One of the most significant findings of the survey is that agency owners appear to be pressuring their producers to concentrate on large accounts, rather than on personal lines business and smaller commercial accounts.
BMG compensation study finds that size does matter
By Phil Zinkewicz
One of the most significant findings of the survey is that agency owners appear to be pressuring their producers to concentrate on large accounts, rather than on personal lines business and smaller commercial accounts.
Independent insurance agents in today's property and casualty insurance marketplace are experiencing difficult times, to be sure. After almost a decade of soft market conditions, in which buyers of insurance and their agents were calling the shots, insurers have begun taking a hard line about the types of business they are willing to write and the rate increases they are determined to implement. In times such as these, agencies are hard put to discover ways of maximizing productivity, growth and profitability. Therefore, independent agents sometimes need to stand back and take a look at what the competition is doing.
Business Management Group (BMG), a subsidiary of The Hartford, is a management consulting firm specializing in insurance agencies and brokers. It offers assistance with mergers and acquisitions, compensation and incentive plan design, management and operations, analysis, business planning, human resources, sales and sales management, and automation services. BMG has just released its 2002 Owner, Executive & Producer Compensation Survey. One of the most significant findings of the survey is that agency owners appear to be pressuring their producers to concentrate on large accounts, rather than on personal lines business and smaller commercial accounts. That doesn't mean that they are abandoning smaller accounts altogether. Many agency owners are restructuring their businesses so that account managers or customer services representatives will handle the smaller accounts.
But the survey resulted in some other interesting findings as well. Specifically, it found that the level of compensation for producers is directly related to agency size and individual production. The smallest agencies, with $2 million or less in revenue, average $47,170 total compensation per producer, while the largest agencies, with revenues of $10 million or higher, average $116,487 per producer, according to the survey. The survey also found that, nationally, the average total compensation was $40,000 for new, inexperienced producers and $71,547 for seasoned producers.
In terms of owner compensation, the survey indicates that owning a profitable firm and having the ability to dispense excess profits, such as bonuses, cause owners to place more importance on profitability than on growth. While the size of the book of business and percentage of ownership in the agency are the most important factors in determining owner salaries, agency profits and percentage of ownership are the key factors in determining owner bonuses, the survey found. In general, these bonuses are more a result of available profit dollars than planned results of specific management contributions, according to the survey results.
"Management responsibility and the size of their book of business are the most important factors in determining executive salaries, according to the survey," notes Suzy Hammett, a vice president with BMG. "More than half the agencies indicate that 50% of executives' bonuses were calculated according to the individual's management responsibilities, achievement of goals and agency profits. Individual production and agency growth were other key factors impacting executives' bonus calculations," says Hammett. "More agencies said they are implementing performance-based incentives for managers than in past years. This shows a trend towards increased focus on accountability for executives. We recommend to our clients that management compensation be tied to growth, profit and measurable objectives," says Hammett.
According to the study, commissions remain the most commonly used method of producer compensation. Survey results indicate commissions paid to producers for new business for medium to large commercial accounts did not exceed 45%, and renewal commissions did not exceed 36%. Commissions were slightly higher for employee benefits--up to 48% for new business and 40% for renewals. The study found agencies paying up to 41% for new personal lines and small commercial business and 35% for renewals. The increased emphasis on profitable growth is reflected throughout the survey, according to Hammett. The study found that, in general, owners and producers are paid a higher percentage on new business and a lower percentage on renewals.
"Interestingly, in the largest agencies ($10 million or over), producer commissions were 4% to 12% less than those in mid-sized and smaller agencies," Hammett says. "The difference is likely due to the fact that larger agencies tend to provide additional resources, such as sales centers, central marketing and account executives that increase the cost of acquiring and keeping business, but also increase each producer's productivity, so overall compensation is higher at these agencies."
As mentioned before, a continuing trend reflected in the survey is the focus on larger accounts. Forty percent of agencies reported requiring mid-market commercial producers to give up small accounts. But agencies aren't giving up on small business, according to Hammett. "Instead, the study found, more agencies are establishing small business units to handle sales and service for these accounts to reduce operating expenses and enable producers to focus on larger accounts."
Hammett said that agencies are also using account managers and CSRs for smaller accounts and that, sometimes, they are even paid commissions. She allows that this change requires an education process. Producers may resist moving into areas where they feel less comfortable, so there will have to be additional training, Hammett says.
The survey also found that the amount and kind of benefits and perks offered by the agency are important components of a producer's total compensation package. Fifty-three percent of the survey group provides reimbursement for travel and entertainment expenses, and 36% of the respondents pay a monthly auto allowance averaging $375 per month. One-quarter of respondents offered owners and executives some type of long-term incentive, and 27% offered producers equity in their book. "We find that it is important that producers be rewarded with some form of ownership to attract and retain top talent," says Hammett.
The success of agencies increasingly depends upon strong productivity ratios and compensation is often structured to reflect this, according to the survey. The study found that, on average, 43% of agencies pay commissions to customer services representatives for writing new business, up from 36% in 1998. CSR sales commission percentages averaged 25% for agencies with revenues under $2 million and 15% for agencies with revenues over $5 million.
The study indicates that 19% of the agencies surveyed have sales managers and, of that group, 13% provide their managers with incentives. Of the agencies that provide incentives for sales managers, over 50% do so based on percentage of commission, with the average being 5.8%. Forty percent of the agencies that provide incentives for sales managers use discretionary bonuses.
The 48-page BMG survey population consisted primarily of agencies focused on commercial lines or personal lines business, as opposed to those focused on employee benefits, life and financial services. Over 60% of the responding agencies and brokerage firms derive at least 69% of their revenues from commercial lines, 63% derive at least 25% of their revenues from personal lines, and over 60% derive at least 12% of their revenues from employee benefits and life. They represent the various geographic regions in the United States, as well as the typical urban, suburban and rural environments in which agencies work. For more information on the survey, contact Karrie Bolas at (800) 772-0208 or visit the BMG Web site (www.bmgconsulting.com) *