Measuring employee performance appears to be a hazy cloud for most agents and managers. When an agent senses an employee is not performing at full potential or whether the employee is not performing at all may be difficult without presenting any statistics or supporting data indicating job performance. We “have a feeling” when an employee is performing badly at their job, but we don’t know exactly how badly or how to measure the performance toward rehabilitating or replacing the employee.
I hope this article along with other assistance that Agency Consulting Group, Inc. can offer an agency in a consulting capacity, can clear away the hazy cloud and make performance indications both clear and objectively determined. This article will tell how to properly measure all of the categories of employees that are common in an insurance agency, from President to receptionist.
Owners active in the agency should be measured in two ways: first the growth and profitability of the entire company, second in the role that they actively pursue within the agency. Planning agencies already know that the top side of every annual plan is growth and profit expectation. If the agency grows to at least its annual goal and achieves at least its annual profit, the owners of the agency have done their jobs directing the progress of their business and are rewarded by greater value and potential dividends. Please notice that we are not tying the owners’ regular compensation into this measure of success. That’s because the success of the company is due to the efforts of all employees and should reward the agency’s owners accordingly – whether they are active in the agency or not. If the agency generates more earnings (profit after taxes) than it needs to sponsor its future growth, the owners may choose to give themselves dividends according to their ownership – not according to how valuable each was to the agency per se. And, of course, the growth and continued profit of any company adds to its terminal value (the value achieved by the owners upon their retirement or residual value if they work until they die). That the ROE (Return on Equity) that is the primary ‘pot of gold’ for business owners.
The measure of success of owners, like any other employee of the agency, depends on their performance in the role that they assume in the agency. If a producer, they should be paid like any other producer. If a manager, they should be paid like any other manager. We have a client that is owned by a husband and wife. She is the primary service agent in the agency and manages it. He works in the agency as the maintenance person, making sure the building, offices and equipment is always working properly and in good condition. She is paid $150,000 for her two roles (in proportion to how much time she spends in each) while he is paid $29,000 for his role. At the end of the year, they commonly split 50% of the earnings (the rest stays in the agency to sponsor its growth, employees, etc), which could generate a nice six-figure check to each of them. They decided (many years ago with our assistance) that they should earn exactly what it would cost to replace their functional efforts if they had to replace one or the other of them. In that way, their expenditure for their efforts is “fair and equitable” compared to the cost of their other employees, but they are rewarded for their business success at the end of the year based on the levels of success they can drive each year. By the way, two employees in the agency make more than the owner because of their productivity and contribution to the agency’s success. Those two employees are heading for ownership within a short period of time when the husband and wife retire.
Producers’ compensation has been muddied by the desire of every agency to pay straight commission (ie: We pay for results) and the need of the employees to have stable compensation levels with which to sponsor their families’ and their lifestyles. However, whether we use salary, draw, commission or a combination of these gauges to pay a Relationship Manager, the measurement of their success can be boiled down to two things, 1) revenue from sales and management of existing relationships, and 2) levels of activity sufficient to generate the target revenues each year.
We pay producers for the next year based on the past year’s revenue results. So if a producer has generated sufficient revenue to warrant $75,000 personal income (and that is sustainable through retention and similar production in the following year – this discounts multi-year deals and one-time big sales), his next year’s income will be projected (and paid) based on $75,000 (or a close 80% – 90%) of that expectation. We do NOT try to pay the lowest regular compensation each year with bonus money making up the difference in traditionally successful producers because they are probably living up to their historical earnings level and need that money on a regular basis to support their lifestyles. And most agency owners don’t pay themselves that way either (If it’s good for the goose…. the fairness doctrine at work). It is demeaning to pay someone who you and they know will earn $75,000 at a $40,000 rate until they (again) prove the $75,000 every year.
