Independent Agent Magazine with MarshBerry Perspective

1. 28 INDEPENDENT AGENT n April 2013
Think your producer comp
system is driving results?
You might be surprised.
BY SUSAN L. HODGES
SMART AGENCY
BY SUSAN L. HODGES
SMART AGENCY

2. yAGi stuDio/Getty imAGes April 2013 n INDEPENDENT AGENT 29
New business, higher commission.
Not enough new business, see rates for renewals
go down. Throw in some non-monetary perks.
It seems straightforward.
But the reality of producer compensation
is different. A recent sales study conducted
by Reagan Consulting, Inc., of Atlanta found
that agency compensation incentives “really do
not drive behavior, unless they are perceived
to be grossly unfair, in which case they lead
to poor results.” The study also found little or
no correlation in most cases between agency
growth and use of such common compensation
approaches as:
• commission differentiation between new and
existing business
• equity rewards
• stair-stepping of rates paid for new business,
and
• “claw-backs” (reduction of renewal commis-
sion rate until new-business minimums are
reached).
What does appear to drive producer behav-
ior and lead to success, the study found, is a
combination of high performance standards and
accountability to those standards. Under these
conditions, sales people who meet or exceed their
goals may be paid in a variety of ways. In con-
trast, producers who fail to meet their goals may
see their renewal commissions shaved until they
meet new-business minimums. But what are the
compensation methods in the real world of agen-
cies that are achieving above-average growth? >>
Motivates
Producers?

3. 30 INDEPENDENT AGENT n April 2013 John Kuczala/Getty Images
Compensation’s Four-Letter Word
I
t’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 them
that.”
But claw-back is the best-known term for a reduction in renewal rates paid to
producers who don’t sell enough new business. Under a claw-back, producers who
consistently fail to produce a minimum amount of new business see their renewal
commission lowered by an average five percentage points. The rate doesn’t go back
up 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 reported
at 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 lower
performance point when adopting the tool. Second, firms using claw-backs may
not expect them to change producer behavior, but instead save commission dollars
that can used to hire and develop new producers.
—S.H.
Increasing the Ante
Pritchard and Jerden, Inc., is an Atlanta-
based agency with 19 producers. The firm
stair-stepped commission rates for new
business until 1997, when Jim Bailey joined
the company and suggested change. “I
didn’t think the stair-stepping model alone
was aligned with our corporate models of
growth,” says Bailey, who is now agency
president. “We weren’t providing incentives
for people to keep the business they got
the previous year.”
The agency subsequently added a year-
end, growth-in-book bonus. Under the
revised system, producers who met goals
both for retaining business and writing
new accounts would be paid at top
commission rates and earn an annual
bonus. Bonus amounts would hinge on
the dollar amount of growth produced by
each sales person.
That wasn’t all. At the start of each
fiscal year, five percentage points would
be withheld from renewal commissions for
all producers. “Once they met minimum
requirements for new business, the five
points would be restored with a lump-sum
payment,” says Bailey. Producers who failed
to meet minimum growth requirements two
years in a row would have to meet those
requirements for the next two years con-
secutively to regain their original renewal
rates.
Sixteen years later, Pritchard and Jerden
still uses this approach. “True producers
like it,” says Bailey. “It’s also a good way to
show 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 compensation
strategy is now aligned with the agency’s
overall corporate growth strategy.
PowerTools
RJF, a 29-producer Marsh McLennan
Agency LLC company in Minneapolis, also
aligns producer financial compensation
with agency growth by paying for growth
of book of business. But Tim Fleming, RJF’s
president, believes it is the agency’s obliga-
tion to provide additional compensation in
the form of tools that differentiate RJF from
its competitors. In so doing, says Fleming,
RJF lays a foundation for its sales people to
build ever-growing books of business.
“When we think about compensation,
we think about providing a sales culture
with resources that empower producers,”
says Fleming. “The best producers are
entrepreneurs at heart who want to break
through that million-dollar barrier, and
then break through the $2-million barrier
that comes next. For us, it’s about creating
robust resources to help them do this.”
RJF’s “PREVENT Process” is such a
resource. Producers use a consistent seven
step approach to learn about a client’s
business, understand and expose its risks
and create solutions to prevent or reduce
those risks. Next, an account team creates
a stewardship program that shows how the
risk-management solutions affected the
risk challenges. Says Fleming, “It’s much
different from telling clients what we did
to just go out and market their business.”
To calculate a producer’s financial
compensation, RJF examines individual
performance. Those who don’t generate
the required level of business development
experience a reduction in their renewal
commission. “Setting minimum new busi-
ness standards allows us to distinguish
between those who really want to do
business development and those who want
to sit on a book of business and provide
technical expertise,” says Fleming. “When
everything is working, producers feel well
compensated because they’re growing their
business, and that has an effect on all divi-

