Why pay producers 35 percent on new business rather than the 30 percent an agency might pay for renewals? Or why pay 40 percent for new and 25 percent for renewals? These types of commission splits are within the industry standard, but is this the best system for paying producers? Do these compensation rates motivate producers to perform at their peaks?
Traditionally, paying more for new business will incite producers to grow their books. Financially, though, the extra amount is insignificant in the broad scope of compensation if retention is average. For example, consider the fairly common scenario of a producer with a $350,000 commission book, 0 percent growth, and 90 percent retention. This leaves 10 percent of the book, or $35,000, as new annually (not net new, just new, and it is important for agencies to measure and manage both metrics). If the producer is paid 35 percent new and 25 percent renewal, he or she earns an extra $3,500 annually ($35,000 times the percentage difference between new and renewall, or times 10 percent) for new sales. Even if the split was 45 percent new and 30 percent renewal, the extra money for new business is only $5,250 ($35,000 times 15 percent) annually.
Is this really enough to motivate producers to bust their butts writing new business? Many agency owners and managers tweak new business commissions to get producers to sell more when truthfully, they cannot tweak it enough to make a positive, material difference. I haven't met many producers willing to work extra hours to make $3,500 more. In agencies I have visited, most producers who are paid more for new business do not grow their books more quickly than producers whose new and renewal splits are the same. Sure, there are exceptions but as a rule, I don't see a major difference. If the higher commission rate is not enough to motivate them, then why pay any extra? The extra commission is just a waste of money.
Some agencies take paying more for new business to an extreme, and without proper management, the results can be disastrous. I've seen too many agencies offer huge new business commissions– and their producers abused the system by churning accounts, focusing on accounts that will leave within a year or two, and even committing fraud. If an agency does offer significantly higher new business commission, it behooves management to take significant precautions to make sure the system is not abused.
Theoretically, the goal is to encourage producers to write high-quality accounts that stay with the agency for many years. However, the industry's standard pay system does not support that goal. In fact, the pay system totally muddles it because the cause and effect of earning more for writing high-quality accounts is hidden. Under the standard system, it appears producers are paid a higher new business commission simply for the extra effort required to put new business on the books and the renewal commission is for keeping it on the books. Producers have no idea that part of the incentive is to write quality business.
The reality is that part of the renewal commission is supposed to be compensation for writing quality new accounts that stick. This can be seen by comparing the industry standard pay for "given" (or inherited) accounts to standard renewal rates. The industry standard is to pay producers 20 to 25 percent on given accounts while the standard rate for renewals is at least 5 percentage points higher. If producers generate it, they should get paid extra–and the longer the account stays, the more the producer gets paid. Yet producers do not see it this way, which misaligns producer motivation. Instead, once producers acheive a certain level, they focus too hard on saving rather than writing new accounts. This is especially pernicious when producers achieve their income comfort level plateaus at a low levels.
An even worse result of this compensation system is that it rewards producers for not working. Producers are usually paid on all accounts they produce, regardless of whether they work the renewal. Why pay someone for doing nothing?
If the producer does not work an account, it is just like purchasing an account from another agency with a retention payment that lasts the life of the account. For example, a producer sells a $500 account and is paid 40 percent, or $200, the first year. Producers rarely work $500 renewals (the staff works them or they are renewed "as is"), but the producer earns a 30 percent renewal commission anyway. Over the next 4 years, the producer is paid another $600 for the renewals. This equals a total of $800 over 5 years. The agency has effectively paid a price of 1.6 times commission in the first 5 years for a $500 account.
This bizarre compensation system has two more vile effects. First, it creates an entitlement culture. This is where producers believe, "I am due 30 percent forevermore, regardless of whether I work for it or not." How does such an attitude benefit an agency? For those who doubt this point, have you ever seen a producer get upset about losing commission on an account they have not worked in years? If you have, then you have witnessed an entitlement attitude. They think they deserve something for nothing. An entitlement culture does not help generate new sales, improve morale or generate teamwork.
The second negative effect is that producers who do work their renewals are punished. Call it an example of unintended consequences. If a producer is paid X percent on renewals, even if they do not work the renewals, how much more are they paid for working the renewal? I have never seen an agency make such a distinction, so why work renewals? The logic then becomes that some accounts are worked because the account will otherwise be lost, so the agency is always playing defense but never offense.
If producers are paid the same on renewals regardless of whether the producer works the renewal, are renewal commissions a wasted expense? Or are the renewal commissions some form of deferred new business commissions? If it is deferred new business commissions, is the agency overpaying for the new business? Overpaying, regardless of the reason, creates satiated producers who quit trying to build their books and who often quit working renewals. They then begin losing accounts because not enough emphasis is placed on direct rewards for specific effort and results.
For a pay system to make sense, a cause and effect should be clear. If you want specific results, it is best to be direct. Compensation should directly follow effort and results. Pay full new business commission upfront. If a piece of new business really is worth 1.6 times, pay 1.6 times. If it is only worth 1.6 times if it renews 5 years, then pay 30 percent each year for only 5 years! If the producer should be working renewals, pay a renewal rate but only if the producer works to keep the account.
The current system results in unprofitable behaviors, poor growth and inadequate profit margins. It is simple and the industry standard, though. If your agency is ready to look beyond simple and standard, consider re-aligning your compensation with your agency's goals. You may find great results awaiting you.
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