REAP THE REWARDS OF PERFORMANCE-BASED COMPENSATION
You really do get the behavior you reward. If you are experiencing behaviors you don’t want, look for the reward you are inadvertently providing in order to eliminate the behavior.
By Mary M. Belka, CPCU, ARM, ARe, RPLU, CIC, CPIW
Agency owners struggle to shape the behavior of their employees in order to achieve desired results. The questions are the same, regardless of agency size:
- What is the appropriate incentive for account managers to ensure that they provide the highest levels of service for our clients?
- How do we measure account manager performance?
- What are the performance metrics?
- Who should do the measurement?
- What should the reward be?
- Objective evaluation of account manager performance is a challenge for most agency owners. Few are accomplished account managers in their own right, nor do they employ operations managers who understand and/or have actually performed account manager duties. Most owners are producers with a tendency toward rewarding account managers as producers are rewarded-with some measure of commission for “writing new business.” Or worse, simply rewarding all account managers with the same (generally small) bonus amount. This is actually a disincentive for the best performers and can also create employment practices liability (EPL) exposure for the agency in the case of poor performers. It can be hard to justify termination of an employee who received a bonus.
Components that muddy the waters
The account manager position has been sliced and diced until it is, in some cases, unrecognizable, creating additional barriers to consistent performance measurement. In some cases, account managers have become mere processors while compensation has increased with little correlation to performance. A clear account manager position description is a must, and all account managers should have the same duties and responsibilities. I am a fan of the alpha split-consistent and fair, and easy to administer.
Assistants and processors, and outsourced handling of any servicing aspects, are not recommended as discussed in previous columns. These positions have not helped to increase the size of books that account managers handle, but they have increased overall operating expenses and E&O exposure. You would be amazed how well account managers can handle a bigger book of business when their compensation is tied to performance metrics.
Technology has affected many servicing aspects; but in most cases, again, it has not increased the amount of revenue that account managers are able to handle, nor has it increased the ability of agencies to grow.
Unfortunately, most agencies continue with obsolete practices while introducing the new, fearing “pushback” from employees, and thus are unable to harness insurtech to their advantage. The resulting inefficiencies have blunted the ROI that properly implemented technology can provide.
For an accurate measurement of performance, requirements could include:
- Rule number one: If the agency does not make a profit, no one gets a bonus.
- Rule number two: Producers never receive a bonus-they are paid commission and can be bonused with increased commission when they exceed established goals.
- A strategic plan, including primary goals: growth, profit, and retention. It doesn’t need to be complex, but there needs to be a plan. Individual goals are related to overall agency goals.
- Operations management. The individual measuring performance should be the person (there should just be one) to whom account managers report, with the authority to correct any issues, up to and including termination.
- Consistent procedures, position descriptions and metrics in place.
- Appropriate activities and reports set up in the agency management system (for instance, for measuring up-selling and cross-selling, and tracking retention and system errors).
- A recommended “dry run”-usually six to 12 months prior to “making it real.” The agency can establish goals and metrics, tracking results and tweaking as needed. This allows employees to begin working in a performance-based environment while getting acclimated to a new way of being compensated in the future.
Performance-based compensation components
The performance components are those related to all aspects of the servicing role. They include up-selling and cross-selling metrics-but no new business sales metrics. That is the purview of producers, not account managers. You must measure-and reward-the behavior you want.
Personal lines and small commercial lines account managers may be responsible for handling new business call-ins. This is not “sales”-it is part of the account manager’s responsibilities. This can skew the size of book that can be handled.
Avoid being all things to all people and quoting with multiple carriers. Pre-qualification and target client parameters are a must. The agency should work to control transaction cost and the types of accounts written-and adjust to avoid low net accounts of any size.
The primary components, all of which are objectively measurable (except one), are listed below. The agency sets the min-imum goal/standard for each. If the account manager misses the minimum standard for any component, there is no bonus. The idea is to perform all components to standard-because all are essential to doing the job properly. This helps to pinpoint areas for additional training, coaching, and education.
