Compensation for "captive" Independent Agent?

[sgriswold]

I have a question regarding agent comp but I'm not sure if anyone has experience in a similar situation.

My agency targets a niche market, and thus has a very specific marketing plan. Also, due to the way our business is structured, we require total "ownership" of our book.

Naturally, this presents a problem for the traditional independent agent/agency model. I've been tweaking our current agent's contract every couple months to find the right balance of compensation but I'm not sure how to balance being "fair" with incentivizing him to sell.

The agent:
- Sells primarily to our generated leads (tons of them)
- Can bring in his own leads if desired
- Has no ownership of his book. This is an integral part of our business model. **(see edit below)
- Is our exclusive in-house P&C agent (but can cross-sell L&H) and thus gets to work on ALL of our new P&C business
- Currently is also responsible for some servicing, but only because he's new and I want him to have the experience. Servicing will be offloaded to my assistant when the book gets larger.

Current benefits:
- Health, dental, vision, life insurance paid for 100% by company
- We pay E&O
- We supply workspace, office supplies, business cards, etc.
- We supply comprehensive training and marketing support


Right now we're giving him a non-recourse draw (paid as a salary) plus a sliding commission scale of 50-60% for commissions earned over this base draw amount. We can't do commission-only because of the benefit structure.

I'm considering one of two payment models:

1) Base salary plus 20-40% of commission on all new business
2) Base salary plus 40-60% of commission on all new business OVER $X/mo (i.e. if production is <$X there is no commission split)

I think this is a very, very good deal for him, but I think it is fair considering he doesn't have ownership of the book so we need to keep him incentivized to produce.

Any ideas?


**edit: In lieu of book ownership we may be able to offer the agent partial ownership of the agency/profit sharing.

 

[Crabcake Johnny]

First of all, sounds like a great opportunity. However, I'd need to know what the base salary would be - pretty big factor.

 

[sgriswold]

I was thinking a base salary of $22,000-25,000.

 

[YouGotMyMoney]

I was thinking a base salary of $22,000-25,000.

What's that work out to be in California money?

 

[VolAgent]

I was thinking a base salary of $22,000-25,000.

Benefits fully paid for? What will they be selling, home and auto or commercial? Will they get any of the renewals?

 

[FLInsa]

Sgriswold, sorry to be blunt but your pay structure is weak. No book ownership? You won't keep high-caliber producers for long. Here is some reading I gathered from another source.

Good luck.


Okie dokie - so here will be a somewhat controversial post on this issue but nevertheless represent my best faith attempt to answer this very important question.

First the distribution channel must be identified, i.e., 1) global, 2) national, 3) regional, 4) agency, 5) sole proprietorship.

Second, the fundamental truth is that more business on a yearly basis can be written by an individual producer as you move upstream, or, as it is often called, 'upmarket' which is where the larger firms live and breath.

Third, to pay for overhead, general expenses, selling expenses, client management expenses, etc., etc., etc., the larger firms naturally pay LESS of a percentage of comp compared to revenues generated by a producer - but since the cases are larger NET income to producers generating that business tends to be significant.

FOR EXAMPLE a producer at a sole proprietorship or agency generating $50,000 of new business commissions per year being comped at 50% or 60% will make less on that platform vs at a global where they can generate $325,000+ of new business commissions (because of the platform and the market's propensity to do business with that platform for larger revenue accounts) at 15%-22%

Here are the average comp plans by stratum within retail insurance broking's channels:

1) Globals: 15%-22% of total book - incentive comp on new business as much as 40% - no equity
2) Nationals: typically 40% new/25% renewal - no equity
3) Regionals: typically 40% new/30% or 25% renewal + equity within 5 years
4) Agencies: 50% new/35%-40% renewal + immediate equity first year ramping to owning half the book within 5 years
5) Sole-proprietorships: 60% new/50% renewal - equity + you get to date the owners daughter

My advice:

