Bad Comp Structure Can Sink Agency

"They are actually scorekeepers," he said, noting the competition with fellow producers that often keeps agents selling beyond their targets. "Once they reach a level of comfort in their lives, where they are making enough money, it is no longer [new business] production, but the money they make each month that becomes their way of keeping score."

Suzy Hammett, vice president at Business Management Group, an insurance agency consulting firm and subsidiary of The Hartford, said the idea of not rocking the boat is one reason that agencies fail to redesign producer commission schedules.

Often, Ms. Hammett said, when she does operational reviews of agencies, and she looks at the sales results and corresponding profitability related to those sales, she finds that equivalent commission rates are being paid for new and renewal business. "The agency does not want to rock the boat with the producers," she explained.

Both Mr. Diamond and Ms. Hammett said that when they see an agency paying the same commission rates for both new and renewal business, that is a prescription for disaster. There is no incentive for producers to find new business after they have reached a level of financial comfort, they noted.

Without new business, the agency will not grow, and could well find it cannot afford the commission percentages it is paying, they said.

"In older agencies, the agent may be paid 50 percent commission on both new and renewal business, but when expenses are 60 percent of the business, that's a problem," Mr. Diamond said.

What an agency wants to avoid is having producers who are practically "retired" in place, explained Mr. Diamond.

"What I have noticed, especially with owners, is that they feel they have paid their dues and the business owes them back," Mr. Diamond said. "The younger producers become the more productive ones, while the older agents live on renewals. It is not the right way to run any business."

The fallout from this practice can go beyond the agency finding that it cannot afford the current commission schedule.

Younger agents feel that older agents are living off their efforts to grow the agency. Because the older agent is comfortable in his "working retirement," there is no room for younger agents to grow within the agency, a situation that is especially evident in small agencies, Mr. Diamond pointed out.

"It hurts the future of the agency," he said.

To grow, the young agent may leave, hurting not only the prospect of growth for the agency but also any perpetuation plans the older agent may have envisioned with the younger agent.

"This is why all the large brokerage firms are acquiring the small agencies because they are not attracting the younger producers. The younger agent feels there is never a chance to get into management of the agency, while the older agents are just looking to cash in," he said.

"We must perpetuate these agencies, and the only way to do that is to bring in younger agents and design a perpetuation plan," he added.

Mr. Diamond advocates a plan that allows for perpetuation among a group of young agents who have become independent agents because of their disenchantment with corporate life and are looking to strike out on their own.

"We lay out a plan where the owner enjoys the assets of his work but the young people become active in taking over the business," he said.

A successful plan to create incentives in an agency involves the creation of a tier commission schedule, the two consultants pointed out. In this format, the agent is paid a higher percentage for new business and less on renewal maybe as much as 10 percent less.

To bring more incentive to the program, Ms. Hammett said, the commission schedule should be broken down even further. She advocates giving an agent a commission growth goal over the previous year10 percent, for example. If the agent reaches that goal, he or she receives the agreed renewal percentage plus a percentage point or two on top of that as a bonus. If the growth exceeds the goal, the bonus percentage is higher. However, if the agent does not reach that goal, there is no bonus, and in some cases, even a decrease in the renewal percentage.

But commission rates are only part of a compensation package, said Ms. Hammett. Other forms of compensation could include payment for cell phone or a car allowance, as well as a travel and entertainment allowance. But it should all be tied in some way to growth and retention of the book of business, she noted.

She emphasized that to be very successful an additional component to the agency's sales strategy is a strong sales management structure.

"Overachievers do what they do, but others need direction," Ms. Hammett said. "Real success is based on a sales plan that a person puts together."

She said that a successful structure should include the monitoring and posting of sales to develop peer pressure, which can stimulate competition.

Sales management also includes recognition of effort, she said. Recognition can take on the form of awards, trips, golf outings, "fun things" that let top performers know they are being noticed.

When an agency recognizes that it must make changes in order to improve and survive, Ms. Hammett advised that the changes should never be done too quickly, but instead over a few months through a series of gradual changes.

The key to getting producers to embrace any compensation plan successfully is to make sure that it is clearly defined, she said.

"Any commission structure must be easy to communicate and explained," said Ms. Hammett. "It must not be complicated."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 25, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.