4. IAmagazine.com April 2013 n INDEPENDENT AGENT 31
sions of the company. When things aren’t
working for a producer, that also has an
effect on his team and everyone else.”
But producer compensation overall
seems to be working at RJF. The agency’s
organic growth for 2010 tallied 10.9%,
while 2011 organic growth came in at
8.7%. Through 2012, organic growth mea-
sured 9.3%. Growth rates for all three years
substantially exceed the agency median for
each year as tracked by Reagan Consulting,
Fleming says, and twice the agency has
reached more than double the median
number. “I’m really proud of our team,”
says Fleming. “This sales platform is real.”
One Rate, Undivided
Keith Stone, principal, CFO and COO at
Gibson Insurance in South Bend, Ind. and
three other locations, knows about suc-
cessful sales platforms. Producers at this
90-person, 20-producer firm have written
more than $2 million in new business com-
missions for each of the past two years.
“We’re trying to write 22% of our book to
grow,” says Stone. “Growth is paramount in
our vision and part of everything we are.”
Another Voice
J
ustin Berry, vice president of sales management at MarshBerry, a Willoughby,
Ohio-based agency consultancy, acknowledges the complexities involved in
setting and reviewing producer compensation. But he suggests starting with
a framework: “When considering changes to a producer compensation model, real-
ize that compensation alone won’t produce a long-term outcome,” he says. “What
will produce long-term results is reinventing your culture so that everyone in the
organization is held accountable.”
Also be sure producers know what they are accountable for. “If growth is the
agency’s focus, make sure producers know it should be their focus as well,” says
Berry. “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.

5. 32 INDEPENDENT AGENT n April 2013 IAmagazine.com
Like Carrier, Like Agency?
I
f 80% of business comes from top 20% of clients, what is happening to the
bottom 20%? And how are producers being paid for it?
One trend Jim Wochele, sales manager at MarshBerry, is seeing at certain
carriers is the creation of small business units (SBUs) designed to handle the bottom
20% 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 agency
is pushing minimum account sizes upstream. “We’re doing it because agents might
not 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 accounts
efficiently. Adds Bailey, “We do not see carriers decreasing commission rates on
small business.”
Jon Loftin, president and COO of MJ Insurance, in Indianapolis, says his firm is
feeling 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,” Loftin
says.
—S.H.
To that end, producers are paid at the
same rate for both new and renewal busi-
ness. Sales of value-added services, such
as loss-prevention contracts and fleet
management programs, are also compen-
sated at this rate. “We’ve found this really
eliminates silo-ing,” says Stone. “People
would try to maximize commission and fee
income at the expense of selling claims or
consulting services because they didn’t get
paid as much. When we leveled the playing
field, those silos went away and we have a
better work team than ever.”
Stone has done the math and knows
that if the firm went to a 40-25 commis-
sion split for new business and renewals,
agency profits would rise. “We’d pay our
producers less,” he says. “But our system is
designed to create growth—and if we can
do that, we’ll pay premium compensation
for premium growth.”
Gibson Insurance has tried various
producer-compensation methods over
the years and found, in short, that sticks
break and carrots grow. “Our people are
motivated by two things: money and
recognition,” says Stone. “But money isn’t
the prime motivator. These people want to
win!”
To make that happen, the brokerage
implemented production teams in 2008.
Each of three teams in property-casualty
and one team in the benefits department is
staffed with “door-openers,” or employees
who make appointments; technical people
and sales experts. “Our teams have been a
huge success,” says Stone. “True producers
are freed up to hunt new business and it
works. For a firm our size, I’d stack up our
new business against anyone’s.”
Two Sets of Stairs
“There’s not an agent in the country who
doesn’t think about producer compensation
all the time,” says Jon Loftin, president
and COO of MJ Insurance, in Indianapolis.
Principals at this 28-producer brokerage
use a tiered system to pay for both new
and renewal business. The more business
sales people write, the more money they
take home. Producers can also earn their
way into a stock-purchase plan and qualify
for an annual incentive trip. “But tiered
structures don’t change non-performers
into superstars,” says Loftin, “and carrots
and sticks don’t drive producer behavior.”
Then what does? Loftin says it’s the
agency’s ability to provide value. “Risk
management, loss analytics and wellness
programs are among the tools customers
up-market are starting to demand on the
basis of value,” he says. “Our challenge
is to deliver these services in a mutually
beneficial way.”
Equip producers with value-added prod-
ucts and services to help them succeed,
Loftin advocates. But also weigh total
employee expense against the cost of pro-
viding the firm’s value proposition. “Where
agencies win or lose is the way they com-
bine producer and non-producer expenses,”
he says. “In our opinion, comparing your
producer expenses as a percentage of
revenue against industry benchmarks in
isolation doesn’t provide guidance you can
act on. Nor can you compare non-producer
expenses as a percentage of revenue in
isolation. It’s the total employee expense
that matters, and it’s up each firm to
determine how to balance these expenses
based on the value proposition they are
delivering.” I
Susan Hodges (hodgeswrites@gmail
.com) is an IA senior contributing writer.