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January 9, 2014

Paying Staff for Selling Activity in Personal Lines

3 min read

Topic: Insurance Sales Insurance Agency Management Start an Agency Grow an Agency

Continuing our discussion on how to properly compensate staff, let’s discuss compensating internal staff for personal lines sales activities. I have written before on how to and how much to pay commercial lines producers (see posts on “Bloodsuckers” for more information), so we will not discuss that again here.

When we look at benchmarking data from The National Academy for Producer Studies (the CIC/CISR people) we see that most agencies which achieve a reasonable level of profitability pay no more than 25% of commission income for producer compensation in personal lines (the limit for commercial lines is 35%). Other benchmarking studies bear out the wisdom of this limit. 

So that’s how much (max). But let’s define our terms a little better. What is a producer? A producer is someone who sells! So, commission is for selling! Commission is NOT paid for servicing. The first thing you need to do is separate servicing payroll from selling payroll, even if the payroll is paid to the same person (which happens a lot in the small growth agency)! You simply cannot make a reasonable profit if you pay more than this.

If we think about what we want a producer to do it’s to produce, right? But we also want them to retain! Retention of customers is partly the responsibility of the service staff but also can be partly the responsibility of sales staff. If you’re sales staff never contacts a customer again after the sale, and all further relationship after the sale comes from service staff you may be able to pay more than 25% commission.

Consider a simple example where the average customer stays with your agency four years (this would be a terrible retention rate, but the math is easy). If the average commission is $100 that’s $400 over four years, right? If you paid 100% commission to the producer or $100 to produce the account but never paid them renewals your average commission rate would be 25% right? This is, more or less, how it’s done in life insurance, but it’s hard to do in the small sale world of personal lines where it would be tough to make a living this way.

So, what if you paid 50% new commission and 10% renewal on the same deal?  Well, then you’d pay $80 in commission over the four years of the customer life or 20%. Less total commission but there is some residual income to the producer. Or you could be more generous and pay 50% new and 20% renewal. In this case, total commission would be $110 or 27.5% on average. I think this is too much. But we’re getting close.

If we paid 40% new and 20% renewal we’d be paying $100 over four years or 25%. We’d be paying no more than the average agency and we’d have an incentive to produce new business because of the higher commission with a retention commission to help the producer develop a stable income.

BUT!! If we’re going to pay the producer a renewal commission they have to earn it! That means they have to re-contact the customer every year and do some basic relationship activities and help renew the account. They should not do service work but focus instead on making sure coverage is still important, perhaps cross sell, seek referrals, etc. AND, if they do these things your retention will increase above 75% and your average commission rate will actually drop. 

So, no magic formula here, just some thought experiments. To summarize:  1) pay commission only for selling activity, 2) pay a higher commission for new business, 3) don’t pay more than 25% of commission income to producers on average 4) develop a plan which motivates producers to sell and to sell the renewal, 5) develop a plan that allows the producer to build their income over time.