Everyone is motivated by money to some extent. Money motivates sales people more than people in other types of careers. For some people, money is the source of security; providing funding for home, food and other 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. Yet even in sales, most participants have a Comfort Zone at which they have the THINGS that they desire. When they reach the Comfort Zone, they plateau, with more effort spent trying to maintain that level of comfort rather than exceed it.
Traditionally, agency producer’s have received commission on new business and renewals. This is not bad. We would like the producer to be interested in retaining 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 and settled into a service and maintenance career. Certainly, he would sell a policy if a client was referred, and he would sell if some of his customers left the agency in order 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 when he was hungry for a sale. 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
A key issue in producer compensation plans is 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, sometimes to the detriment of renewals. Many agency analyses that we performed reflect 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.
A solution in this scenario is the conversion of compensation from new and renewal commissions, to BASE and GROWTH commissions. 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 the 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 pays on average between 30% and 33% of the commission dollar to producers. Generally, 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 from the example 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 additional expense to manage the additional growth. Strong growth should also be beneficial to the producer by rewarding him geometrically. We suggest that you measure growth in one year and increase the 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 example illustrated 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, at the end of the year he would achieve a second level bonus 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 or 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.
In traditional compensation programs, a producer could earn a 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. The agency lost renewals, but it has to continuously pay higher new business commissions. A Growth/Base compensation program requires the producer to rebuild lost business in order to maintain the Base commission before the larger Growth commission and bonuses can be earned.
One other caveat protects the agency, the producer must achieve a gross commission level at least as high as his prior highest 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 (800) 779-2430.