Posted on 02 Feb 10
In previous issues, Al Diamond, president of Agency Consulting Group, has shared with us his successful Asset Protection Model (APM)©, a program designed to re-educate customers to view insurance agents as trusted consultants responsible for knowing which client assets need protection and to re-organize insurance policies and implement non-insurable devices to protect those assets. Part of this program is establishing a solid relationship foundation with each client and prospect and implementing a process to maintain the relationship. Pivotal to doing so is a producer compensation program that motivates, incentivizes, and rewards those who embrace and implement the model.
In this issue, we talked with Al about the producer compensation plan he has implemented in many agencies and how it works.
Annie George (AG): Al, I recently attended our annual Peak Performance conference where producer compensation was addressed, including getting producers to perform and tier-ing compensation to that performance, something that has not been done in many agencies. Your program does just this. Please elaborate.
Al Diamond (AD): “Compensation in itself is not a motivator…the motivation has to come from within. A motivated producer is someone getting a reward for activities that he performs because he is challenging himself, sometimes for money, sometimes for other reasons, such as recognition.
“Our compensation program is designed to help those motivated people to achieve their goals and to continue to provide incentives to excel. Our objective is to incentivize producers to perform activities that will make both them and the agency successful. In most agencies those activities are selling insurance. However, we have a growing number of agencies for which the goal isn’t selling insurance, but building and maintaining relationships with clients [the Asset Protection Model©, we previously discussed]. Selling products is the result because that is what happens when we build relationships, but it isn’t about the sale of the product…it’s making sure that the clients are properly protected and our Asset Protection Model© addresses that. Our compensation program, while it works very well independently, is an integral component of the model.
“The program is built on two primary activities: Keeping producers extremely active, and “tier-ing” compensation so that the larger producers, those who are more successful and generate more business for the agency, are paid better than the others. The more successful you are as a producer, the more money you make the agency, the more you will make yourself. This isn’t an arithmetic progression; it’s geometric because the agency’s economy of scale goes up dramatically as producers generate more income. The more revenue (and that is commissions and fees, we’re always talking about commissions) generated by a producer, the more profit he generates geometrically. A $100,000 producer may or may not be profitable for an agency. Certainly a $200,00, $400,000, or $600,000 producer will be much more profitable, will contribute much more than his share to normal agency operation costs, ultimately driving more profit to the agency on a percentage basis.
“Since those successful producers are more profitable for the agency, we can calculate profitability per producer and pay each accordingly. In most agencies, there are different revenue levels (breakpoints) for producers to generate, resulting in greater profitability to the agency. If you can identify those breakpoints in your agency, then you have conquered half the battle. There are normally two, three, or four breakpoints… It can be $100,000- $200,000 at the first breakpoint, $300,000-$400,000 at the second, and $600,000-$700,000 at the third. This will depend on the agency’s expense rate and every agency’s expense rate is different.”
AG: What makes a successful producer?
AD: “It isn’t sales that make a producer successful. If a producer is a professional, knows how to sell the product, deliver the message, and make friends with prospects and clients, then it’s truly the level of activity that defines whether a producer is successful or not. Theoretically and practically, we don’t measure sales; we assume they will follow if he does the right thins every day…(and of course, if the producer is active and never sells anything, then you have to coach, counsel, retrain, or replace that producer…you can’t have a producer who makes a lot of friends but is unable close a sale). But if a producer is a closer, can sell, then we want him to be quite active every day of the week, every week of the year.
“Activity is not defined by phone calls or emails. Activity means face-to-face meetings with decision makers and influencers within target clients and prospects. We work backwards from each producer’s individual needs down to how many activities are needed in order to achieve those goals within the agency. For example, if a producer wants to earn $50,000 this year, and last year he earned $40,000 and his book of business is $100,000 or $200,000, we can identify by the number and size of his clients how many more clients are needed to achieve his financial goals and what the sales activity needs to be in order to realize the goal.
“We go backwards from earnings to the number of clients required to generate those earnings, the number of proposals to get those clients, defined by the producer’s experience. If historically a producer closes one out of two proposals, we know that at least 10 clients are needed…therefore he needs to produce 20 proposals. Then we look at the number of times a prospect needs to be visited before the sale is made. This applies for an experienced producer. If it’s a new producer, we have industry standards that will apply and, as the producer earns his stripes, becomes active, we convert those standards into his own history.
“If a producer needs to create 10 proposals, for example, during the year, and his average is to go on four sales calls before getting to the proposal stage, we know 40 sales calls are needed. This may sound like a lot, but it isn’t. The average agency in our producer compensation program and, certainly in our Asset Protection Model©, has their producers doing between 10 and 15 sales calls [again, this is face-to-face visits] per week. These producers are seeing two types of people: prospects and clients. One of things we do in the Asset Protection Model© is to visit all our clients a predetermined number of times throughout the year.
“The bottom line is we want producers to be active. As we said before, an experienced producer is paid according to his history and a reasonable expectation for success, based on the activity levels he is willing to put in. So if you have a producer who is happy, who is making a couple of hundred thousand a year and wants to make more, but is not willing to work more, he will not be getting paid extra. If he actually succeeds in writing more insurance, there will be an increase in payment.
“Yet there is a hook within our program. One of the things that makes our program work is a contract that stipulates that if activity levels are not met in any two consecutive months – the producer’s draw or salary (his or her compensation) -- will decrease thereafter. However, (s)he can regain the original draw by turning up the activity. The activity is measured very carefully -- by day, week and month, turning our agency owners into sales managers. This is another critical component, owners have to manage their producers… even the best producers need co-counseling and management, otherwise they would have their own agencies.”