- Size of book handled
- Cross-selling-account rounding for existing clients
- Up-selling-higher limits, better coverage on existing policies
- Maintaining minimum backlog/workflow standards
- Error ratio-some like to invert this to an “accuracy ratio”
- Automation acumen/use
- National designation parts completed-recommended minimum of one part every two years to remain employed/one per year to be eligible for bonus
- Surveys/input from under-writers/clients/peers-only subjective component
Attendance-about 80% of my clients include this: must be present to win, even if one works remotely-time clock software recommended.
When considering performance-based compensation, remember that:
What gets measured gets done.
These components should be weighted each year as a percentage of the total score. The easy route is 10% of the individual’s total score assigned to each of the 10 components, totaling100%. For instance, if you are concerned about retention, you can weight retention, cross-selling, and up-selling at higher percentages in order to create emphasis, since there is direct correlation to overall retention. I would not recommend changing the weights more often than annually. They can vary between departments, based upon the goals and the results each is trying to achieve.
What gets rewarded gets repeated. The basis for this approach is using a base salary plus bonus. When transitioning from traditional flat salaries/raises, it’s actually a plus if salaries are lower than average. It is affordable to shift to a bonus approach. It can be a little more challenging if salaries start out high. The idea is never to give raises again; compensation is in the hands of the individual based on performance. Account managers who do not reach minimum standards may need training or, over time, may no longer be a match for the agency.
Agencies should avoid paying commission to account managers. There can be one-time finder’s fees for referring business to the agency, but there are potential EPL and/or wage and hour issues for paying non-exempt employees on a commission basis. Account managers who are currently paid commissions can transition the first year by raising base salaries to include commission amount paid, then moving forward with a base salary/bonus performance-based structure.
Bonus is determined first by whether or not the agency has made a profit. If the agency is profitable, the agency owner determines the amount that will be made available for bonuses. Individuals are then rewarded based upon reaching/exceeding all minimum metrics. Employees need to see the correlation between profit and their contribution to the whole. They learn to control what they can control-and the agency will be better because of it.
You get the behavior you reward. An account manager’s book of business can easily be increased when someone leaves. This is a good time to consider redistributing the book rather than hiring an additional person.
You would be amazed how capable people become when they know they can increase their compensation by handling more. In several agencies, account managers have asked management for this opportunity when someone leaves. It is heartening to see account managers run their desk like a business when the agency is run more like a business.
Employees may begin to care more about expenses if you use this approach; be prepared for tough questions if the agency is not profitable and employees are holding each other accountable to assure profitability-and thus increased compensation!
You really do get the behavior you reward. If you are experiencing behaviors you don’t want, look for the reward you are inadvertently providing in order to eliminate the behavior. Add rewards for behavior you want.
Benefits of performance-based compensation for account managers include:
- No more “raises.” People know the performance standards each year and they know how they are performing because their performance weights are tied to agency goals. They focus on what they know you want done. The focus may or may not change somewhat from year to year and can be adjusted accordingly.
- Base salaries can begin where folks are now-just back into it.
- No more “I need this amount of money … .” Someone who needs more money knows how to earn it-through performance.
- Performers love this system; those who are not good performers do not welcome it.
- No one’s pay has to go down when starting this approach. You can “subsidize” it at the beginning. You are doing this anyway if they are not handling a big enough book to justify their current salary levels.
- If you establish department goals as well as individual goals, you will improve teamwork. It is more work to administer, but worth the effort.
- If your focus is too much on individual goals, you will have less teamwork. Balance is recommended.
Mary M. Belka is owner and CEO of Eisenhart Consulting Group, Inc., providing management and operations consulting to the insurance industry. She also is an endorsed agency E&O auditor for Swiss Re/Westport. A graduate of the University of Nebraska, Mary holds the CPCU, ARM, ARe, RPLU, CIC, and CPIW designations.