KEEP PRODUCERS ENGAGES, PRODUCTIVE WITH A SMARTER INCENTIVE PAY PLAN
The National Underwriter - Property & Casualty Edition
What can you do to boost your agency out of its holding pattern? How about instituting a smarter pay program? Compensation incentive plans can greatly benefit both an agency and its producers, but for best results they must be carefully implemented.
Benefits include a boost in the firm’s reputation, better relationships with your carriers, happier associates because they’re working smarter instead of harder, and ultimately, increased shareholder value.
Pitfalls come from implementing a plan that is not well defined or completely thought out, and could ultimately result in short-term focus at the expense of long-term growth, higher turnover of producers, greater back-office costs, organizational distraction, the need to continually reinvest in the sales infrastructure, and lost contingents due to lack of quality.
Do the potential problems outweigh the benefits? Not at all. It’s simply a matter of thoroughly considering changes to your plan, then taking a very measured approach to rolling it out.
Twin Goals
Changing compensation often has two objectives—to achieve higher sales performance, and to keep your sales pros motivated. Conventionally, an agency would simply divide compensation between the company and the producer; but we’ve gone beyond the era when such a basic approach would work.
Higher sales figures are not just pulled out of a hat. The effective approach is to develop goals based on a strategic plan. Such a plan must also provide motivation because you need buy-in and continual action by the field staff. Therefore, the compensation must track with the goals.
A strategic overview will reveal the many factors affecting your revenue. Carriers provide compensation based on loss ratio and production. Larger clients, and those you can retain over time, produce more profit. When these factors jump off the strategic plan and into your compensation plan, you can make it real to your producers.
Consider this example:
An agency wants to change from straight-percentage compensation to one that boosts a producer’s pay based on performance on the factors outlined above. They decide to blend that traditional fixed commission with a matrix-based incentive combining quantitative and qualitative measures. The matrix covers four key areas:
- Production growth base incentive: A quantitative measure tied to volume.
- Loss ratio variable: Similar to what carriers use, this qualitative measure ties risk performance to the book of business.
- Average case variable: Another qualitative measure, based on the size of each client’s purchase.
- Persistency/retention variable: A bonus for keeping good clients, which holds down acquisition costs.
One caveat is that these metrics will vary based on the unique position of each firm. Retention, case size and loss ratio are dependent upon the lines of business sold. The economics of your market will affect your ability to increase production.
Most importantly, the historical profitability of your firm will determine how much value you can expect from goals regarding additional business or higher retention rates.
Do The Math
Figure 1A shows the assumptions we’ve made about a producer’s revenues and statistics related to the four variables in our matrix. We’ll use these figures to make calculations on the producer’s traditional compensation and incentive bonus.
 Figure 1B shows our bonus calculations, which use the ranges shown in Figure 2. For example, our producer’s production growth rate is 16.2 percent, which puts them in the metric range of 15-to-20 percent, giving a 10 percent bonus for this factor.
Likewise, match the loss ratio of the clients, the average case size and client retention rate to the ranges given.
Taken together, these bonuses result in an additional $108,295 in compensation based on gross revenues. Add that bonus to their provisional (fixed percentage) compensation, and we see that we’ve boosted the total compensation package from 50 percent to 62.1 percent. That’s a significant incentive that would motivate most producers. And if the producer works hard on increasing all those numbers, the rate could be even higher next year.
Perhaps more importantly for agency shareholders is the fact that this plan delivers the other of the twin goals—it achieves higher-quality sales performance.
Note that I did not say just “higher sales figures.” Performance is a strategic goal, which takes in all the factors that you’re asking your sales person to track.
The sales person with a good loss ratio is contributing to the success of the firm by not taking on bad risks to artificially boost revenue numbers. It is helping to lower incremental support-staff costs by not churning too high of a percentage of new business and increasing the average case size boosts firm efficiency.
All variables, compensation and commission assumptions will vary greatly based upon the firm’s core client profile, product array, profit margin requirements and support services (such as risk management, account executive and underwriting support).
However, the matrix approach ensures high-quality growth during a time when highly competitive rate market conditions warrant not just quantity, but efficiency and quality as well.
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