PRODUCER-RELATED ISSUES
A hybrid plan rewards both retention and new production
By Michael J. Weinberg
Agency owners need to find a system for producer compensation that motivates existing and future sales teams to a higher level of productivity.
For a number of years, I have had the opportunity to speak to--and with--agents and agency owners across the country. One common theme that always crops up is how best to find, hire and compensate producers. In this, my inaugural column for Rough Notes, I'd like to focus on producer compensation plans. In subsequent columns, I will address other producer-related issues.
When I speak with agency owners, two truths become apparent. First, they all believe that their agency's current plan of producer compensation is the best possible plan (otherwise, why would they still be using it?). And equally true is that each agency owner feels the need to find a better system for producer compensation in order to motivate the sales team to a higher level of productivity.
No matter what we say or do as agency sales managers, nothing in this world has a more motivating effect than money. And, interestingly enough, money can be equally as motivating when it is taken away as when it is given. For that reason, the best pay plan is one that has a meaningful financial incentive for the producer to sell at higher than expected levels.
Typical compensation plans call for either a level commission split for each year the policy is in force, or a "high-low" commission plan that will pay a higher split of gross commission income to the producer in the first policy year and a lower split in subsequent years. A typical high-low plan might call for a 40% first-year split and a 20% split in all other years.
I have two problems with the high-low. First, it doesn't provide any additional incentive. I have never seen an agent work harder for a case because he or she was getting a higher split in the first year. It just doesn't happen. Either an agent is motivated to make a sale or not. Second, I have a real problem with a pay plan that will allow an agent to write a case one year, lose it the next, and then re-write it in third year without penalty for allowing the case to lapse in year two. In our agency, we preach "retention" and I don't like having a pay plan that provides the agent with less incentive to renew the account.
In fact, if I had my druthers, I would like to see all agents paid on a "low-high" split that in my opinion more correctly rewards the agent/sales force for retention by paying higher commissions each year an account renews. After all, the acquisition cost of a new account is high enough before we pay agents a commission. It truly makes little sense to pay the agent such a high first-year split before we start recouping our investment. Unfortunately, I haven't been able to sell the low-high concept to anyone--including my partners!
Ideally, the purpose of any pay plan is to motivate the producers to both retain their existing book and to go out and sell insurance to new clients. The age-old complaint that we hear from agency owners is that their seasoned sales veterans are too quick to forgo the sales process once their book of business reaches sufficient levels to support their lifestyle. And the lament that we constantly hear from agents in return is that they are so busy servicing and increasing premiums on their current book that they have no time to prospect for and sell new accounts. So what is the solution?
The hybrid plan
We thought long and hard about this problem and spent countless hours agonizing over a possible solution. During that process, we adopted two very important concepts for our Sales Center:
First, we had to grow to satisfy both our needs and the needs of the companies that we represent. It is unacceptable to say to an insurance company that we appreciate the fact that they need new business but, unfortunately, since our agents are quite satisfied with their lifestyles, we will be unable to commit to any growth in the future. It is equally unacceptable to say to our support staff that they should not count on raises for the coming year because, again, our agents are quite content with their current income levels and without growth, there can't be any expectation of increased salaries.
Second, no growth costs us money. If an agent's book were to remain level year after year, and the agent's compensation remained level year after year on that same book, then the agency's profit has to go down each year as inflation causes expenses to rise.
From this analysis, it became clear that if anyone's income should go down because an agent sat around and failed to grow a book in any given year, it should be the agent's, not the agency's nor the support staff's. We then developed a hybrid producer compensation plan to reflect this conclusion.
Here's how we worked it out. Let's say an agent has a book of business that generated $300,000 of recurring commission income in 2001, and we were paying the agent 35% of that total, or $105,000. Let's also assume that our budget for 2002 calls for the agency to increase its book by 10%. Proportionately, we need that agent to add $30,000 of commission income to his or her book to keep pace with inflation and contribute to the agency's anticipated growth. If the agent achieves that $30,000 of growth (we don't care if it comes from new business or from growth within the existing book), then we continue to pay the same commission split for 2002. If the agent fails to achieve the agreed upon amount of growth, then we reduce the agent's split to 30% for the following year. If the agent achieves growth in excess of 115% of his or her goal, then we pay a substantial bonus (25% of the excess amount over the goal) in addition to the normal commissions. An agent must be at the 35% level to achieve the bonus. Any agent who has been reduced to the 30% level must meet goal in the following year or be reduced by another 5%. In any year that the agent exceeds goal by 115%, he or she can "regain" a lost 5%. Upon being fully reinstated to the 35% level, the agent becomes eligible for bonuses.
We have found that this plan works very well for both the agency and the agents as long as the agent agrees to and "buys" into the compensation on the basis of being able to achieve a bonus for superior production as well a cut for a sub-par sales effort. Admittedly, agents became discontented in years when their percentage splits declined. On the other hand, those who achieved the higher level of sales and qualified for the bonus have always been the biggest proponents of this plan.
The last issue is producer compensation plans for the new recruit. Many agents are willing to give new agents a draw but are reluctant to pay a salary. I disagree with this philosophy for two reasons. First, in almost all cases, you will never recoup the "draw" dollars if an agent leaves, so it only makes sense to recognize the expense for what it is at the time it is paid. Second, giving a producer a salary makes that person a true employee who is fully accountable in exchange for that salary--and more likely to listen to everything you say. All too often when a salesperson is paid a draw, he or she correctly views that as a loan and therefore does not feel a need to follow your precise marching orders because you have no real investment in the new agent's income. And, from a practical matter, offering a young agent the opportunity to go further into debt (in addition to college loans, a mortgage, car payments, etc.) makes recruiting very tough! It is hard enough to recruit good, young sales talent into our industry without having the added stigma of a "draw."
Good luck to all of you. I hope to hear from you with questions and/or with any producer compensation plans or ideas that you have successfully implemented. *
The author
Michael J. Weinberg, nationally known columnist, speaker and seminar leader, is the managing director of Gateway Insurance Agency where he spearheads the agency's marketing/sales and automation efforts. He invites reader participation and feedback through his e-mail address (mweinberg@gatewayins.com).