In this episode of The Digital Broker, Steve and Ryan examine compensation structures and the impact they have on insurance agency operations. By listening to this episode, you will learn:
- How the compensation structure makes or breaks an agency
- What a typical compensation structure looks like inside an agency
- How increasing or decreasing different commission points incentivizes different behaviors
- How to design a compensation structure that scales, maximizes potential and pays everyone fairly
Ask 10 principals to name the challenges facing insurance agencies today, and about 9 of them will say something about motivating producers to get out there and produce. After all, that’s what feeds agency revenue: new business and renewals. In an effort to drum up both of those, principals will sometimes apply compensation structures that are all over the place. This is especially the case at smaller agencies, where business is done more informally, with agents and brokers cutting each other in on improvised, handshake deals.
But if your compensation structures don’t make sense, you’re creating headaches for your accounting team, slowing down their operations and taking them away from more important matters. You might be doing the same to your producers, who are already in the habit of stressing out over whether they’re being paid their fair share; complex compensation structures don’t make it easy to determine that.
Moreover, a weirdly designed compensation structure can incentivize the wrong kind of producer behavior, with ruinous consequences. (6:12) You get the behavior that you reward, and there are definitely strategic implications to different compensation structures.
Suppose you’re paying out higher on renewal versus new business—e.g., 30% versus 15%. Does this encourage producers to “sit on their books,” minding only the revenue from existing clients and ignoring the discovery of new ones?
If you go too far the other way with it—spiking the commission on new business and decreasing the one on renewals—you leave yourself open to another problem. (12:18) Say you’re paying out 60% on new business, and a producer of yours secures a $100,000 account. That’s a $60,000 commission—but if you’re only retaining that account for 18 months, it’s unlikely that you’ll recoup the cost.
Does this mean you ought to keep commissions even—say, 35% on new and renewals? We don’t think so. It sends out the wrong idea: that a producer ought to treat new business and renewals the same. (15:52) In our opinion, a producer’s primary goal ought to be to go out and generate new business. We’re okay with paying a much higher commission on new business to incentivize that, but only with some safeguards in place.
First, you have to set a minimum amount of retention on the new business in order for the commission to kick in—say, three years. This protects your salary-to-revenue ratio, keeping you from paying out amounts you can’t afford. Second, consider pairing your producers with an account executive who can concentrate on renewals. (16:40) Some agencies are already doing this, with stellar results. The producers will go out there and close a new account, which they then turn over to account executives, who are like producers but without the bias toward new business. Whereas producers excel at dazzling new clients, account executives thrive on keeping current clients happy—and renewing. Now you’re maximizing. Now you can scale. You won’t ever see a multi-million dollar book of business without a significant team like this behind it.
But we come back to the question of the compensation structure. Now that a team is in on the sales process, shouldn’t it have some ownership of it? Of course it should—we went over this in a recent episode. Producers have historically owned the whole sales process, and some of them might be loath to part with any of it. But when an operations team is successfully managing a sales process, it’s a boon for the entire agency—including producers. With so much follow-up and follow-through being handled by other people, producers can now go chase other opportunities; the ones they work on will have a higher close; fewer touch points will get in the way; and so on and so forth.
But this process doesn’t pay for itself, and account executives don’t come cheap. It is only fair to reconfigure the compensation structure to pay everyone their fair share.
For the good of the accounting team, compensation schedules ought to be simple. For the good of your producers, they have to be balanced and strategic. For the good of your entire agency, they must be fair and inclusive. Why do you use the compensation structure that you have, and does it make sense to keep it that way? Are you using one that was drafted a long time ago and has since become outdated? Is it time to reconsider it in order to scale your operations?
If you want to work out the answers to some of those questions, we invite you to join us at the Digital Broker LinkedIn group, where insurance agency professionals get together to talk operational excellence. Didn’t like the compensation structures we described? Have you figured out a structure that works better, or experimented with one that didn’t work at all? Are you a producer who has had it up to here with what we’re saying? We want to hear from you. Join us and talk.
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