As many agents know, we have been establishing Incentive Compensation Programs in agencies for several decades now. The theory of the ICP is that the agency should pay for enhanced employee productivity, not just for “employee attendance”.
Productivity is defined in terms of Revenue per Employee, Compensation per Employee and Spread (the difference between the first two measures). Spread defines the revenue per employee available to pay overhead (relatively fixed) and profit (hopefully rising) after the cost of compensation. The more productive the employees, the more money drops to the bottom line (part of which is available to pay more to the employees).
Employees will always seek their best interest (a natural tendency). Employees also tend to equate longevity and “working hard” with their expectation for compensation increases. In the 20th Century organized labor did a permanent disservice to employers through their introduction of Cost-of-Living Increases (COLA’s) designed to increase employee compensation to meet inflation. While increased taxes paid for these increases for government workers and pensioners, no one considered how private employers were going to “find” the money to advance employee compensation automatically every year when business realities sometimes constricted real income. It is up to 21st Century employers to educate employees that their enhanced productivity, the resulting productivity gains of the agency and, subsequently, agency profits and growth are the determining factors of compensation. If the same number of people can handle 10% more revenue without additional expenses, that 10% increased revenue will drop to the bottom line and permit raises and agency profits in the next year.
And who should get raises? And how much should they get? The ICP concept takes the guess-work out of that process. In its simplest terms, raises go to the people whose productivity increased. And the amount of the raise is directly related to the percentage of productivity gained (as long as profitability is maintained).
As we install more ICPs we are often asked if agencies can use bonuses to reward productive employees instead of raises. The owners seek higher profits and while a bonus is a one-time payment, a raise is “forever”.
The answer to this question is multi-faceted.
IF the productivity increase is repeatable – the increased revenue is renewable (all things remaining equal), a raise is more appropriate than a bonus IF the agency profit level is still increased after the raise or IF employee compensation levels are below or equal to that of the competition in the area.
If the advances in the agency are due to contingency payments (that are unusual for the agency) – IF a single account or a one-time revenue (fee or commission) is the cause of the growth, a bonus may be a better respondent to employee rewards. In this way, the percentage of compensation to revenue remains stable when the environment returns to normal levels.
Employee heroics like one employee doing the job of two during a pregnancy leave also justifies a bonus outside of normal pay raises for productivity gains.
A number of owners have committed to paying high salaries for employees who are much more productive than the average agency employee. However, when the ICP works and employees EARN strong raises because they are able to handle more revenue and clients than other agencies in the area, some owners are reluctant to grant the earned raises. Like it or not, some owners get the ‘glint of gold’ in their eyes. Even though the increased productivity results in greater profits, the owners consider the effect on profits if they did not provide the raises as calculated in the ICP. In other words, they want the employees to understand why raises cannot be given if productivity doesn’t rise but want to have the latitude to “adjust” raises when the productivity gains actually occur.
Obviously, we point out to the owners that when the gains are made, rarely is more than 20% of the gains committed to pay raises. That means most of the 80% of the gains will fall to the bottom line. Frankly, if that’s not enough profit for the owners, they should not have implemented the ICP!
An ICP has many triggers – and safeguards. Raises are limited to the actual profit dollars achieved by the employee group. This assures that a strong performance by one department (in terms of growth percentage) while others are mediocre doesn’t affect the agency bottom line more than the actual profit dollars generated by the high-performance department. If profits are not created, the ICP raise diminishes (to zero if there are no profits, regardless of the growth). This guards against spending more than you grow (i.e. having to add personnel) while also paying employees for that growth. We also guard against paying too much in salaries during high profit years if the profits are not generated by enhanced employee productivity. If productivity growth does not occur (revenue per employee growth percentage), no raises are earned regardless of agency profitability.
However, agency owners must understand that a commitment to Incentive Compensation comes with a price. Employees are educated by exciting them about growth and profit in the agency. They are told on at least a monthly basis how they are doing individually and collectively toward both rolling 12-month goals (the best way to measure growth) and on a Year-To-Date basis (best way to measure annual profitability). They quickly come to understand the relationship between their enhanced productivity and profitability and their pocket-books. If you change attitudes when the growth and profits are strong, you will lose the initiative and excitement that you have built into your staff. Making the staff a part of the growth and profit direction of the agency is the best way to excite and motivate employees. Keep consistent in good years and bad to transmit the right message.
Action Steps: Call Agency Consulting Group, Inc. to do a GPP Analysis (Growth, Profitability & Productivity) to determine if an Incentive Compensation Program is the best way to motivate your agency to grow and increase profitability (800-779-2430). We have different solutions for agencies with different scenarios. We will evaluate your agency’s health and propose solutions (including ICP (Incentive Compensation Programs) to address your particular situation.