Compensation paying off: agents and brokers are revising compensation plans to encourage new sales and growth of business from both producers and customer service representatives.

In March of 2006, Business Management Group conducted a nationwide survey to determine how compensation has changed among agency owners, executives and producers. We surveyed agents and brokers of all revenue sizes and in every region of the United States. We asked about commission rates paid to producers and owners by line of business and size of account, compensation for experienced versus inexperienced producers, producer expense payments, producer contracts and non-competes. We also asked about sales management practices, such as production expectations for new and experienced producers, sales manager incentives and recruiting practices. The survey data was organized by agency size and by region of the country. Comparisons were made to our last Owner, Executive and Producer Survey in 2002.

We formal that agents and brokers were revising their compensation plans to encourage new sales and growth of the business. They were improving their sales management practices and developing incentives for the sales managers they were hiring to work with their producers. We also found that as larger agencies were hiring nonowner executives, they were developing performance-based plans to reward them for results. Some of the key findings of the survey were:

Producer compensation was related to agency size. There is a gradual and dramatic increase in the amount of compensation an experienced producer can cam as an agency increases in size. In small agencies, defined as having less than $500,000 in revenue, producers averaged $55,000 in total compensation. These small agency producers typically sold multi-line accounts which limited their new business production, and, therefore, their earnings. In the largest agencies, defined as having revenues in excess of $25 million, producers focused on large accounts and, therefore, sold higher new business commissions. As a result, they averaged $192,400 in compensation.

Producer commission percentages differed by agency size. We obtained new business and renewal commission rates for personal lines, commercial lines, and life and group businessa. After organizing the data by agency size, we found producers are paid lower commission percentages in larger firms. In the largest agencies--those with revenues greater than $25 million--commissions averaged from 4% to 12% less than those in midsize and smaller agencies. In our experience, larger agencies have achieved their size by targeting larger accounts. Selling and retaining these accounts has meant adding resources, such as centralized marketing, loss control and claims management services, and more technical service personnel. These additions increased the cost of doing business, but they allowed producers to focus on sales, rather than service activities. In adding these costs, agencies needed also to adjust producer compensation.

Agencies were changing the way they sell small accounts. A trend which continued from the previous survey was the focus on selling larger accounts. According to the survey, 24% of agencies were eliminating or reducing commissions paid to producers on small commercial accounts. This approach increases the profitability of small accounts, but it also encourages producers to sell larger accounts. In our consulting work, we find many agencies moving their small accounts into separate traits and using a different business model to both sell and service these accounts.

Executive compensation was tied to agency results. Sixty-two percent of respondents ranked agency profits as the key factor for determining executive bonuses, compared with 50% of respondents in BMG's 2002 survey. But agency growth has become increasingly important in bonus calculation since our last survey, moving from fourth place to second place in determining the executive's bonus.

More agencies were offering long-term incentives. To retain producers and executives, more agencies today were offering long-term incentives in the form of stock redemption and deferred compensation plans. We found that 36% of respondents were offering incentives to owners and 39% to senior management, compared with just 25% in 2002.

Customer service representatives were rewarded for sales. Although their primary role is to service customers, CSRs were rewarded for selling accounts or referring leads. We found that 65% of agencies were paying CSRs an incentive for writing new business. This trend was an increase from results in our 2002 study, which showed only 43% of agencies providing incentives.

Another trend found in the survey was the interest in hiring new producers, often from outside the industry, to sell the much-needed new accounts.

All of these trends demonstrate the industry's need for organic growth in a continuing soft market where competition is keen.

Sharon Cunningbam, a Best's Review columnist, is president of Business Management Group, a management consulting firm in Hartford, Conn. She can be reached at [e-mail].