June 18, 2020
Insurance Producers are Hard to Manage. Here are Some Good Tips.
12 min read
As soon as the owner of a growing insurance agency has maximized their own time available for the sales function (by hiring others to do as much as possible of the service function), they will naturally want to hire additional people to help continue growing revenue. This is a critical moment in the growth trajectory of the business!
Many years ago, the United Negro College Fund (I told you it was many years ago!) had a series of TV ads with the slogan “A mind is a terrible thing to waste”. The idea was we should invest in what’s important.
I’d like to think about the same idea with respect to the people who create sales (also known as income) for our agencies.
Generally speaking, they aren’t producers. They are agency owners!
It seems most agency owners want to hire producers because they think they are the answer to agency growth. If you think about it much, though, you’ll realize that most producers are just blood-sucking growth killers!
Why Producers Can Be Growth Killers
Producers often demand a commission rate, which is too high for the agency to make a profit paying.
They frequently demand to own their book of business.
Most don’t produce much – there is a tremendously high turnover rate
They demand a tremendous amount of time to train and manage.
Often, if they’re any good, they leave and start their own agencies!
All of this creates a huge drain on an agency’s capital, staff time, and agency owner’s time!
What if, instead of hiring producers, an agency hired more service people? Well, then the agency owner, who usually is a good producer, could spend more of their time selling and creating growth.
If you’ve been reading my blog you already know I think that hiring producers is a bad idea for most small businesses in the insurance industry. Insurance agents take a lot more management time, cost a lot more money than most realize, and actually cause the agency to grow slower in most cases than if the agency owner focused on production.
But, you’re going to ignore my advice, aren’t you?
Producers Mean Increased Overhead Costs
The first thing to know is that the producer MUST be an employee!
That’s right – they can’t be an independent contractor. Why? Because it’s against the law of the United States. In the insurance agency business, you simply cannot meet rules set by the Employment Security Commission, Worker’s Compensation and Federal Wage and Hour for independent contractors.
I was an expert on this in the Oklahoma Legislature. I tried for years to develop a workaround. It’s not possible. So, you can either break the law and wait until you get caught, with very expensive consequences or do it right from the beginning.
Make sure you understand what the producer is costing you as an employee in non-direct compensation expenses:
7.65% for FICA
3% for Unemployment Insurance, and
6.2% for Social Security.
Maybe you can avoid health insurance, vacation pay, and other things... but these I just listed you simply can’t avoid. Plus, you need to factor in additional overhead costs like rent, E&O, telephone, etc. that will be increased by this addition. You will have increased expenses for additional customer service and clerical support.
You may think you’ll avoid all these costs. And you may, in the beginning, avoid some of them. But, eventually, they will all be necessary and you need to anticipate them. Otherwise, you’ll be tempted to overpay this bloodsucker, I mean producer, you want to hire!
So, if you want a nice round number to work with, use 50% for total overhead costs, not including commission expense and profits.
Speaking of profits – it’s wise to always plan to make some! So, what do you get out of this as an agency owner?
Let’s assume the average agency makes a 10% profit. Do you really want to be average? Most successful agencies, that are professionally run, want to do better than that. They will plan for about 20%. The plan (budget) does not include profit sharing or bonuses from insurance companies. You can’t count on that. So treat it as just what it is. A bonus.
So, now, where are we? We are hiring a new employee and to pay the agency (profit) and cover overhead we need 70% of the revenue.
Let’s Talk About Producer Compensation
I’ve run through the real costs of hiring an “employee” known as a producer. Some of you, I am sure, are arguing with me that I have overstated the expense.
But I don’t think so. I’ve been running an agency for a long time. We believe in being profitable. We are building an asset. We pay attention to agency operations and agency value. We talk to other agency owners. We benchmark, every quarter, our results against our Growth and Performance Study and the Best Practices results.
I am very confident I know what I’m talking about with respect to the numbers.
Pay More for New Business over Renewals
Clearly, we have about 30% to work with. I will give a little on this subject because OAA members really can count on getting bonus income every year and our commissions are higher than the typical agency. So, if you want, you could use 35%. Those of you who aren’t OAA agencies should do so only with extreme caution.
Now, how do we pay?
If you read much on this subject you will come to the wisdom that it is better to pay more for new production than renewal. This should be obvious. If you’re hiring someone to sell insurance, pay for that. Pay someone else for service, or pay the salesman less for service - and make it abundantly clear on the job description. If you don’t, you will find that the “producer” plateaus in three to five years. Bank on it.
