What Can You Afford to Pay?
Producer compensation is one of the trickiest issues facing owners of independent insurance agency businesses. You can’t afford to pay too much – but if you don’t pay enough, you can’t hire and retain quality sales staff. It’s a balancing act.
You have to weigh the costs against expected or actual results. You have to weigh agency needs against what the producers need. You have to balance the need to keep it simple with the need to make sure your plan is comprehensive. And you have to weigh your plan against the competition—your compensation plan has to be attractive to job applicants. But, first, it has to be affordable.
What is affordable? How do you know? How much can you afford to pay? Here is a very simple process to determine what you can afford to pay.
Five easy steps to understanding
Start with base revenues.
- Determine your desired profit. Many agency owners settle for what’s left after all expenses have been covered and everyone has been paid. Better to plan for a fair return on your sweat equity in the business. Anything less lowers the value of the agency.
- Add back Contingents and Interest. These items do contribute to profitability although they are much more volatile.
You now have the amount of revenue available to pay all expenses.
- Deduct Sales Expense—Advertising and Promotion, Travel, Automobiles, Entertainment.
- Deduct all other non-employment Operating and Administrative Expenses.
What’s left now is the amount available to pay everyone.
- Deduct the cost of salaries and benefits for management and support staff. Include Payroll Taxes here.
This is the amount you can afford to pay producers.
Here is an illustration of a simple worksheet using sample numbers based on industry averages.
This does not mean that your commission schedule should be 28%. If your results were the same as the sample agency, you would have 28% of your total agency income available to pay producers. So, for example, if total revenues were 5 million dollars, in the above example you would have 1.4 million dollars available for producer compensation—total producer compensation. And remember, when calculating producer compensation, you must include payroll taxes, insurance and other employee benefits, and any other “perks’ paid to sales staff.
- If you’re currently paying out more than you can afford to producers, then you have an affordability issue.
- If what you can afford isn’t enough to be competitive or to provide the right kind of incentives to support your production and growth goals, then you have an affordability issue.
Note: The available to pay producers is based on total agency income, including “house” business, which is not subject to sales compensation. This allows the individual commission percentage paid to producers to be higher than the percentage amount available after all other expenses and profit are paid. Theoretically, however, you should expect to make a reasonable profit on each individual producer’s book of business as well.
It is likely you have producers to whom you are already paying compensation. You have a compensation plan. Why be concerned about affordability now?
You’ll want to know what you can afford to pay—if:
- The plan you have isn’t working as well as you would like. Either you’re not getting the sales results you want or you’re concerned about the bottom line and looking for ways to control expense. Or,
- You want to hire new producers and want to make sure the investment is viable.
When times are tough, producer compensation is a real hot button issue for many agencies. The market is still soft. Revenues are down. Expenses are not. There continues to be a lot of fear in the marketplace. But affordability shouldn’t be one of those things you think about when things are tough. Your compensation plan should be cost-effective regardless of the market or the marketplace.
How you pay producers—so that compensation is fair and equitable and provides the right incentives to help the agency achieve its goals—is the subject of your compensation plan.
For help determining what you can afford to pay producers or for help with your strategic producer compensation plan, call Pam at 530.295.1093