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Hunters or Farmers? Does your agency compensation system create hunters of new business or farmers of old?
Leader's Edge, July/August 2007
Fast Focus
- Give your hunters effective tools and incentives that reward results.
- A compensation plan should provide "gain" for top performers and "pain" for non-performers.
- Don't forget the support staff.
Just as a nomadic tribe could settle down and build houses once they
found a place that was inhabitable year-round, so too can your
salespeople settle comfortably into a profitable groove once you and
they figure out the right equation for success.
Just like the tribal leader from the past, your leadership as CEO is the
key to success. Your role as the tribal leader is to engage, align,
clarify, support and reward your tribe.
First, engage and empower them in teams and align their activities with
those that support the agency vision and mission. Next you need to
clarify key expectations—what you want to see as far as business
results, service levels, quality standards and individual performance.
Then you need to provide support—the tools, training, information and
communication channels that ensure you and your staff are moving toward
the same goals. Finally, structuring a dynamic reward-and-recognition
program will keep your staff motivated to work toward those goals.
Finding that groove is all about organization and compensation
strategies. Our mission statement for our tribe of producers and support
staff is as follows:
"Create an organizational structure that supports the delivery of
EXCEPTIONAL QUALITY SERVICE that results in superior retention rates
while providing your producers TIME TO SELL."
Organize to Maximize
Adaptation is as necessary for your success as it was for tribal
settlements. Too many agencies have tried to stick with the status quo
only to see their new sales decrease and profits and their effectiveness
slowly slip away.
First, resolve to allow your producers to focus on selling. Turn them
into hunters rather than farmers. Hunters will beat the bushes for new
clients, while farmers just tend to the fields. Ideally, the hunt should
occupy at least 50% of a sales person's time; 60% to 70% is better.
An agency of true hunters has common characteristics. The tribal leaders
make sure the hunters know how much food is needed to feed the tribe.
All barriers to successful hunting are stripped away, and the goal of
delivering sustenance to the tribe is clearly defined. The commitment to
hunting is more than just talk; it is a demonstrated commitment to
recruiting, training, managing, rewarding and supporting the hunters.
To motivate and manage salespeople, create a commission- and
incentive-based compensation system that rewards results. You may even
offer firm equity with success. The salesperson's goal needs to be
clearly stated and aligned with the agency's goals. Make sales meetings
more effective by relating those goals to activities, monitoring
salespeople's progress and holding them accountable for follow-through.
Improved management is not enough, however. You must support sales
activities with a complete program that includes a full-featured contact
management system, marketing tools and sales training. Create
centralized marketing and develop workflows and deliverables that are
standard to ensure you maximize efficiencies and productivities. With
these tools at their disposal, your salespeople will be empowered to
succeed with no excuses for failure.
Building a service team is essential to support great hunters. How those
teams will look will vary at each agency. For instance, you may match
individual producers with an individual account executive, account
manager or client service rep. Or one account executive, account manager
or CSR might serve several producers. The key to a successful team is to
make sure that they have the resources and talent to assume the client
relationship after the sale.
A number of benefits will result from this arrangement: better
coordination of sales, improved client service, higher retention, and
multiple agency contacts for the client. Expect that your teams also
will be better equipped to make decisions and solve problems. The result
will be lower service costs, more efficiency and better productivity.
Communications and quality of service will improve both inwardly (inside
the agency) and outwardly (to the client).
Finally, let's go back to building your tribe. Do not make the mistake
that so many tribal leaders make: that is, just letting anyone join the
tribe. Yes, most of you test your hunters with profiling tools, but not
enough of you test the people that support your hunters. Since your
tribal support is responsible for managing the relationships of all your
clients, why would you not test them?
Reformat Rewards System
Sales goals, team efforts and accountability will be very effective in
the right atmosphere, which is ensured by a great compensation plan. But
how do you know if you have an effective compensation plan? Ask yourself
these three simple questions:
- Is your plan driving desired activity?
- Is your plan delivering the results your agency needs?
- Are my producers producing, or are they constantly coming up
short?
How do I define a compensation system that is ineffective? Try this: "A
poorly designed pay plan causes salespeople to focus on the wrong things
or causes them to stop selling completely—either because they have
surpassed their goals, have no realistic chance of attaining them or are
not properly compensated for selling versus servicing."
I often ask clients what keeps them up at night, and I hear comments
like:
- Our top performers max out and quit, while low performers stay too
long.
- Too many salespeople have become comfortable with the income they
earn from existing customers.
- We want to improve the firm's ability to recruit top salespeople and
become the 'employer of choice.'
How do you keep and reward good employees and create a culture where low
performers either step up or step out? The answer is in a compensation
plan that provides gain for top performers and pain for
non-performers—an incentive compensation program, which extends to all
team members, producers, account execs (AEs), account managers (AMs),
CSRs and administrative employees that better rewards desired activities
and results.
A solid compensation plan is performance-based. It recognizes and
rewards the achievement of company goals, team or division goals and
individual goals. There is also a discretionary mechanism for rewarding
truly outstanding efforts. It must maintain a proper balance between
salary, bonus and commission. If it focuses on increasing profit and not
just revenue, the overall agency results will be greater.
Let's discuss the problems with many agencies' current compensation
plans. By far the biggest issue is that producers are not effectively
motivated to sell. The commission percentage is high for both new and
renewal. There is no goal setting and no punishment for not generating
new business. In essence, the plan allows the producers to earn a
comfortable income and their books of business stop growing. For support
staff there is no "skin" in the game—no pain and gain, which means that
support staff compensation is not aligned with the agency goals and
objectives. Win or lose, the support staff still receive the same
compensation.
