In the over 40 years of agency analysis, we have seen hundreds of different compensation methods based in some way on salary, draw and commission. Regardless of the method by which a producer is compensated, an often-overlooked criterion in compensating producers is to identify the activity requirements that a producer would have to maintain to achieve the desired or proposed compensation level. A subsequent need is for both agent or broker and producer to be able to easily measure that activity and report the results toward the validation levels.
If you feel that your producers have no incentive to grow their books of business and have become “Maintenance Producers,” keeping the same customers, replacing those who leave but otherwise are not growing the agency, you need our services to establish a new Producer Compensation Program for your agency. Call Al Diamond (856-779-2430) to discuss your particular situation.
If your producers are incented to grow but don’t have the guidelines to what they need to do to meet their goals and objectives, Agency Consulting Group, Inc.’s Validation and Management Program is the right tool for you.
Achieving these two goals (concentrating on activity that would normally result in expected revenue generation and a measurement tool that is live and on-going through the year) is the purpose of this simple, but comprehensive Producer Validation and Management Program that Agency Consulting Group, Inc. designed decades ago and has been updated annually.
Most producers need and want a regular source of income even though they know that their income ultimately depends on their commission production each year. As long as the actual sales activity and revenue follows the producer’s historical or expected success levels, the validated activity will result in sufficient revenue production to support the desired compensation levels. In other words, if the agent or broker is paying the producer a salary or draw, that salary or draw remains constant and consistent as long as the producer’s activity level meets the validation schedule. That activity level should result in sufficient commissions and fees to properly pay that annualized compensation on which the draw or salary is based.
HERE’S HOW IT WORKS
First, we identify the activity level needed for the producer to achieve the sales goals that would properly compensate him or her over the course of a year. The first three pages of the Producer Validation and Management Program represent different versions of the Producer Validation Schedule. The difference that the first page uses the common practice of paying producers on a New and Renewal schedule. The second page uses the advanced technique of paying producers for base and growth. Base is the revenue levels the producer achieved in the prior year and growth commissions are generated in the current year beyond the base level in the prior year. For a more detailed explanation of Base and Growth compensation, you can read our article on Growth Loaded Compensation in this issue. The third page is a more recent revision to be used for new producers to the agency (or new to production). It is based on the expectation of the agency advancing funds to sponsor the producer for 18 months while the producer learns or accelerates sales activities followed by an 18 month period during which the producer’s efforts repay the advanced monies of the agency until, after 36 months, the producer graduates to one of the first two methods of compensation.
We are aware that every agency has points in the compensation plan that are unique to that agency. Agency Consulting Group will create a customized version of the Producer Validation and Management Program specifically for your agency to meet the existing or proposed compensation method.
As you and each producer complete a Validation Schedule in the version appropriate for your agency, it will illustrate several things:
- Is the producer’s historical performance and the activity necessary reasonable to expect the level of compensation desired?
- What is the level of activity necessary for inexperienced or new producers based on YOUR projections of their potential Hit Rate and their potential Proposal Rate? For experienced producers, these rates are defined by their own personal production experience.
- It will define the average size of account new producers need to pursue and the size of an existing producer’s prospects based on the experienced producer’s historical average. We have found that producers don’t live up to “industry averages” – they perform at or in comparison to their own historical averages.
This Validation Schedule is the key to the program because it provides a “Reality Test” to determine whether it is reasonable for the producer to expect to achieve his or her desired compensation based on their experience or expected activity levels. Expectations of compensation must be modified to more realistic figures if the current expectations of compensation or activity are unrealistic. Otherwise, both the producer and the manager understand that his or her compensation or expectation of compensation cannot be reasonably reached based on the experience or level of activity that is projected and will be measured during the year by this program.
The final display represents a tracking device that identifies the activities that would lead to sales. This measures how close the producer is to achieving the activity requirements and sales results that would define his or her success in a year. The two Management Reports accomplish that end in 6 month increments.
In our example, the producer desires a $60,000 annual compensation. The agency would provide an initial compensation level of $50,000 as the producer builds the sales volume toward the validation level required to earn the $60,000. In this scenario, the producer produced $150,000 of renewable commissions and fees in the prior year, and the renewals of will “credit” $135,000 after an expected retention loss of 10% due to lost business, soft market, etc. toward his or her compensation in the current year. His or her Renewal Commission rate is 25% (for this example). New Business commission rate is 40% (for this example).
Two target validation schedules are defined, a MINIMUM SALES GOAL Schedule and a TARGET SALES GOAL Schedule. The Minimum Sales Goal defines the level of sales in gross commission income required in order to support the Initial Salary or Draw. The Target Sales Goal defines the level of sales required to support the producer’s desired compensation in the year. The producer receives a copy of the Target Sales Goal as the activity target and the monitor of results. The agency manager retains the Minimum Sales Goal to define the “window” between acceptable performance and the desired results.
For experienced producers, the agency or brokerage uses the producer’s historical Proposal to Sales ratio and Sales Call to Proposal ratio in the appropriate source cells which are defined in the worksheet by a bold border. For new producers, the agency or brokerage should evolve the “expected” ratios based on the agency’s historical experience.
The goals are defined in the Validation Schedule are the Sales Call Target, and the Proposal, Sales, Weekly Annualized Premium and Weekly Annualized Commissions expected. The Sales Call Target defines the activity level necessary for the producer to achieve his or her desired compensation levels based on his or her own history, or, if they have no history, based on the agency’s or brokerage’s expectations of performance toward which the producer is being trained.
The second Validation tab is for the more advanced way of paying producers, the Base and Growth model. On this page, the producer is compensated at the rate of 25% for achieving the revenue level attained in the prior year, regardless of whether the source of annualized revenue is new or renewal. He or she is compensated at the higher, growth commission rate for all revenues generated above the base level during the year (40% in this example). The new total revenue generated becomes the producer’s base in the following year. This form of compensation requires the producer to achieve growth each year and keeps the agency from paying traditionally, higher NB commission levels when the producer’s gross commission income has actually deteriorated from retention losses and/or market conditions. The producer’s goal is to get to the prior year level of gross commission from renewals, policy changes, audits, and new business as early in the year as possible in order to trigger his or her “growth” level compensation for the rest of the year.
The next pages of the program each reflect six months of activity and results of the producer’s activity. The producer, enters the data each week to reflect the number of sales calls made, the number of proposals and sales and the annualized premiums and Commission including annualized fees that will be attained by the sales made that week. The program collates the Year-To-Date results and provides the agency or brokerage and the producer with the calculation of percentage to Goal on each category measured.
All pages in the Producer Validation and Management Program are printable with one-touch. Simply go to that page and hit your computer’s “print” button.
Many agents and brokers can, and have, created their own internal programs to manage validation and record-keeping. However, our program has been in use for many years and is time-tested. We also upgrade it regularly as changes are implemented in the compensation systems.
If you would like a 30-Day Sample Version of this program, call us at 856-779-2430 and we’ll get one out to you. If you understand the program already and would like to purchase a full version, simply call us or go to our website, www.agencyconsulting.com and access it through the ACG Products Tab, the Producer Validation sub-tab. It will lead you to PayPal where you can purchase the full edition at a cost of only $350 and comes with the one-year program including all telephone support, annual updates for a small fee of $200 per year for continued telephone support and program updates, or you can choose the Platinum Edition with unlimited updates and lifetime product support for $600.
If you have questions about compensations programs for producers or non-production staff in your agency, or if you would like more detailed information about the Asset Protection Model of Relationship sales, please call Al Diamond at (856) 779-2430.
