Insurance Producer Compensation Plans for Growth

There are a wide range of models to how an agency can incentivize producers to stay focused on growth. Factors such as the agency’s business model, the type of business the producer generates, the team support structure, and other resources provided to sales staff can all contribute to a producer compensation or incentive plan.

Common questions for producer compensation or incentive plans:

• What is a fair commission split for an insurance producer?
• What is a good commission rate for new business for a producer?
• Is it a good idea to offer my producers equity in their book?
• Should I allow producers to become partners in the agency?

These are all great questions and should be explored thoughtfully before deciding on what to implement for your agency.

A few key points for this article:

1. It’s critical to define agency performance standards and business model before agreeing to any commission splits or incentive plans.
2. There are many types of commission structures or incentive plan options.
3. There are other ways to incentivize production roles beyond commission splits.

A Higher New Business Commission Rate is an Incentive

The primary goal for paying commission is putting attention on new business activities. The most common commission structure in the industry is paying a higher commission rate on new business, usually the first policy period, and a reduced commission rate on policies that renew with the agency. This could be 40% on new policies and 30% renewals, or 50% on new and 40% on renewals. Regardless of the percentage, if an agency offers a higher rate for new business activity it is incentivizing the producer to place focus on new sales.

Example:

• Comp plan structure is 45% on new policies and 30% on renewal policies.
• End of prior year revenue baseline of $500,000.
• Team achieves a revenue retention rate of 90%, and has $450,000 of renewal commissions.
• Producer writes and agency earns $130,000 of new revenue within the year.
• At the end of the year the producer’s book of business is $580,000.
  • Renewal commission = $450,000 * 30% = $135,000
  • New commission = $130,000 * 45% = $58,500
  • Total earnings = $135,000 + $58,500 = $193,500

There are also business cases for this such as:

• The producer or team expends more effort to prospect, market, and bring in new accounts.
• Instead of marketing spend, the agency allocates higher commission for customer acquisition costs.
• Competitive commission rates are a factor in recruiting producers.

Two potential downsides of utilizing a different commission rate for new vs renewal transactions are (1) client retention may suffer if a producer or team places an imbalanced effort on pursuing new accounts  and (2) producers can churn business if the agency is not effectively tracking production activity.   These risks can be mitigated with proper procedures and the adoption of a good AMS but beware because these are real issues that happen when agencies fail to implement the right systems.

Base Plus Growth or Book Growth Commission Plan

If the number one goal is to focus on revenue growth for a book of business, then there are plan options to pay a flat consistent commission rate on all transactions with a bonus or override structure for year over year growth. What does this look like?

Example:

• Comp plan base commission percentage of 30%, growth commission percentage of 20% (50% of total growth over baseline).
• End of prior year revenue baseline $500,000.
• In the current year, producer is paid 30% of every dollar of production, then 20% additional bonus/override on every $1 above $500,000.
• At the end of the year the producer’s book of business is $580,000.
  • Base commission is $580,000 * 30% = $174,000.
  • Bonus/Override is ($580,000 – $500,000) * 20% = $16,000.
  • Total earnings of $190,000.

Tiered Activity Bonus or Commission Plans

Probably the most common commission or incentive plan type utilized is tiering higher commission rates or bonuses on a scale of minimum to higher activity targets. This can take many forms like new policy count, cross-selling targets, premium targets, etc. It makes logical sense why an agency would use a plan like this as it emphasizes upsized or disproportionate compensation for producing a higher volume of activity. So long as it’s structured well these plans can be effective by maintaining below or average performers within a predictable range and high performers to benefit from hitting defined marks.

Most plans here tend to work better when blending a few metrics such as premium and cross selling or policy type goals, but with the tradeoff of increased complexity.

These types of plans are widely used in captive agencies or mostly personal lines agencies because agency profitability can be significantly different when writing multiple lines per clients compared to monoline.

Candidly another reason those types of plans are so prevalent for smaller or personal lines focused agencies is the lack of discipline tracking commission data in the agency management system and reliance on carrier reports for policy or premium production.

Deferred Compensation or Equity Incentive Plans

A common question is what options are available for insurance producer equity? Candidly most plans utilized by agencies are not equity, but deferred compensation plans which specify payments owed to a producer upon an agency sale or retirement. It’s often referred to as “book equity” or “book ownership” but are more appropriately a post-termination bonus defined as a formula relative to a book of business. That being said, there are incentive plan options which can include awarding or purchasing equity tied to a producer’s performance. Here are a few types of incentives agencies can implement:

• 401(k) Mirror Plan or Non-Qualified Deferred Comp Plans (NQDC) – often used by companies where highly compensated employees want salary deferral options not subject to 401(k) qualified plan rules, and the agency can match or contribute funds as well.
• Supplemental Executive Retirement Plan (SERP) – is the formal term for most applications of “book equity.” A bonus plan designed to pay a benefit upon separation of employment, which can be determined as a formula of a book of business or producer commissions.
• Phantom Equity – is an option to reward people with financial benefits mirroring company performance. While not owning shares of the company, phantom equity provides the opportunity to benefit similar to owning shares around major events like a company sale, retirement, or even profit sharing related to proportional vested awards.
• Employee Stock Purchase Plan (ESPP) – enables a producer or employee to purchase shares of a company, often discounted, over a period of time through payroll deductions or elections.
• Stock grants – can be a mechanism to award or give stock based on performance goals or milestones.

I wrote another article that goes through these in more detail, which will be linked below if you want to learn more.

How Do You Choose The Right Incentive Plan for Producers?

While the premise of this article is focused on producers, there are cases some of these incentive options can be utilized for other roles in the agency. I’ll also call back key points for incentive plans to be successful:

1. Incentives should align with the agency’s client experience, service standards, producer goals, and agency profitability goals.
2. Role matters. Incentive plans should be intentionally designed to reward desired outcomes relative to someone’s role description. For producers this usually means sustainable long term growth.
3. Plans must be easy to track and administer to maintain producer trust. Doesn’t mean easy to achieve, but expectations are clear as to what can be earned.
4. Before agreeing to any type of incentive it’s important to properly design a plan to avoid future risks of unclear expectations or outsized financial obligations.

We offer consultative services for agencies to assist with designing and implementing producer compensation and incentive plans. This includes determining appropriate commission splits, defining performance standards, and choosing which incentive plan makes sense for your producers based on clear goals.

If you are interested to have this conversation then schedule an introductory call with me. After scheduling your intro call, visit my other article “Equity Options for Insurance Producers.”