While compensation for producers is determined by their overall revenue production, whether they are invited to stay employed at the agency during the year should depend on their levels of activity. If your Relationship Manager invests most of his time serving his existing book of business, he is NOT in a production role, he is an Account Executive, and he should be paid accordingly. Even as an account executive, he may sell some insurance and will achieve additional income accordingly, but we are not expecting him to perform at the high levels we expect from Relationship Managers who are devoted to building NEW relationships with folks we do not yet insure (thereby growing the agency each year). Those Relationship Managers may need to devote some time to maintaining relationships with clients they have already sold (in order to assure their retention) and they receive part of their income for the retention of those clients. But their “bread is buttered” primarily by introducing the agency to prospects and converting them to clients. These Relationship Managers are worth their weight in gold. The Relationship Manager’s goals each year involve their income expectations and are driven down to how many visits they need to make with clients and prospects each day, week, and month in order to assure their success. THEIR MEASURE OF SUCCESS IS THE ACHIEVEMENT OF THE REQUIRED ACTIVITY EVERY WEEK MORE THAN THEIR SALES, THEMSELVES.
This article addresses the measures of success, not the “HOW” to pay producers. We have other articles and consulting advice to maximize the effectiveness and motivation of producers through their compensation program – call us at 800-779-2430 to talk about that.
The measure of success of any customer service job is how many customers (and how much revenue base) they can service. This is illusively simple. The more clients an employee can manage and the more revenue he or she can manage each year, the more they are worth to you as an employee. So the measure of success and of compensation is the number of employees serviced and revenue base of those clients on a rolling 12-month basis. You can establish a report from either AMS or Applied and from most other systems that will automatically give you and the employee that information on an annual basis.
While you don’t pay service employees on a commission, in fact their existing compensation divided by the size of their book of business tells you what percentage of the commissions generated they get as compensation. If you are satisfied that the service employees are earning a fair percentage of the commission that is competitive and still permitting you to earn a profit from their efforts, keeping that percentage stable will give each employee a raise in accordance with their performance every year. The most important part that will motivate the employees .once they understand the implications, is giving them the report of their own annual performance every month. They will soon realize that they are looking at their potential raise when raise time approaches.
Of course, this principal is more complicated in execution (what if you’re currently paying too much or not enough to one or more people), but this gives you the concept and we can help you tailor it to your agency.
Administrative employees who do not deal with customers are actually almost treated like owners from a measurement standpoint. Like other employees, we determine their value to the agency based on their current compensation divided by the agency’s “operating” income. Operating income is limited to commissions and fees, the rest accruing to the benefit of owners, but not of employees. And the measure of their future value is their percentage of compensation to operating income as that income stream grows.
Managers are judged by two things, growth to expectation and profit of their responsive department. All other things aside, their future with the agency should be dependent on their ability to plan for growth and profit each year and motivate their employees to achieve those goals through implementation of appropriate action plans measured monthly by the benchmarks of every action plan and objective. They earn bonuses for achieving more than the combined growth and profit projected and will earn raises accordingly – based on their fair compensation for the prior revenue base growing as the revenues grow, subject to maintaining a sufficient profit margin.
We can help any agency specifically tailor a compensation program to their situation and needs. No two agencies are exactly alike so tailoring is needed in every case. However, two caveats must be mentioned in case you use this information to “do it yourself”. First, the Fairness Doctrine, that is used by every employee to demand more money because they “work hard” and shouldn’t be penalized just because the agency hasn’t done well in total. THE WORLD IS NOT FAIR! GOOD PEOPLE ARE HURT AND DIE! SOMETIMES THE BAD PREVAIL! And, no, Toto, you don’t get a raise if we don’t grow or we don’t make a profit in the agency. And for those “hard workers”, you must sometimes point outside the window to the folks who are digging ditches. They “work” harder than any office worker, but may not be paid as much because they are not as financially productive. Similarly, if the growth and profit isn’t available, regardless of fault, raises cannot be given.
The second issue that must be acknowledged is that most of the agency’s employees ARE, in fact, on salary, not on commission. This means that their compensation cannot be decreased when revenues decline or profit disappears. However, they cannot get a raise until the revenue base for which they are earning a salary increases to a level above the highest previous level. And, by the way, if your agency’s revenue diminishes sufficiently, you are not guaranteeing every employee a job. Declining businesses must cut staff if revenue declines sufficiently. It should always be the least productive staff.
If you would have any questions or would like to implement a compensation program in your agency that motivates every employee toward growth and profit, call Al or David Diamond at 800-779-2430.