AG: When meeting with potential new hires, you ask them what they need to make.
AD: “Yes, when addressing compensation, we ask producers a personal question: ‘How much do you need to run your household?’ This needs to be asked because a producer who is not making enough to pay the bills is under stress…and that stress is felt by clients and prospects alike… who feel that the person is not doing the right thing by them. Therefore, as employers we need to provide our sales force with at least enough funding to cover their bills on a weekly and monthly basis. This applies both to new and experienced producers and ties into the activity levels that sponsor the funding. What happens if a producer has a $100,000 lifestyle, but is not willing to work for it? Then he or she is in the wrong job and needs to find something else. The reverse also exists…there are folks who are happy with less, perhaps $25,000 or $35,000, to support their lifestyle. That’s great, but it isn’t going to support an agency that needs a continuous flow of growth. If an agency keeps this producer, then other producers have to sponsor the growth. It’s a reality check for both the agency and producer.
“We are paying enough to satisfy the producer’s needs… and the rest is coming from growth. The decision for the agency owner is to determine whether this new person, whether he is out of college or coming from another industry, is capable of paying the agency back for the salary advances while building a book of business. Will this person become successful enough that a profit is realized and the agency experiences growth on a continuous basis? This is determined during the interview process, the testing process, checking of references, etc. If you do this, then you make the investment because you believe this person can earn it.”
AG: Typically how long do you give that person to see if he or she will succeed?
AD: “An agency owner has to be prepared to sponsor a new producer for up to three years. You don’t have to overpay the person throughout the three years…but it will be a three-year journey from the time the producer begins to when he has repaid the draw and is out on his own. In the first year, that producer is going to generate potentially as much income as he receives in compensation. Every agency owner knows you are losing a lot of money if a producer generates $60,000 and you’re paying $60,000. But if that producer does this in the first year, then doubles the amount in the second year and triples it in the third year, you’re looking at breaking even during year two and by three year, the producer would have repaid his entire deficit draw and is ready to break into the ranks of commission producers. This compensation program works whether you pay a salary, draw, or commission.”
AG: Let’s discuss the “tier-ing” concept of the compensation program.
AD: “The final component of the compensation program is what we refer to as “tier-ing.” Here you identify at what levels of revenue a producer is worth so much more to you, that he should be earning more as a percentage of commission. The key to this is that it differs from other compensation programs in that when a producer reaches the next tier, we will go back to the first dollar generated within that year and pay an extra commission on every dollar. For example, if you find that for your agency the commission level is $200,000 for that producer, once he reaches this level, he is 20% more profitable to you. Therefore, in lieu of paying a 30% commission to the producer, you will pay 35% on every dollar, not just the dollars above the $200,000 level, for that year. What that means to the producer and to the agency, is that any producer near the tier levels is going to do whatever is humanly possibly to get to the next tier, because he will be receiving a big bonus. Many of our agents have split their tier levels…they will pay additional commission at $100,000 levels so each producer is constantly approaching the next tier and always reaching for that next dollar bump.
“Compensation that ensures the bills are being paid but requires producers to keep up activity levels, along with a “tier-ing” component, makes for very incentivized producers. We found that those producers keep growing… in fact, part of their contract includes that they have to grow their books of business by a specific percentage in order to maintain the same commission rate they received the previous year. Otherwise, if the book shrinks, they still remain in the program, but commission levels revert to a couple of points lower.”
AG: Do you distinguish between new and renewal business and pay different commission rates?
AD: “We don’t look at renewals or new business…we look at the book of business. We identify a stable commission on all business, whether it’s a renewal or new business. This way as a producer you know what you are responsible for each month…you know that 30% of the entire agency book of business is yours. You are motivated to have your clients stay with you. For every client that doesn’t renew, you bleed… it doesn’t make sense to pay 40-50% on new business, and 30% on renewals…if you lose the renewal after the first year, you are paying the higher commission to get the same revenue you got from the producer the prior year.”
AG: Does this program work for any size agency?
AD: “It works for an agency with an owner and one producer and for agencies with $20-$30 million in revenue… it works on any size…depends on the owner and the drive of the producers. But you need to train agency owners as well as the producers so that they are all committed. You can’t implement this program on a trial basis… it won’t work. “
For more on producer compensation from Agency Consulting Group, call Joanne at 800-779-2430 or email at Joanne@agencyconsulting.com.
About Al Diamond
Al has been president of the American Association of Insurance Management Consultants (AAIMCO) and belongs to the American Arbitration Association. He was a charter member of the Quality Insurance Congress. Al also serves as an independent moderator for disputes arising from insurance agency operations, and as a facilitator for mergers, acquisitions, divestitures and internal perpetuation plans.
He is a qualified instructor for the Best Practices of Insurance Agencies programs of the Independent Insurance Agents of America. He has been named Business Skills Department Head for the Independent Insurance Agents of America’s Virtual University.
Al is an identified Expert on business management issues for the AllExperts Website and serves as an Expert Witness in both federal and state courts on all subjects related to insurance agency values, compensation and operations.
Al is the author of THE PIPELINE, a national newsletter for insurance agency principals and insurance industry executives. THE PIPELINE has been in continuous monthly distribution to agents, associations and carriers throughout the United States since 1987.