28 INDEPENDENT AGENT n April 2013Think your producer compsystem is driving results?You might be surprised.BY SUSAN L. HODGESSMART AGENCYBY SUSAN L. HODGESSMART AGENCY
yAGi stuDio/Getty imAGes April 2013 n INDEPENDENT AGENT 29New business, higher commission.Not enough new business, see rates for renewalsgo down. Throw in some non-monetary perks.It seems straightforward.But the reality of producer compensationis different. A recent sales study conductedby Reagan Consulting, Inc., of Atlanta foundthat agency compensation incentives “really donot drive behavior, unless they are perceivedto be grossly unfair, in which case they leadto poor results.” The study also found little orno correlation in most cases between agencygrowth and use of such common compensationapproaches as:• commission differentiation between new andexisting business• equity rewards• stair-stepping of rates paid for new business,and• “claw-backs” (reduction of renewal commis-sion rate until new-business minimums arereached).What does appear to drive producer behav-ior and lead to success, the study found, is acombination of high performance standards andaccountability to those standards. Under theseconditions, sales people who meet or exceed theirgoals may be paid in a variety of ways. In con-trast, producers who fail to meet their goals maysee their renewal commissions shaved until theymeet new-business minimums. But what are thecompensation methods in the real world of agen-cies that are achieving above-average growth? >>MotivatesProducers?
30 INDEPENDENT AGENT n April 2013 John Kuczala/Getty ImagesCompensation’s Four-Letter WordIt’s a producer compensation tool that’s used at agencies around the country—but don’t ask principals to name it. “Can we say ‘reduced commission levels’instead?” asked one. “Yes,” said another, “we use them, but we don’t call themthat.”But claw-back is the best-known term for a reduction in renewal rates paid toproducers who don’t sell enough new business. Under a claw-back, producers whoconsistently fail to produce a minimum amount of new business see their renewalcommission lowered by an average five percentage points. The rate doesn’t go backup until new-business requirements are met.Reagan Consulting’s 2012 Sales Study reported that of 100 firms surveyed, 37%use a renewal-rate claw-back. Yet, growth at firms using claw-backs was reportedat 2.4% less than agencies that don’t use them. Study authors theorized two rea-sons for the lower results: First, firms using claw-backs may have started at a lowerperformance point when adopting the tool. Second, firms using claw-backs maynot expect them to change producer behavior, but instead save commission dollarsthat can used to hire and develop new producers.—S.H.Increasing the AntePritchard and Jerden, Inc., is an Atlanta-based agency with 19 producers. The firmstair-stepped commission rates for newbusiness until 1997, when Jim Bailey joinedthe company and suggested change. “Ididn’t think the stair-stepping model alonewas aligned with our corporate models ofgrowth,” says Bailey, who is now agencypresident. “We weren’t providing incentivesfor people to keep the business they gotthe previous year.”The agency subsequently added a year-end, growth-in-book bonus. Under therevised system, producers who met goalsboth for retaining business and writingnew accounts would be paid at topcommission rates and earn an annualbonus. Bonus amounts would hinge onthe dollar amount of growth produced byeach sales person.That wasn’t all. At the start of eachfiscal year, five percentage points wouldbe withheld from renewal commissions forall producers. “Once they met minimumrequirements for new business, the fivepoints would be restored with a lump-sumpayment,” says Bailey. Producers who failedto meet minimum growth requirements twoyears in a row would have to meet thoserequirements for the next two years con-secutively to regain their original renewalrates.Sixteen years later, Pritchard and Jerdenstill uses this approach. “True producerslike it,” says Bailey. “It’s also a good way toshow younger producers coming off part-salary what they can earn as full remunera-tion if they retain their book and grow.”As a result, the producer compensationstrategy is now aligned with the agency’soverall corporate growth strategy.PowerToolsRJF, a 29-producer Marsh McLennanAgency LLC company in Minneapolis, alsoaligns producer financial compensationwith agency growth by paying for growthof book of business. But Tim Fleming, RJF’spresident, believes it is the agency’s obliga-tion to provide additional compensation inthe form of tools that differentiate RJF fromits competitors. In so doing, says Fleming,RJF lays a foundation for its sales people tobuild ever-growing books of business.“When we think about compensation,we think about providing a sales culturewith resources that empower producers,”says Fleming. “The best producers areentrepreneurs at heart who want to breakthrough that million-dollar barrier, andthen break through the $2-million barrierthat comes next. For us, it’s about creatingrobust resources to help them do this.”RJF’s “PREVENT Process” is such aresource. Producers use a consistent sevenstep approach to learn about a client’sbusiness, understand and expose its risksand create solutions to prevent or reducethose risks. Next, an account team createsa stewardship program that shows how therisk-management solutions affected therisk challenges. Says Fleming, “It’s muchdifferent from telling clients what we didto just go out and market their business.”To calculate a producer’s financialcompensation, RJF examines individualperformance. Those who don’t generatethe required level of business developmentexperience a reduction in their renewalcommission. “Setting minimum new busi-ness standards allows us to distinguishbetween those who really want to dobusiness development and those who wantto sit on a book of business and providetechnical expertise,” says Fleming. “Wheneverything is working, producers feel wellcompensated because they’re growing theirbusiness, and that has an effect on all divi-
IAmagazine.com April 2013 n INDEPENDENT AGENT 31sions of the company. When things aren’tworking for a producer, that also has aneffect on his team and everyone else.”But producer compensation overallseems to be working at RJF. The agency’sorganic growth for 2010 tallied 10.9%,while 2011 organic growth came in at8.7%. Through 2012, organic growth mea-sured 9.3%. Growth rates for all three yearssubstantially exceed the agency median foreach year as tracked by Reagan Consulting,Fleming says, and twice the agency hasreached more than double the mediannumber. “I’m really proud of our team,”says Fleming. “This sales platform is real.”One Rate, UndividedKeith Stone, principal, CFO and COO atGibson Insurance in South Bend, Ind. andthree other locations, knows about suc-cessful sales platforms. Producers at this90-person, 20-producer firm have writtenmore than $2 million in new business com-missions for each of the past two years.“We’re trying to write 22% of our book togrow,” says Stone. “Growth is paramount inour vision and part of everything we are.”Another VoiceJustin Berry, vice president of sales management at MarshBerry, a Willoughby,Ohio-based agency consultancy, acknowledges the complexities involved insetting and reviewing producer compensation. But he suggests starting witha framework: “When considering changes to a producer compensation model, real-ize that compensation alone won’t produce a long-term outcome,” he says. “Whatwill produce long-term results is reinventing your culture so that everyone in theorganization is held accountable.”Also be sure producers know what they are accountable for. “If growth is theagency’s focus, make sure producers know it should be their focus as well,” saysBerry. “Tell them where you want them to grow, and give them the tools and capa-bilities to do it and to keep doing it.”—S.H.
