Is “everyone gets a trophy”
a valid reward system?
The surest path to mediocrity is failing to create an
intentional, objective approach to performance-based compensation.
By Cheryl Koch, CPCU, ARM, AAI, ACSR, AFIS, and Mary Belka, CPCU, ARM, ARe, RPLU, CIC
A recent article in Fortune magazine indicated that nearly half of employers are considering scaling back their merit-based pay increases in favor of “peanut butter” raises that are spread among all employees. This “everyone gets a trophy” way of thinking has returned in many companies because of concerns about the impact of inflation on lower-wage workers, uncertain economic conditions, and an attempt to control input costs to a greater degree.
Some companies, such as Walmart, are bucking the trend by continuing to offer substantial pay increases to store managers who are top performers so they will feel like owners of their locations, while others, like Starbucks, are offering uniform percentage raises to all of its salaried employees.
Only time will tell, but we have long advocated a compensation system that recognizes and rewards outstanding job performance. We have witnessed firsthand the positive impact on the bottom line of organizations that understand how rewards really work. Over and over, we have proven that a small group of qualified, motivated individuals, who have specific goals in order to earn quantified performance-based rewards, will repeat that behavior, to the agency’s and its clients’ benefit.
We have also seen the dark side. When agencies reward those who have not earned it, the message is, “Keep up the bad work!” In other words, repeat the behavior the agency has unfortunately rewarded. The underperformers expect those rewards to continue—why wouldn’t they? The surest path to mediocrity is failing to create an intentional, objective approach to performance-based compensation.
Figuring out pay-for-performance for an agency’s salespeople is pretty simple. If a producer sells more, he or she is rewarded with a larger paycheck. Unfortunately, some producers get to a point where that paycheck is sufficient to fulfill their needs and desires, and increased levels of sales activity don’t seem worth the effort just to make more money. Therefore, additional incentives (or disincentives) need to be implemented to keep them focused on their primary job, which is to grow the agency.
Still, a pretty simple approach can be easily put in place by management, for instance, tying renewal commission levels to reaching minimum annual new business goals.
Compensation for service workers, the agency’s account managers, has always been where many owners struggle. Metrics seem to be difficult to configure and obtain, yet we feel it is straightforward once you know what the factors are that contribute to the agency’s overall success. In addition, it’s important to acknowledge that motivation is different between producers and account managers.
While account managers certainly want to be paid fairly, they are not completely motivated by higher wages. Acknowledgment of a job well done and recognition of their efforts, especially by their clients and their managers, are what they crave and often do not receive, either at work or at home. They want to feel that they are in control of at least some aspect of their work, and performance is something they can definitely control.
We offer the following as examples of creating pay-for-performance standards—here are what we consider the top five (of ten or so) components:
- Total revenue handled. If we only had a dollar for every time we have been asked, “What’s the exact amount of revenue each account manager should handle?” As frustrating as this may be, the answer is always the same: It depends.
Books of business in an agency are rarely identical and there are many factors to take into account before determining the proper size of an account manager’s book. Are the accounts simple or complex? Are they large or small? What is the level of activity on each account? Are producers involved? Is the agency still taking payments, encouraging walk-in or call-in quotes, and/or contacting those clients who don’t pay on time (don’t get us started)? Are your account managers also acting as receptionists?
All of that being said, the agency should establish base pay (salary) for account managers based on an acceptable percentage of revenue, perhaps 20% to 25%, and then reward those who can handle more. Again, the percentage will obviously have to be adjusted based on the operational efficiency of the agency.
- Retention. Retention should always be measured at multiple levels. Agency, producer, and account manager retention are the starting points and usually have to be calculated rather than produced by a single report in the agency’s management system. Policies in force (PIF count) as well as total commission should be measured.
Most independent agencies have relatively high retention across the board, but an examination at the account manager level could reveal performance issues. When accounts are not handled timely or communication is poor, retention tends to slip. Be careful to look for “outliers” that are not representative of an account manager’s performance, especially when there is dual accountability for renewal with a producer and account manager involved.
Retention on an individual desk that is high relative to the agency’s average should be cause for celebration.
- Sales. Nearly every account manager has an opportunity to increase revenue through sales to existing agency clients. However, keep in mind that that is not necessarily what they most enjoy doing. Account managers like to solve problems, so sales should be viewed as a component of “service”—a method to avoid a negative outcome for the client in the future.
We seldom see agencies where every account is fully rounded out, leaving a huge opportunity for account managers. Set realistic goals for this activity that takes into account the workload on each desk. And train people properly in how—and when—to have these conversations. It is generally not an effective strategy for an account manager to say during a client call, “While I have you on the phone, I notice you don’t have a ___ policy.”
Sales campaigns require planning and sound execution, not something done on the fly. Compensation for additional sales can be either a percentage of commission (first year only) or a flat amount, whichever best suits the agency’s culture. Caveat: It can also be a calculation included in the overall bonus structure, rather than on a “one-off” basis. Paying non-commissioned people on a commission basis can get complicated.
- Professional development. We frequently write about this key component to account manager success. While most agencies are generous in paying for staff members to take classes, others provide additional incentives in the form of pay increases. Every employee should have an individual development plan that is supported by management and rewarded based on achievement. There is always something new to learn that will enable account managers to better serve their clients and this is directly tied to the goal of increased sales.
No one is comfortable speaking to someone about a topic they don’t fully understand, like cyber coverage or captive insurance or contingent business income. There are literally dozens of places to go to expand one’s knowledge and myriad professional credentials that can be obtained based on growth of knowledge. And a side benefit to the agency is generally a reduction in knowledge-based errors and omissions.
- Adherence to procedures. Once good procedures are put into place in the agency, it is critical that they be followed by everyone. In the best agencies, regular auditing is performed and can therefore be used as a compensation metric.
Those who consistently perform tasks the right way increase the agency’s overall profitability. They should be recognized financially for their exemplary performance and may even like to be involved in training others as another way to increase their income—and that of the agency.
You may be wondering about some of the other traditional measures that have been used to establish reward systems, such as seniority or attendance. While showing up still matters, what really counts is what you do with the hours you’re there.
We have certainly seen the difference between 20 years of experience and one year of experience 20 times over. Longevity can be recognized through the awarding of plaques and pins, but pay should be based on something in the immediate control of the account manager.
This year, for the first time, the Big Ten Conference’s men’s basketball tournament will involve all 18 teams. Although there will be only one winner, everyone gets to participate. We wonder what that does to those who have performed so well during the regular season. What incentive do they have to finish in first or second place, to ensure themselves a chance at dancing into March Madness?
Once again, only time will tell, but until then, we’re sticking with the notion that what we reward is what gets done.
The authors
Cheryl Koch is the owner of Agency Management Resource Group, a California firm providing training, education and consulting to producers, account managers and owners of independent agencies. She has a BA in Economics from UCLA and an MBA from Sacramento State University. She has also earned several insurance professional designations: CPCU, CIC, ARM, AAI, AAI-M, API, AIS, AAM, AIM, ARP, AINS, ACSR, AFIS, and MLIS.
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.
