*This article is part of a continuing series about how to maintain and grow the value of your insurance agency so it will hopefully be worth more tomorrow than it was yesterday. In this entry we cover the importance of the Compensation Plans for an agency’s staff and producers and how it relates to value.
Imagine if you met with your agents or CSRs and told them the following: “I’m going to pay you $1,000 a week and I want you to service our clients, quote new business, and sell as many policies as you can through new leads and cross-selling of our existing clients during your service calls.
But if you sell a lot of policies, I’m not going to pay you anything more than $1,000/week. And if you don’t sell any policies at all, I’m still going to pay you $1,000/week.” How many new policies do you think your staff will be motivated to sell each week? If you answered “zero”, that would be correct.
How you pay your staff has everything to do with the growth and value of your agency. In a business environment, people will typically do exactly what you pay them to do. If you pay them regardless of what they do, there’s no motivation for them to do anything at all!
Before you dismiss this as just hypothetical conjecture, take a moment to consider how you pay your own staff. If they get paid an hourly wage or monthly salary with no performance goals, incentives, or bonus possibilities, then you are basically doing exactly what the example above shows. Whether they write 20 deals this month or 5 or none at all, they will still get paid the same thing. And by the way, unfortunately we see that exact compensation model in about 75% of the insurance agencies we work with. The other 25% are growing in value.
Now imagine you told your staff this: “If you cross-sell one of our existing clients any other line of business we write, I will pay you $30 each time you do that.” Or, “If you write 10 new business applications this month, I will pay you $200 on top of your salary.” Now your people have a reason to actually offer another line of business to your existing clients or to push for 10 new applications before the end of the month. They have a goal. They have a defined and simple reward if they hit that goal. And you have new business hitting your books, helping your agency grow, and increasing its value.
I’m sure this sounds much too simple to be true, but until you try it you won’t know. It’s just human nature. We all tend to view tasks and extra effort as “what’s in it for me?” And if there’s nothing in it, then why do it? This same concept extends to producers as well. We see many agencies who have producer commission plans that pay 40% for new business and 40% for renewal business (sometimes even higher).
So after two or three years of the producer writing a decent amount of new business, that producer realizes he’s making a good living off of his renewals and stops pushing so hard to write new business. After all, if he gets the same amount for renewals as he does for new business, why should he try so hard to go out and find new business when he can just work on keeping his existing clients happy and renewing? It’s human nature. The other way these compensation plans can hurt the value of your agency, other than the fact that your people have no incentive to grow your business with new sales, is that one day a new owner will have to inherit these legacy compensation plans you have in place today.
When you decide to sell your agency, whether to a third party or minority partner or some up and coming producer within your own agency, nobody is going to want to be stuck paying 60% commission rates to producers, or $60,000 salaries to CSRs who never write a single new policy. And the new owner can’t very well come in and immediately start changing how people get paid, or those people who have been fat and comfortable under your pay plan for so long will be completely offended and start working on their resumes. So when buyers of insurance agencies see compensation plans that look more like “entitlement” than having anything to do with performance, they use that as justification to pay less for the agency. If you want to maximize the value of your agency in the future, whether you intend to perpetuate internally or sell to a third party, you need to start looking right now at how you pay your people.
You should make changes slowly over time to transition them from a static pay plan to a performance based pay plan that motivates them to hit specific goals and realize incentives that you have pre-defined. Making these changes now will definitely add value to your agency later.
About the Author: Jerry Pickett is VP of Mergers & Acquisitions/Client Consulting with Agency Acquisitions – an Astonish Results Company (www.AgencyAcquisitions.com). Agency Acquisitions works with agency owners to help maximize the value of their agency, perform agency valuation analysis, and handle all aspects of acquisition transactions for sellers and buyers of insurance agencies. Contact Jerry @ 614.859.9606 or email: jpickett@astonishresults.com
