earn 25% of all commissions generated and a 15% bonus for production above his prior year base.

Example Two: During the year, Bob would earn 25% of every commission dollar generated (25% of $200,000 = $50,000). Once he generated a commission level equal to his BASE (prior year total), he would also earn an additional 15% bonus for every commission dollar in excess of his BASE (BASE was $150,000). $50,000 growth would bring Bob an additional $15,000. Bob’s annual income would be $57,500, or 29%.

Step Three: Level Two Bonus for Growth Beyond Target

Strong growth is beneficial to the agency because it doesn’t take additional staff to support marginal growth. This means that if Bob had grown his produced book of business to $210,000 instead of $200,000 it is unlikely that the agency would have required substantial additional expense. Strong growth should also be beneficial to the producer by rewarding him geometrically. We suggest that you measure growth in one year and increase growth expectation by 10% for the next year. If the producer exceeds that expectation, he should enjoy an additional 10% bonus for growth beyond the target.

The producer’s historical growth is the basis of future growth. In our examples (above), if Bob’s prior year growth took him from $125,000 to $150,000, his target for this year would have been $25,000 growth plus 10%, or $27,500. Since he grew by $50,000, he would achieve a second level bonus (at the end of the year) of 10% on the growth beyond his target. This would earn Bob 10% more commission on $22,500 or $2,250 Level Two Bonus.

In our scenario, Bob has earned $59,750 (30% of gross commission). We have initiated compensation programs with additional bonus levels, as well. 15% of growth over 20% (above BASE) and 20% of growth over 30% (above BASE) incents producers to hit ever higher levels of commission.

The best part of this type of compensation program is that the producer, as well as the agency, is penalized by lost business because that business must be made up before growth bonuses can be earned. Previously, a producer could earn his higher new business commission in one year, lose much of the business in the next and earn the higher new business commission again for writing additional lines that may just bring his volume to prior levels. No help for the agency and it has to continuously pay higher new business commissions.

One other caveat protects the agency. The producer must achieve a gross commission level at least as high as his prior high level (within this program) before qualifying for bonus commission. This avoids the loss of one or two major accounts while still providing growth bonuses as the producer regains his commission position.

This compensation program is designed to protect the agency from financial losses while incenting the producers to target growth while not disregarding renewal retention. If you would like Agency Consulting Group, Inc. to help you design a compensation program specifically tailored for your agency’s situation, please call 1-800-779-2430.