1)look for the 'ripples' in the value proposition of the different models to maximize your take home
2) as you move 'upstream' make every effort to obtain equity, or, absent of that issue, a 'buy out' clause so if you leave you can buy your book back from the house, or negotiate with your future employer the purchase of the book (often you can make some $ on the arbitrage) so that it's portable
3) for smaller firms (regionals, agencies, sole-proprietorships) negotiate IMMEDIATE vesting of a percentage of your book (most tend to max out at owning 50% of your book after 5 years
4) keep in mind your 'happiness' level as it relates to writing business - if you need to write 4-6 big cases per year you need to be at the houses or perhaps a super regional. If you are okay with 10-15 cases a year mid-market, then you're a good fit for the nationals and regionals. If you are okay with 18-25 cases per year, mostly mainstreet and some smaller mid-market then a sole proprietorship or agency will suit you fine.

We've developed a producer cash flow analysis, which allows producers to plug in new business production, attrition, renewal comp, general expense, client management expense as a function of serviceable revenue, equity allocation, etc., and generates an EBITDA percentage to demonstrate a producer's contribution to margin to their employer in order to enter into equity discussions with their employer on an informed basis using basic economic principles and the dynamics unique to the insurance profession and industry. If you would like to obtain this template/model feel free to contact me and I'll be happy to send it.

All the best and good luck.

Cheers

 

[sgriswold]

Benefits fully paid for? What will they be selling, home and auto or commercial? Will they get any of the renewals?

Yes, benefits paid 100% by agency. Selling mostly commercial but also limited home & auto (enough to keep our appointments active but it won't be our wheelhouse). Also as I said he has capacity to do life/health in some instances.

I'm not sure how to handle renewals. Currently renewal commissions are same as first year comp.


FLInsa, thanks for your input -- while helpful, that quote doesn't address the nuances of my issue. I CAN'T use an "established" comp structure because we aren't structured like a typical agency. Our business model depends greatly on the agency owning the business, not the agent. However, there may be potential down the road for equity in the form of ownership shares after a certain number of years.

 

[VolAgent]

Yes, benefits paid 100% by agency. Selling mostly commercial but also limited home & auto (enough to keep our appointments active but it won't be our wheelhouse). Also as I said he has capacity to do life/health in some instances.

I'm not sure how to handle renewals. Currently renewal commissions are same as first year comp.


FLInsa, thanks for your input -- while helpful, that quote doesn't address the nuances of my issue. I CAN'T use an "established" comp structure because we aren't structured like a typical agency. Our business model depends greatly on the agency owning the business, not the agent. However, there may be potential down the road for equity in the form of ownership shares after a certain number of years.

Then it sounds like you are going to have to give away the farm. Base salary plus 40-60% of new and renewal.

Also, I get this distinct feeling that you are starting a new P&C book. If so, you really need to give this guy something as he is building your book from nothing.

 

[FLInsa]

Then it sounds like you are going to have to give away the farm. Base salary plus 40-60% of new and renewal.

Also, I get this distinct feeling that you are starting a new P&C book. If so, you really need to give this guy something as he is building your book from nothing.

+ 1,000 %.

Sgriswold, put it this way. Say I was a top-notch-high-caliber-superstar producer and one day a national alphabet house and a local small agency both offered me a position. Which one do you think I would go with?

The big national agency with all of its "clout", markets and bigger platform, or that local small agency with fewer markets, where I would have to work twice as hard to make the same amount of money I could make with the national agency?

As an ex-producer turned agency owner I can assure you - actually guarantee you - that under your business model you will have a tough time bringing in and more importantly KEEPING superstar producers because you are not offering anything to them that can they can not have with a bigger agency. To be successful you've to be different and give them something different so they can say "huh, that is unique and yeah, I will go for that!".

Oh sure, you may get lucky and get a producer or two that will put up some good numbers, but over the long haul your sales force will start to crumble because again, a superstar producer will quickly figure out if you are giving him/her a good deal or not - IF you can even get them to come in for an interview!

I would be glad to share my formula with you, if you're interested pm me.

Good luck!

 

[sgriswold]

Not sure if this was clear - I have a producer hired already; he's been with us for several months. He's not a "superstar producer" -- never claimed to be hiring one. In fact, he has been licensed for just under a year. I'm training him from scratch.

I would think this would make some sort of difference.