COMPENSATING HIGH REVENUE PRODUCERS
Every agency owner hiring producers hope that each producer will “catch fire” and become highly productive to both him(her)self and to the agency. But be careful – you may get what you wish for!! If you don’t prepare properly you may be shocked one day to lose your best performers while you retain the dead wood that litters most agency portals.
The agency pays dearly to employ new producers and producers who are generating less than a few hundred thousand dollars of agency commission income. Most agents don’t realize (or accept as growing pains) the costs of maintaining a producer through the first few hundred thousand dollars of revenue generation until the producer actually achieves parity and is making a profit for the agency – not just earning a decent living for himself.
Unfortunately, most producers become journeymen, generating enough revenue to give them a decent paycheck but not enough to sponsor real value and agency growth for the owners. You will certainly know when a producer becomes self-sufficient by changes in the producer’s demeanor and traits. The producer becomes more confident and more independent. Eventually, he begins to attract attention of the carriers and of the insurance industry in the area (including your competitors). He may be flattered when he gets his first offer to change employment but that is a significant sign that you should be enhancing both his compensation package and his ties with your agency in order to avoid the death-trap of hiring, training and living through the trials and tribulations of young producers just to lose them when they are offered more money or opportunity to move than he has to stay with your agency.
It’s not a bad thing to have a successful producer. If you have listened to our advice you are calculating the producer’s productivity and profitability to the agency as his revenue grows. The larger a producer gets (commission income) the greater the opportunity to make profits from his efforts for the agency. And, remember, it’s NOT the top line premiums or commissions that are truly important to you, the agency owner; it’s the bottom-line profits from which you pay yourself and increase the value of your business.
Compensation must be carefully tailored to give the producer a fair value for the time and effort used to grow the agency’s book of business but not so much that the agency loses money on every dollar produced (a more insidious and common problem than most agents understand).
How much is affordable and common to pay producers? According to our statistics (gathered from several thousand agencies annually in our Composite Group Study) the average compensation for new and arising producers is between 25% (salaried and Personal Lines) and 30% (commissioned) and as much as 33% of the commission dollar produced for agencies who are fiscally conservative in their operational expenditures.
However, once a producer achieves a book of business of $250,000 to $350,000 the profitability of that book of business increases as more commission income is produced. When we devise compensation programs for our clients, producer profitability is calculated and the compensation program is tailored to allow the producer to share in the profit growth through increased compensation. That’s why it is common to see as much as 5% differential compensation as a producer’s commission income grows from $300k to $500k and even higher commissions for continued growth as the book of business grows to and past the $1 MM level.
If you are consistently under-paying your producers you will eventually find that other companies will entice them with stronger compensation programs and you will lose your best performers. Matching outside offers rarely works in the long run since the employees will assume that the only way they can get more compensation from you, is to entertain other opportunities. This is strategically a losing proposition.
Assuming you are paying your producers competitively, you will find that their interests turn from their immediate needs to their long term needs as they earn enough to pay their living expenses and as they get older. They may mention EQUITY and seek ownership of their books of business or minority ownership of the agency. This is your opportunity to integrate them fully into the agency to assure that they remain with you through their productive careers.
Ownership – Stock – Shadow Stock
Bitter experience has taught many agency owners that it’s rarely a good idea to give a producer equity in his/her book of business if your goal is to keep the producer with you in the long term. First, it defines to a court that the producer’s book of business can be owned by the producer. We have spent decades convincing courts that the producer is an employee of the agency and all business written belongs to and cannot be separated from the agency. The agency is the contract holder with the carrier, not the producer, and the producer doesn’t have the ability to permit transfer of the contract between the carrier and the client to another individual or agency unless the carrier permits it.
From a motivation standpoint, if the equity of a producer is for only the book of business that (s)he produced for the agency it is likely that the producer will give (and may ask your employees to give) preferential treatment to those clients instead of helping any agency client who needs assistance.
A primary question is whether a producer should be granted an ownership role in the agency simply because (s)he has produced a substantial book of business for the agency. First, the producer has likely been equitably paid for that production, new and renewal. Second, stock ownership should be reserved for people who are capable of becoming and will likely be the future principals of the agency. So, if the producer in question has a long-term and strategic view of the agency and wishes to participate in both planning and management, stock ownership is absolutely on the table and must be considered for the large revenue producer. It will tie the producer to the agency and place the producer in a fiduciary role to make the producer concerned with all production and all profit generation of the agency to bolster both the producer’s and the agency’s overall value. However, if the producer is (like many salespeople) a great individual performer, but is not interested in spending the rest of his/her career concerned with the future of the agency and management issues a different approach can be used to cement the relationship between the producer and the agency to keep the producer from being tempted by the offers that will come to them for the rest of his career.
Shadow Stock
In a nutshell, a Shadow Stock agreement promises the recipient the value equivalent of a percentage of the value of the agency in the event of the employee’s death, disability or retirement from the business of insurance. It can either be a fixed number created at the point in time of the granting of the Shadow Stock or it can ‘float’ rising and falling with the value of the agency and the value of the recipient’s interest as the book of business grows or diminishes. It is also convertible and can be redeemed for agency stock upon the approval of the agency’s Board of Directors. It is even possible to allow the recipient to redeem the Shadow Stock for a book of business should the agency agree to separate from the employee and permit the sale of a part of the book of business.
As you can see, the Shadow Stock agreement permits the agency to award a producer a percentage of the value of the agency equivalent to the value of book of business created for the agency by the producer. Its purpose is to tie the producer to the agency with a virtual retirement benefit that may be lost if the producer leaves, that can be converted and cashed out if the agency terminates the relationship and can either grow or not based on the desire of the agency for promoting and incenting future growth of the producer. It does NOT imply stock ownership nor voting rights. It may or may not carry profit sharing capability for year-end bonuses.
The goal of equity is to cement the relationship between the agency and its key producer to avoid the producer leaving simply because of a more lucrative offer. The benefit of any equity program is to keep the producer incented to continue to grow the agency’s book of business. It should never be used only as leverage, either by the producer or by the agency. If the agency and the producer don’t see eye-to-eye the advent of an equity relationship of any kind with further complicate, not simplify, the situation.
Please call Al Diamond, 856 779 2430 to discuss the potential of the use of equity, stock or shadow stock in your agency.