Owner Compensation Performance Based – Part 2

Last month we discussed the three components of owner compensation that we recommend. These include the management piece, production component and how to split up the profits all based on the performance of each owner.

This month is an example of how to do the numbers using an actual case.

Agency Profile

For purposes of this sample let’s assume a firm has three owners with $1,500,000 in total revenues. Approximately 90% of the book of business is from property/casualty accounts. The firm was able to generate a 10% before tax profit margin for the past year. The firm will retain $50,000 in profit for future capital expenditures. Therefore, the owners’ bonus for this year will be $100,000 (a profit of 10% on $1,500,000 in revenues less $50,000).

Based on the size of the firm they have set aside 5% of revenues or $75,000 for a strategic management fee.

Table 1 shows the ownership split, each owner’s management role and the amount of new commissions and their current book of business. The production component will be 40% new and 30% of the renewal book of business for commercial lines and employee benefits only.

The $100,000 profit is then split on a prorated basis for each of the four criteria: equity, management, new produc- tion, book of business.

Owner 1, for example, is responsible for 20% of the management ($15,000 fee divided by $75,000 total fee), so that owner earns 20% of the $25,000 bonus for management.

Owner 2 is responsible for 30% of new business production, so that owner earns 30% of the $25,000 bonus for new production. Table 2 summarizes the results of the profit distribution.

Table 3 summarizes the information included in Tables 1 and 2. Each owner receives three components for their compensation based on the their relative contributions to the overall operation of the firm.

Summary

Having an equitable owner compensation plan is important in order to make sure that all owners feel they are adequately compensated for their contributions to the agency. Many agencies in the past did not have such a methodology and it often caused problems. This methodology is easy to implement and follow and should provide harmony in the agency.