The Future of Producer Compensation

It is a fact that many people with the title “producer” don’t produce. They service and they accept what comes to them, but they do not produce.

It is also a fact that companies are going to find a way to minimize what they pay agencies. After watching benefits carriers drastically reduce compensation without realizing drastic losses, property/casualty carriers will certainly follow their lead. Benefits carriers have learned they do not have to pay agents, at least not for small accounts. Sure, ObamaCare plays into this, but the writing is on the wall. And even if company compensation is not cut going forward, producers and agencies are going to have to do much more to earn their money.

This is not a “doom and gloom” future. Clearly some agencies will continue their paternalistic and ego-driven model of employing non-producing producers for as long as denial trumps financial reality. The great news is for those agencies and producers that are innovative and want to bring more than an insurance policy to their clients, the future promises tremendous rewards. The agencies that act first will gain a long head-start.

How Producers Get Paid

Producer pay, however, has to change. Most agencies are far behind in recognizing this. Large brokers and more sophisticated agencies have a big head-start. The fact is that to deliver the value that will be required, producers have to take a pay cut. This is not as bad as it sounds, because even at a lower percentage, the best producers will make more money than ever as they take over the accounts of all the producers who don’t produce or don’t realize the world of insurance sales has changed forever.

Some sales consultants are on the right path. They are preaching that agencies’ opportunities lie in bringing “value added” services to clients. “Value added” is in quotations because the effectiveness of the different messages varies considerably, with some consultants not even telling their clients clearly what those value-added services are. The ones delivering the truest messages are giving some of the best sales advice I have heard in my 25 years in this industry.

Any sales consultants who suggest agencies offer these services without suggesting the agencies’ producers pay for it are only advocating growth, not profits and not survivability. I have seen agencies barely make payroll as a result of focusing on these strategies without understanding the cost of these strategies.

These value-added services cost money, sometimes serious money. At the simplest level, some web-based marketing programs are reported to cost $50,000 annually. The average agency today has a profit margin of 0 percent on a commission basis. If a producer is paid the same for sales generated by the website as they are for sales they generate on their own, how is it affordable? Some other programs easily exceed $100,000 when the cost of training, personnel, software and other tools are considered. These efforts should benefit producers, so why shouldn’t they pay at least part of the price?

Big Agency Advantage

This is where the big agencies are so far ahead. They generally pay half of what normal independent agencies pay producers. Many agency owners do not understand this completely and make the mistake of continuing to pay producers normal commissions. Paying 40 percent when the producer does everything may make sense. Why continue to pay 40 percent when the agency has to effectively pay an extra 3 percent to provide the tools necessary for future quality sales?

To put it in perspective, a consulting firm used to publish an annual study on producer compensation. Every year, the press release would be the same: “Producers at large agencies are paid significantly more than producers at small agencies!” The headline was completely wrong every year. Producers at large agencies were paid significantly less, 20 percent versus 40 percent. However, they made more because their books were so much bigger that they made up the difference between 20 percent and 40 percent. (For example, 40 percent of $200,000 is $80,000 and 20 percent of $800,000 is $160,000.) Give the right producers these tools, have them pay for them, and everyone will make more than ever.

Owners however, will be burned if they employ producers who cannot really sell. These employees will implore the agency to pay for all their tools without them putting any skin into the game. I have seen this time after time. Performance improves when everyone has skin in the game. If I were a producer who could not sell, I would absolutely not want to put skin in the game because I’d be a definite loser.

Agencies that act now have a great future. Combine sales tools with refined producer compensation now so you can take advantage of your slower competitors. When companies really begin to pay commission rates commensurate with doing nothing but delivering policies, those agencies still in denial will be doomed. When a policy is renewed year after year with no proactive contact with the client, it is ridiculous to argue that the agency is working for the commission. Yet, many agencies rely on this business model because they cannot afford to regularly touch every client. Imagine then what happens when they feel compelled to provide producers with better tools?

Procedures and Pay

Another advantage sophisticated agencies have is their producers must already follow procedures. I estimate that more than 90 percent of all producers are not required to follow their agency’s policies and procedures except, maybe, in a couple of key areas such as turning money over to the agency immediately.

The most sophisticated agencies completely understand how producers not following procedures create huge inefficiencies. To pay for the tools and extra staff that enable these agencies to work proactively all the time with clients, they had to get more efficient. So they demand producers follow procedures. To get ahead of all others and to catch up with the ones that have gone before, make your producers follow procedures.

Tie compensation and following procedures together, and the agency wins the jackpot. Providing sales tools increases the cost of the servicing platform. Producers who follow procedures significantly decrease that extra cost.

My recommendation is to not pay producers if they do not follow the agency’s procedures on an account. If the producer professes that the rules are too complex, make the producer pay for additional staff. Make them put skin in the game. Otherwise, all the sales they make will only move the agency closer to bankruptcy. Agencies do not owe their producers these tools for free. Some agencies may provide them for free, but these are rarely going to be long-term competitors.

The industry already has changed. Few agencies seem to recognize the true scope of these changes.

The agencies that do and act upon them have the brightest futures ever. I look forward to experiencing it with my clients.