Al has been part of the insurance industry for nearly 45 years, with strong agency, stock company, and direct writing experience. He has been deeply involved in all facets of insurance agency operations including mergers, acquisitions, and divestitures: perpetuation and strategic planning; organizational development, compensation, and salary administration programs; administrative and financial operations; marketing and automation planning; ESOP; and much more.
Annie George (AG): Let’s talk about the genesis of why you developed the ICP model, and then go into the details of how it works.
Al Diamond (AD): “Traditionally we have paid non-producers (administrative staff, customer service reps) for just being there, for remaining with the agency. The longer they’re with an agency, the more they get paid. Each year, the staff expects a pay raise based on a certain percentage, even if agency expenses go up. What we haven’t considered is whether these individuals have been more productive, remained at the same level, or are less productive than the previous year.
“Every job in the insurance agency – from the president to the receptionist – has productivity measures. Whether it’s in accounting, customer service, or management, individuals have to be measured against whether they’re retaining customers, keeping them happy, adding new ones, and making more money for the agency every year so that there is income from which to pay them. But what happens when an agency shrinks, as many have during this soft market? They’re not necessarily losing clients, but revenue is down and employees still expect another 5% pay raise. Where does that money come from? It either comes from the owner’s pocket or it reduces the agency’s profitability and asset value, which is intolerable.
“We developed an incentive compensation program that pays people based on productivity and profitability – the only way they can get raise is by increasing their productivity. The principal on which an ICP is based is that employees who are more productive and more profitable are worth more than employees (in the same jobs) who are less productive and/or less profitable.”
AG: How does an ICP work?
AD: “Our program involves a three-year cycle. In the first year, compensation growth at the end of the year is based on revenue growth for each department or for the agency, depending on the size of the firm. Salary increases are based on the growth of the book of business for the year. Everyone in the department or agency is pulling together to help grow the book of business. Employees are interested in new production because this is what’s going to translate into a raise for them. Everyone will be extremely concerned about not losing clients because every lost customer might take away from getting a raise the following year.
“During the first year, it’s very simple – the more you grow the more you get paid. If you grow by 5%, you get a 5% raise. The employees themselves are provided with the tools to monitor their growth levels on a daily basis if they want. This allows them to know exactly where they stand at any point in time.
“In the second year, we refine the program and we teach employees that growth is extremely important, but it has to be tied to profitability. We discuss profitability as a percentage of either the agency as a whole for smaller firms or as a percentage of each department in larger agencies. On a daily, weekly, or monthly basis, depending on the agency, we look at a combination of the growth of the agency or individual department and the profit year to date or on rolling 12-month basis. On a rolling 12-month basis, employees will know the percentage of their raise or whether they’re going without one. They will be concerned not only with growing the book of business but also with expenditures and making a profit level that is acceptable to the agency or they won’t achieve the growth rate.
“By the third year, employees know that productivity is about growing the agency and they understand that an insurance agency is a profit-making organization of which they have to be a part. Now it’s time to look at individual growth. If you have a book of business and you’re a customer service rep making $30,000 on a $250,000 book of business, you’re worth 15% of its value, because that’s what the agency is paying you on the incentive compensation plan. The amount cannot go down. But, it can only go up when the growth level of your book of business for your department or the agency exceeds the previous highest levels. This is when we balance out the needs of the individual and that of the agency, understanding that the only way an employee gets paid more is if the agency grows and it does so profitability with him or her as an integral part of it.
“What’s more, employees will never make the same amount of money as one another, as no one works the same way. When you pay all your service reps the same dollar amount, you are de-incenting the highly productive employees, and not incenting the lower productive employees.”
Al explained that the ICP model is also combined with an evaluation program so that the agency owner and managers are still evaluating employees but not in relation to salary increases. The manager determines if the employee stays with the agency. “If you have an employee with a terrible attitude, regardless of how productive he or she is you’re going to terminate him or her.”
AG: I can see this model is effective for team building and a way of getting CSRs to work with their producers to grow the business. How does this impact the employees’ interaction with one another?
AD: “Service people begin to put a great deal of pressure on producers. It’s no longer an arm’s length relationship. The CSRs are now saying, ‘get out of the office and sell insurance.’ This is what should have been happening, CSRs and producers working as partners with the same goals. What’s more, CSRs will complain if someone is not pulling his or her weight. The program gets rid of the deadwood, which is what you want. It offers an agency an opportunity to search for more productive employees, those interested and vested in the growth of the business. If you don’t make changes and still prop up the lesser-productive employee, your really good employees will realize that the playing field is not even and you’ll end up losing them.
“The program empowers employees. They have control over their income. They will start utilizing their automation system better than you ever thought they would. They will realize that anything they can do faster allows them to take care of more customers. The more customers they take care of, the more money they make. And for the first time, employees are pressuring the agency NOT to hire anyone else. The downside is that they’re working to their maximum capabilities and you end up growing the agency beyond what they can do, and you have to add people.”
AG: Do you see resistance from long-term employees, or do they step up to the plate and get with the program?
AD: “The same percentage of long-term employees and younger, newer employees embrace the program. Some have been there for 20 years, but basically have one-year experience multiplied 20 times. Then there are others who are desperately looking for ways to improve things but never had the opportunity to do so. Now they have the ability to make more income and shine.”
AG: What results have you seen? Do those in the program see higher pay raises?
AD: “We keep track of all the agencies using the ICP model. The average agency in the program pays its staff about 20-30% more than the market does for the same job, and their productivity and revenue per employee is about doubled than those who do not use this type of program.”
AG: Will the ICP model work for every agency?
AD: “No. This is not for the uncommitted. You have to be committed to being a profit- making and professionally managed organization for this to work. We won’t implement the program unless we have analyzed the agency and it has proved to be one with a culture that can take this type of productivity-based program. If the agency doesn’t have the right mindset, the commitment and culture, the program will fail miserably, which is why we conduct an analysis first. We talk to the owners and employees and gauge the culture. About two to three out of 10 agencies are ready for the program.”
Al and his group work with any size agency – from those with a small staff to those with hundreds of employees. “An ICP is a no-lose situation for the agency,” said Al. “And a win-lose situation for those who are either good productive employees or those that are there for the paycheck. This becomes evident very quickly, usually within 30 days.”
For more information about the ICP model and any of Agency Consulting Group’s services, please contact Al at 800-779-2430 or via email at al@agencyconsulting.com. You can also visit www.agencyconsulting.com for more information.