Willis CEO Rejects New Bonus Compensation Plans

Willis Group Holdings said it will not accept insurers' new bonus compensation plans because they present the same conflicts of interest as the traditional contingency fees given up by the major brokerages two years ago.

The broker first announced its decision to reject the plans, termed supplemental compensation plans, in a written press statement released last Monday. A day later, Willis' chairman and chief executive officer, Joseph Plumeri, reiterated his position in an exclusive interview with National Underwriter.

“As currently designed, the proposals do not afford a conflict-free environment for the client, and we are not going to take them,” Mr. Plumeri in the press statement. He added that the decision was not based on the plans' legality.

Willis did not name the insurance companies involved, but described the plans as relating to performance-driven elements dealing with retention, growth and profitability.

During the NU interview, which took place during the Risk and Insurance Management Society's annual meeting here, Mr. Plumeri said his intention “is not to show up carriers, but to stand by our principles.”

“Any formula that suggests business be given to Tom, Dick or Harry based upon anything retrospective or prospective is a conflict,” he said.

Willis was among those that voluntarily gave up contingency fees after a probe by New York's then attorney general (now governor) Eliot Spitzer found evidence of bid-rigging and account-steering on the part of a number of the major brokerages to trigger volume-based bonus payments. Willis was the first to voluntarily end contingent commissions, and Marsh, Aon, and Arthur J. Gallagher later followed suit.

Mr. Plumeri said the latest supplemental compensation plans being shopped by carriers amount to “numeric semantics.”

“We're dead set against contingency fees,” he told NU. “That doesn't mean we don't want to get paid. We just don't want our pay to be based on any particular set of circumstances that could lead to conflicts with client interests.”

“I don't know why we can't simply make a deal that companies pay us a fair commission and that's that,” he added. “Why must there be some extra motivation to place business with some particular carrier? Then it just becomes a race for companies to get the attention of the broker, rather than focusing on doing what's best for the client.”

Even if regulators or attorneys general sign off on the latest bonus agreements, Mr. Plumeri said he wants no part of them. “When we were kids, and you did something you probably shouldn't have done, you used to say, 'There's no law against it.' But that's not the way you should run your business.”

Mr. Plumeri angered independent agent groups in the past with remarks about the need to do away with contingency fees altogether, but this time around the Willis statement said “such supplemental plans are best housed in an agency relationship.”

What's the difference?

“Our conflict comes with the fact that as brokers we represent clients to the market,” he explained. “Agents represent markets to the client, so in that context, if they earn contingency fees from the carriers they represent, that's okay, as long as that's disclosed.”

Mr. Plumeri spoke with NU hours before a CEO panel hosted by RIMS, in which he had been scheduled to participate before cancelling his appearance a week earlier. Explaining why Mr. Plumeri pulled out, a Willis spokesperson said the CEO felt there were too many panelists to allow for any substantive discussion.

Participating on the panel, Marsh CEO Brian Storms said his firm “is going to take time to examine the issue. We're going to talk with our clients about what they think about it. Whether or not they are satisfied is our ultimate priority.”

Aon CEO Greg Case said, “We don't know what the definition of 'supplemental' is yet, but I can say for sure that we're not going to do anything to jeopardize our relationship and credibility with clients.”

J. Patrick Gallagher, chairman, president and CEO of Arthur J. Gallagher & Company, said that he, too, would “sit down with clients and say, this is up to you. If the value is there, how are we going to get paid? We are committed to transparency.”

However, Evan Greenberg, president and CEO of ACE Ltd., said that “if these supplemental commissions are based upon the behavior of a brokerage, as distinguished from an agency, I don't like them.”

“Transparency does not eliminate conflicts…For brokers, there should be no contingency fees unless it's one negotiated between a broker and [a] client,” he said. “Frankly, it's a little cynical to me to even be discussing this after all that's happened.”

Assessing the impact of Willis' announcement for investors, Bear Stearns' analyst David Small said it is now more difficult for other brokers to accept the payments. He reasoned that Willis will use the fact it does not accept supplemental commissions as marketing leverage in requests for proposals with clients.

He also said broker Hilb, Rogal & Hobbs could benefit because much of its business is agent related. In 2005, HRH entered into an agreement in Connecticut saying it would no longer take volume-based commissions, but would take those based on profitability.

James B. Auden, a senior director for Fitch Ratings in Chicago, told NU that Willis' move may also force insurers to go back to the drawing board and develop compensation plans that avoid perceptions of conflict. He noted that the next indication of where the whole discussion may be headed could be an analyst's conference call on Monday, May 7 with executives of Marsh & McLennan Companies.

Last year, Chubb, Travelers, Zurich, ACE and American International Group entered into deals with attorneys general and agreed to pay hefty restitution and penalty amounts to dispose of accusations of involvement in the contingency fee scandal.