If you’re selling personal lines you can’t pay as much as for commercial lines because the service transactions are higher and cost more. 25% is usually the limit for a personal lines producer. While we’re it, what does a PL producer do on renewal? Anything? Or is that all done by a CSR? If it is, as it is in my agency, don’t pay renewal commissions at all on PL renewals.
Pay a Base Salary to Get a Quality Producer
Finally, do we pay a salary while the producer is building the commission volume? Only if you want a quality employee.
Think about it.
What kind of employee do you get when you make them take all the risk by working on straight commission, and you’re paying a rate that makes long term sense, but makes it hard for someone to build a living fast?
That’s right. You get the bottom of the barrel.
And you get lots of turnover and lots of headaches. Does this make sense? Or would it be better to hire another support person so you can spend more time selling? You already know you’re good at it right?
Still looking for an insurance producer? Okay, hard case!
How to Hire A Winner
If the entrepreneur gets this wrong and hires the wrong kind of personnel, growth will not only stall, but the business could go backward!
This is true because value, resources, time, and money are wasted with a licensed insurance agent who isn’t truly productive.
Avoiding this risk and maximizing opportunity involves looking for a winner. Here is what I think are the five critical things to ask and look for in your job postings and hiring process:
Demonstrated and Provable previous success. This sometimes isn’t in sales, but sales are better. Winners win!
Drive. Ambition is great, but drive is essential. Ambition without drive is hell on earth for everyone.
Work Ethic. This is very closely related to number two. You want someone who thinks 40 hours per week is part-time and they want a full-time opportunity. Full time in sales is 60-80 hours or more per week.
Ambition. I love it when someone asks if they can skip the base salary and have a higher commission rate. Those people don’t come along often. You must look for them; they are worth looking and waiting for.
Competitive. A great salesperson is always looking for someone, even themselves, to compete with. These people want to be the best, be number one, be better next month than they were this month. They are never satisfied. They are often a pain in the ass in this respect, but that competitive fire is what makes them what you want – a winner. When they want to own a piece of the business and are willing to do seemingly impossible things, you’re on the right track.
The biggest problem I have experienced and have seen our agency owners experience (we have over 200 agencies in our organization), is “settling” for someone who isn’t strong in all five of these things. Mediocrity or failure is always the result. Sales training, years of experience, and an insurance license are not enough to guarantee a winner.
By the way, when you are ready to hire a salesperson use competition to your advantage: Hire three and keep the best.
Finally, remember that statistics show 50% of all applicants lie on their resume or in their interviews.
Everyone is on their best behavior in interviews. So, demand proof of prior successes, such as a W2. Don’t want to show us? Then go away.Also, use a testing instrument to make sure you are getting the plumbing behind the wall that you want. The best I have ever used in over 30 years, bar none, with virtually 100% success rate, is the Culture Index.
So, you’ve decided to hire a salesperson or three. It’s critically important to also commit to managing those people effectively. Perhaps you don’t have enough to justify a full-time sales manager, but someone has to fill the role to maximize the return on your investment in these people.
You’ll Need a Sales Manager
The sales manager needs to be a senior-level leader in the organization, who is responsible and accountable for results, can act as insurance sales coach, and work closely with the producers, with or without a formal training program or coaching program. This could even be you.
They Should Have These Traits:
Look for consistent and increasing levels of success, created from leading a team – not necessarily a sales team.
Look for actual coaching experience outside of sales.
Look for someone who likes working with others to accomplish results, as opposed to doing it independently (which is what you want in the salesperson).
Look for drive.
They need to have planning skills to be able to plan for people, activity, and results on a schedule. While some patience is required, I prefer a strong sense of urgency in their nature.
While people skills are important, they absolutely cannot be someone whose highest value is being liked. They, like their charges, should be driven to succeed.
They need average or better detail orientation as they need to track, analyze, and manage with data. They should be or commit to becoming an expert on your business in the overall sense, as well as your products.
If you’re going to be the coach, does this describe you? If not, look for an option inside your organization or perhaps an outsourced person. You will never get the best performance from any team without coaching and accountability.
The Sales Manager Must Be a Coach
Here is what I think you should be looking for in yourself, another executive leader or an outsourced manager.
While it's helpful for a sales manager to have been in sales at some point (because there is some credibility with the troops), I don't think it's critical. Some say you need to know how to play the game to coach it, but I disagree. For example, my wife is a very successful political consultant who has never run for office.
What a great sales manager needs to be is a great COACH. A great coach is, first of all, someone who loves to win but loves to win through helping others be their best.
A Great Sales Coach:
Understands how the game is played, but even more importantly, is highly observant and able to watch salespeople perform and coach improvement in performance.
Knows what it takes to be a great performer, as well as a mediocre one, and is demanding enough to extract great performance while being patient enough to bring that performance along over time.