32 INDEPENDENT AGENT n April 2013 IAmagazine.comLike Carrier, Like Agency?If 80% of business comes from top 20% of clients, what is happening to thebottom 20%? And how are producers being paid for it?One trend Jim Wochele, sales manager at MarshBerry, is seeing at certaincarriers is the creation of small business units (SBUs) designed to handle the bottom20% of company accounts. “Carriers are very focused on both growth and volume,so they’re looking into this,” says Wochele. “Some agencies are considering this,too.”Jim Bailey, president of Atlanta-based Pritchard and Jerden, Inc., says his agencyis pushing minimum account sizes upstream. “We’re doing it because agents mightnot meet their numbers if they’re working on too many small accounts,” he says.What’s more, he says, Pritchard and Jerden is not set up to handle small accountsefficiently. Adds Bailey, “We do not see carriers decreasing commission rates onsmall business.”Jon Loftin, president and COO of MJ Insurance, in Indianapolis, says his firm isfeeling some pressure in the employee benefits business on smaller group accounts.On the benefits side at the agency, fees for services will become more common.“But we haven’t yet changed any commissions because of carrier behavior,” Loftinsays.—S.H.To that end, producers are paid at thesame rate for both new and renewal busi-ness. Sales of value-added services, suchas loss-prevention contracts and fleetmanagement programs, are also compen-sated at this rate. “We’ve found this reallyeliminates silo-ing,” says Stone. “Peoplewould try to maximize commission and feeincome at the expense of selling claims orconsulting services because they didn’t getpaid as much. When we leveled the playingfield, those silos went away and we have abetter work team than ever.”Stone has done the math and knowsthat if the firm went to a 40-25 commis-sion split for new business and renewals,agency profits would rise. “We’d pay ourproducers less,” he says. “But our system isdesigned to create growth—and if we cando that, we’ll pay premium compensationfor premium growth.”Gibson Insurance has tried variousproducer-compensation methods overthe years and found, in short, that sticksbreak and carrots grow. “Our people aremotivated by two things: money andrecognition,” says Stone. “But money isn’tthe prime motivator. These people want towin!”To make that happen, the brokerageimplemented production teams in 2008.Each of three teams in property-casualtyand one team in the benefits department isstaffed with “door-openers,” or employeeswho make appointments; technical peopleand sales experts. “Our teams have been ahuge success,” says Stone. “True producersare freed up to hunt new business and itworks. For a firm our size, I’d stack up ournew business against anyone’s.”Two Sets of Stairs“There’s not an agent in the country whodoesn’t think about producer compensationall the time,” says Jon Loftin, presidentand COO of MJ Insurance, in Indianapolis.Principals at this 28-producer brokerageuse a tiered system to pay for both newand renewal business. The more businesssales people write, the more money theytake home. Producers can also earn theirway into a stock-purchase plan and qualifyfor an annual incentive trip. “But tieredstructures don’t change non-performersinto superstars,” says Loftin, “and carrotsand sticks don’t drive producer behavior.”Then what does? Loftin says it’s theagency’s ability to provide value. “Riskmanagement, loss analytics and wellnessprograms are among the tools customersup-market are starting to demand on thebasis of value,” he says. “Our challengeis to deliver these services in a mutuallybeneficial way.”Equip producers with value-added prod-ucts and services to help them succeed,Loftin advocates. But also weigh totalemployee expense against the cost of pro-viding the firm’s value proposition. “Whereagencies win or lose is the way they com-bine producer and non-producer expenses,”he says. “In our opinion, comparing yourproducer expenses as a percentage ofrevenue against industry benchmarks inisolation doesn’t provide guidance you canact on. Nor can you compare non-producerexpenses as a percentage of revenue inisolation. It’s the total employee expensethat matters, and it’s up each firm todetermine how to balance these expensesbased on the value proposition they aredelivering.” ISusan Hodges (firstname.lastname@example.org) is an IA senior contributing writer.