How should insurance agency owners be paid?
Until recently this question was rarely asked. Most agencies paid their owners as much as the agencies revenues would permit. Most family owned agencies depleted all profits by the end of each year, preferring to enrich the owners rather than retain earnings.
Well, times have certainly changed!
The two situations that have propelled this change is the decreasing margins in agencies caused by lower commission and contingency rates and a virtually permanent soft market that continues to place downward pressure on rates and premiums. Unfortunately, agency costs continue to rise.
Agency Consulting Group has been assigned to conduct Agency Analysis in a growing number of insurance businesses seeking efficiencies in operations to offset their decreasing revenues. However, when the fat has been cut, what is an agency to do next?
Many agencies (particularly those with more than one owner) have begun a serious analysis of owners’ compensation (as well as producer compensation). The analysis will determine whether or not the agency is paying owners competitive and proper levels of compensation for the efforts provided on behalf of the company. These agent’s have realized that retaining earnings in good years provide a needed buffer when cash needs surpass profits.
In order to evaluate owners compensation levels, a few historical fallacies must be addressed. If the agency owners do not agree that the following are fallacies, any further discussion of revised owners compensation is wasted. Those owners egos will determine their business future. Unfortunately, ego is not a rational driver of business futures.
The first fallacy that must be addressed is the “Busy Syndrome”. Most agents for whom we consult are always on the go — always busy. However, many are far from effective. Being busy is not equivalent to being effective. This is an important concept. Even if the owner is busy, is he/she productively busy — or is the owner opening mail, checking policies and handling duties that could be performed by lower paid employees just as effectively?
The second fallacy that must be contradicted is that an owner should be paid in accordance with his/her percentage ownership in the business. Ownership is compensated through enhanced stock value and through year end dividend distribution (when available). Compensation for work effort should be dependent upon the type of work effort expended. In a professional corporation one of the owners may manage the computer system, another may be the chief underwriter and others may be producers. The value of each job should be market driven. This means that the value of the job depends on what it would cost to replace the owner in that function with another productive employee. The position of the owner’s compensation within the salary range of a job, like all employees, depends on how well and productively the owner performs the functions for which he/she is responsible. Like other types of companies, bonuses can be granted for excellent performance — if the company makes money during the fiscal year. Practically, it is highly unlikely that an agency owner will be fired if the role is not filled to high performance levels. However, in the case of businesses with multiple owners, raises and bonuses should not be freely granted if the owner’s work performance is marginal or only average.
Owners whose primary role is that of a producer occupy a unique position. Their normal annual compensation should be dependent upon the retention and growth of their books of business (like all other producers). The owners will have a much more loyal producer force if they can demonstrate that they must perform to the same levels as other producers to achieve the same compensation levels. Of course, year end bonuses, compensation for management activities (that take away from sales time) and dividends in profitable years will still provide higher overall earning levels to owners of productive agencies.
Many owners who developed their agencies through sales efforts have slowed or stopped sales efforts in favor of managing and servicing their (already sizable) books of business. We have published many Compensation Programs that reflect lower commission percentages in compensation to Service Agents than to Producers. The “Producer” spends most of the time selling (to renewing clients and to prospects). The “Service Agent” has admitted that sales time has been limited by service needs of his/her book of business. While the role of Service Agent is still very important in the maintenance of a book of business, that role can be more easily assumed by qualified Account Executives than could the pure producer’s role. Successful salespeople able to convince prospects to buy insurance from the agency and to close sales have always enjoyed the highest compensation levels in insurance agencies as they do in most other industries.
In order to properly compensate agency owners an analysis should be completed to determine the various job functions accomplished by the owners. The next step is to calculate the percentage of time that the owner spends on each function during his/her normal working year. Next, determining the relative annual value of each function. Finally, the appropriate percentage of time used for each function is applied to the full-time value of that function and the value of all functions are summed to yield the effective value of the job occupied by the owner. The example below illustrates this methodology. We are, of course, available to assist agencies to objectively determine the values of owners’, producers’ and other employees functions in the business.
Example:
Owner “A” has a book of business of $300,000 (commission). He spends 60% of his time servicing and managing that book of business. He also acts as the agency’s administrative manager. Finally, his business grows by approximately $10,000/year (net of new business and retention loss).
* Service Agents in the agency earn 25% commission
* Admin. Managers of this size agencies earn $75,000/year
$300,000 X .25 X .6 = $45,000
$75,000 X .4 = $30,000
Total Job Value = $75,000
Owner “B” is a owner/producer with a $400,000 book of business growing at a 7% average annual rate. He spends 30% of his time as the agency’s sales manager (responsible for hiring, training, evaluating, coaching, and counseling producers and is responsible for the producers’ overall production objectives).
* Producers in the agency earn an average commission of 33%.
* Sales Managers of this size agencies earn $70,000.
$400,000 X .33 X .7 = $92,400
$70,000 X .3 = $21,000
Total Job Value = $113,400