Expects the best out of people they coach and is never willing to settle or enable less than that. Everyone has their best and every salesperson has a different level of ability. The great sales coach knows that and works to bring the salesperson to their best performance. They need to know instinctively how to do this combining encouragement, ego-stroking, data-driven accountability, and sometimes a swift kick in the ass.
Never accepts excuses but understands that no one wins all the time.
Is a leader who motivates by understanding the wants, needs, and aspirations of his players, and is willing to do the hard work to inspire each person.
Never takes performance for granted, is always looking ahead, and constantly recruiting new people for the team. A great coach never falls in love with a player and understands that a business is not a family (a family is where they must take you in).
Will always seek to upgrade where it makes sense and set clear expectations about what is required to remain on the team.
Finding these people is tough! However, if you look for the qualities, instead of resume history, it's easier.
Then, When Hired:
They should be compensated for results themselves.
They need to have a moderate to higher level of autonomy. In other words, given a goal, they should be able to figure out how to reach it, be able to make independent decisions with confidence, etc.
Gauging the Success of the Producer
Now that you have a sales manager in place and have hired a producer or producer, how do you calculate their value to your insurance agency?
About 10 years ago I attended “Dynamics of Sales Management,” which is a program put on by the folks who have the CIC and CISR programs. It was excellent. Not just for the class content; mostly for the opportunity to talk about managing producers with a bunch of successful insurance agency owners.
One of the topics we addressed was the real cost of getting an insurance producer from the date of hire to validation, where validation means the day on which the producer is finally earning their keep. It’s not the date on which they’ve paid back the agency’s investment in them - that comes much later.
This discussion related to commercial lines producers in the central U.S. so your mileage may vary. But, at that time, the consensus was that it takes three years and $250,000 to bring a producer to validation. On average.
Certainly, if your base salary expense, your service expense, marketing costs, etc. are lower the cost may be less. But, let me remind you that we’ve had a lot of inflation in 10 years so it could be worse. And remember, not all producers validate!
Set Annual Production Requirements
Okay, so we’re making this expensive investment. What are our expectations?
We could manage based on a certain amount of production each year. Ultimately that is critically important. But I’ll argue that initially, we need to manage on activity.
The reason for this is simple. We know that certain activities lead to sales. We know this is just a numbers game (and we know our numbers right?). We know the right activities, in the right amounts, given our average sale size, will lead to predictable results.
So, working backward, determine the annual production requirements. MarshBerry, the insurance agency consulting firm, recommends 25% of annual base salary at six months, 50% at nine months, 75% at 12 months, and 100% at 15 months. These numbers make sense to me.
Now, based on closing ratios and average sale size how many initial and closing appointments does the producer need? How many prospecting phone calls must they make to achieve them? I say “phone calls”, but producers nowadays are expected to contact customers through email, social media, video conferencing and any other means that will create a customer experience conducive to selling.
Now, we have numbers we can manage with.
Using a simple activity sheet we can see week by week, month by month and quarter by quarter if the activity is on track, and if it is generating the required sales!
Evaluate: When to Hold ‘Em and When to Fold ‘Em
If the producer is doing the activity and not getting the sales you need to evaluate:
- The market – are they in the right one?
- Account size – is the producer closing business but the size is too small?
- Do you have the right producer?
The day you decide the problem is the producer is the day to let them go. How long should that take? I don’t know. Three months at a minimum. Fifteen at a maximum. But the first day you know it’s not going to work is the day to fold ‘em. Don’t wait for a validation that may never come, and don’t throw a penny of good money after bad. Business is business, and your agency comes first.
Tony Caldwell is a modern “renaissance man,” who is not only immensely successful in the field of insurance, but is also a writer, children’s advocate, mentor and even a licensed pilot.
Always keen on helping others make their dreams come true, Tony and his team have helped independent agents grow into more than 250 independent agencies. This has made OAA the number one ranked Strategic Master Agency of SIAA for the last 5 years, and one of Oklahoma's 25 Best Companies to Work for.
Tony loves to share his knowledge, insight and wisdom through his bestselling books as well as in free mediums including podcasts and blogs.
Tony and his family are members of Crossings Community Church, and he is very active in community initiatives: he’s chairman of It’s My Community Initiative, Inc., a nonprofit working with disadvantaged people in Oklahoma City; and chairman of the Oklahoma Board of Juvenile Affairs., and he has served through many other organizations including the Salvation Army, Last Frontier Council of the Boy Scouts of America, and the Rotary Club.
In his spare time, Tony enjoys time with his family. He’s also an active outdoorsman and instrument-rated commercial pilot.
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