One of the most important questions asked by companies nationally is, ‘”how should we pay our producers?” Vital for every company, this question has stemmed various answers through the decades. MarshBerry, a specialized management-consulting firm providing services to the insurance industry, recently published a report on the complex topic of producer compensation.
“What we have learned is that once you peel back the onion on compensation and marry it with trended results, there is under-appreciated complexity hidden behind the numbers,” said Tommy McDonald, vice president and author of MarshBerry’s report,
Producer Compensation: Behind the Numbers.
According to the report, “40% on new and 25% on renewal” was the simple answer to the question of compensation. However, with an industry that is evolving and the roles of producers changing, the answer may no longer be that simple.
“One of the things that always drive value, either in a transaction or the company’s ability to grow and be profitable is compensation. What is interesting is that a lot of firms take a hard and fast rule with comp. Compensation is much more detailed than just 40/25,” said McDonald.
One subject of debate: new producer compensation. While some companies offer a base salary that is fixed over a few years before offering commission, other companies choose to offer a base salary that gradually declines over a few years while paying commission on top. MarshBerry agrees with the latter. “We want sales people to get paid immediately so they can feel the effect of hard work and closing business,” said McDonald.
What if you are looking to grow your business?
“We believe in a higher new business split relative to renewal so there is an incentive for people to go out and hunt new business. A [15 to 20 percent] spread is typically what we recommend,” he said. In fact, McDonald would argue that top producers who generate a lot of new business should be compensated with a much higher new business commission, such as 60%.“The bigger the spread on new and renewal can be an effective way to drive new business to an organization. The last thing you want to happen is to lose your best producer because you did not think about something that matters in the comp change.”
Gradual, creative and strategic conversations around compensation can help add value and improve a business by transforming how it is structured. Then, communicating why you are adjusting compensation is key.
“If you can communicate to your sales people that the reason why you are adjusting comp is because you want to invest in the business and re-adjust so you can remain independently-held and continue to grow the company strategically, those are things that people need to realize,” said McDonald.
The bottom line: one size does not fit all. How a company structures comp differs based on circumstance, needs and goals. What is simple about comp is that there simply is no one comp plan that works across the board, and how you decide to do it can make or break your business.
“We take a cautionary line with how we approach our advising clients because of circumstance. We are consultants and we are not fans of losing really good people because you are not smart about how you structure comp,” he said.
Related Articles:
How commercial lines agents get paid, and common traits of top producers
Industry battles "upsetting" commission change