Contrast that with compensation plans that truly are effective in
today's market. Agencies continue to provide a good commission on
first-year business to producers but are more focused on new sales than
customer maintenance. Renewal commission percentage is significantly
less in year two and beyond. As a matter of fact, in year two and
beyond, the customer is owned by account service teams, not producers.
This makes some sense because service and retention is the key to
success. But how do we align the goals and objectives for everybody?
Consider the following:
- How about big commissions on new business;
- Incentives pay for exceeding goals (more about this later);
- Renewal commissions around half of new business commissions;
- Penalties for not achieving sales goals and retention rates;
- No commission on small accounts; and
- Skin in the game for support staff.
Realigning Compensation
Many people struggle to figure out how to realign their broken
compensation systems. We advise freezing the compensation structure for
the current book of business and implementing the new structure for new
business. Incorporate incentive plans to help offset the producer pain
(though not real!!) and incorporate penalties if new business goals are
not obtained.
Do not make immediate, dramatic changes in compensation plans as it will
have a negative impact and impact morale. Phase in the changes over
time, perhaps by gradually reducing renewal commission percentages. For
instance, if your current plan offers a healthy commission for new and
renewal business, reduce that renewal rate three percentage points in
year one, another three in year two, four in year three and five in year
four.
Incentive or bonus plans can be used to alleviate producer fears that
they are going to lose under the new scheme. If your basic new business
development goal for a producer is $100,000 and your standard commission
is 50% for new business, there is nothing wrong with paying 60%
commission back to dollar one if goals are exceeded by 15% or more.
Therefore, if the producer generates $120,000 in new business, under the
old plan you would have paid $60,000 in commission. Under the incentive
plan you will pay $72,000, but hopefully you have additional, recurring
revenue of $20,000 per year above your goal. The dollar impact to the
agency is minimal in year one.
You could also offer rewards and penalties for consistent production.
Increase or decrease the renewal commission percentage based on
achieving consistent production. Your reward system for a producer
whose base renewal commission is 30% and meets his new business
development goal might look like this:
- Three out of past three years, renewal commission increases to 33%
- Two out of past three years, renewal commission stays at 30%
- One out of past three years, renewal commission decreases to 27%
- Zero out of past three years, renewal commission decreases to 20%.
Another penalty system for failure to produce can be based on achieving
at least a certain baseline in production. For example, not meeting new
business development goals or some percentage of the plan, say 85% of
plan, would cause a reduction in the commission percentage. A simple
example follows:
- Base commission on new sales: 50% commission
- Minimum percentage of goal to earn 50% commission: 85% of plan
- For every 1% below 85% a reduction in the new commission
percentage
- To add bite to this structure, make it a 2:1 offset, so if the
producer only achieves 80% of plan, then the commission percentage for
new business is 40%.
Finally, let's take a look at the bonus based on meeting overall agency
goals. A typical plan includes an incentive bonus payment, figured as a
percentage (e.g., 3% to 10%) of the producer's book of business based on
factors such as total agency new business growth, retention rates, and
agency revenue and profit goals. Eligibility to participate in the bonus
plan is contingent upon meeting personal production goals.
The bottom line to this structure of compensation is to truly change the
sales culture of your agency. Reward hunters and hopefully change the
behavior of farmers.
Engage Backroom Staff
For your compensation plan to be truly effective, you must also win over
your AE, AM and CSR staff. Understand that these employees are primarily
driven by base salary but are motivated by incentives. Tie their pay to
overall company goals, team goals and individual goals.
Here are some general benchmarks for incentive pay for support staff.
Consider the following guidelines as total incentive potential as a
percentage of base pay:
- Account Executives—15% to 20%
- Account Managers—10% to 15%
- CSRs—8% to 12%
- Administrative support—5% to 10%.
The naysayers may think such amounts are far too rich. However, if 50%
of the incentive payment is based on the agency achieving its revenue
and new business development goals, along with its retention rate goal,
and 25% is discretionary and 25% is tied to specific individual goals
(not the fluff goals that I often see in performance reviews), do you
really think you would end up with anything other than a true alignment
of gain and pain between you as the shareholder or owner and your
employees? Trust me. There is no better way to increase shareholder
value than to provide the proper incentives.
Finally, everyone on the team must buy into the "gain and pain" approach
to retention and growth. To achieve buy-in, there will be a strong need
to provide them with information. Do not be afraid to share at least the
following basic information:
- Agency commission revenue—prior year and current year goal
- New business development goals
- Retention rates—both by revenue and by number of accounts
- Individual books of business that the support staff service
- Revenue per employee.
I can always tell right away if an agency has an effective compensation
plan for their support staff by asking management what information they
share with their employees. If you do not share basic, critical
information like that above, how can you effectively motivate or align
the goals and objectives of your employees with that of the agency? I
have heard almost every reason possible why management does not share
information, but my favorite is, "they could figure out how much money I
make!" Let's get real. That will not happen. To be honest, the most
successful agencies I have worked with generally have some form of "open
book management." Try it. You may be surprised by the results.
The final key to the success of structuring an effective compensation
plan will be in your continual evaluation and plan revision.
Quantitative and qualitative tests can be designed to determine if the
system is working for your staff, for the agency and for your clients.
Apply guidelines to see if you're getting desired results in sales
effectiveness and overall growth.
In short, you must determine whether the revised plan is allowing your
salespeople to focus on selling—on being hunters—and achieving their
goals with no excuses or loopholes. It all starts with clear agency
goals, clearly communicated to staff. It's built on a platform of
activities that improves efficiency, productivity and customer service.
With such a solid base, your agency will be set for long-term growth.
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