Producer Compensation Agreements: Terms Every Agency Owner Should Know

As an agency owner, your producers are among your most valuable revenue-generating assets—but without a well-drafted agreement, you could be exposing your agency to significant legal and financial risk.

Producer agreements are not mere formalities. Some of you may be thinking, “I’ve known her for years, we don’t need an agreement” or even “we have always done things through a handshake agreement—even broaching the subject of a written agreement would violate that trust”. The truth is that if everything stays exactly the same as it is today, you might not need an agreement. However, the only constant in life is change. It only takes one small change, and poof, that relationship shifts from complete trust to suspicion and resentment.

Let’s dispel this notion right here: the goal of a contract is not to gain the upper hand or build in an elaborate web of tricks and traps. The purpose is to provide a clear understanding of your working relationship. Frankly, there is real value in revealing issues or misunderstandings that will provide an opportunity to work through a potential issue before it becomes a problem.

Whether you’re just starting out, growing, preparing for succession, or simply continuing to run your business, we’ll go through the contractual provisions common in producer agreements that every agency owner should understand.

Before we go any further, we recommend consulting an employment attorney licensed to practice in your state. Employment laws vary significantly from state to state, and a non-compliant agreement can expose you to additional liabilities.

Compensation Structure

It’s first because, let’s be honest, no one works for free (especially not high-end producers). The compensation clause sets forth the method and timing of producer pay. A legally sound agreement should clearly delineate:

• Commission structures: What the company is paying for new vs. renewal business, and whether the producer is eligible for a bonus or step-up based on hitting performance goals;
• Payment method: Whether payments are made on a commission draw, advance, or “as-earned” by the company; and
• Timing of payments: Whether the producer is paid bi-weekly, once a month, etc.

Things to consider when deciding on a compensation structure:

• Flexibility: If you can negotiate, you can give yourself flexibility by including language that allows you to amend compensation terms (with written notice);
• Function: Compensation structures do not need to be the same for all producers. Consider the producer’s responsibilities, needs, and how you want them to focus their time.  For example, producers who do not have an account manager should be paid higher than those who do.  Newer producers will need more help ramping up their income than those with established books of business; and
• Competitiveness: Large national and super-regional agencies typically have a set commission structure, but simply because they use a 30%-40% new/20-25% renewal split, does not mean it is “right” for your business.  You may have to be more competitive to attract producers since the larger agencies offer more support and resources.

Book Ownership

“Who owns the book” is critical to understanding what happens if a producer leaves or the agency changes ownership. Agreements should include a clause that clearly states that all client accounts, policyholder data, and goodwill generated are the sole and exclusive property of the agency. Now, not all producers are created equal, and under certain circumstances, you may be willing to allow the producer to own some or all of the business (especially if they are bringing accounts with them).

Important elements of this section include:

• Client Definition: Who is considered a client, including all current, past (within a time frame), and future prospective clients;
• Ownership: That the agency owns the accounts, even if the producer originated or serviced the accounts; and
• No Retention: A clear prohibition on the use, retention, or reproduction of any client information post-termination.

Ambiguity over book ownership is a common source of post-relationship litigation, may result in decreased valuation, or create an issue if you ever choose to sell your agency. Put plainly, you can only sell what you own, and a strong ownership clause prevents future headaches and clarifies the most ambiguous part of the producer-agency relationship.

Restrictive Covenants (Non-Solicitation & Non-Compete)

Restrictive covenants are critical for protecting client relationships and preventing client or staff loss if a producer leaves. Non-Solicitation and Non-Compete are often used interchangeably, but are different in definition, practical application, and enforcement. Non-Solicitation (backed by a strong Ownership clause) prevents a former employee from taking your clients or other employees with them. A non-compete clause attempts to prevent a former employee from doing the same job within a specific territory. A non-solicit focuses on protecting your assets, whereas a non-compete focuses on restricting the person leaving.

The enforceability of these clauses depends on state law, but strong agreements will typically include:

• Non-Solicitation of Clients: This clause restricts direct or indirect efforts to induce clients to move business away from the agency for a certain time period (typically 12–24 months);
• Non-Solicitation of Employees: This provision prevents a former employee from poaching your talent and asking your other employees to follow him or her; and
• Non-Compete: If state law allows, a narrowly tailored non-compete that restricts the former employee from performing the same job within a geographic area and with a defined scope of prohibited activities.

There are two important things to consider when deciding on the appropriate restrictive covenants:

• Non-Compete Restrictions: It is important to note (and one of the reasons we recommend consulting an attorney) that certain states impose fines simply for including a non-compete in your employment agreements (i.e., Washington, D.C., Colorado, and Maine) and there are other restrictions on the horizon for non-compete clauses in other jurisdictions.
• Limits on Restrictive Covenants: Restrictive covenants are not all-powerful. For example, non-solicitation clauses prevent a former employee from reaching out to “Clients” and current employees. However, clients and current employees may reach out to the former employee on their own.  The restriction solely applies to the former employee.

Termination Provisions & Post-Employment Compensation

You hope that you never have to use a termination clause, but if it comes to that, it’s important to have a clear understanding of the terms. Termination clauses should clearly outline:

• Conditions for Termination: What are the reasons that the company can terminate the employment relationship, which may include for cause and without cause (if required by state law)?
• Post-Termination Pay: Do you owe any residual commissions or renewal compensation after the termination, under what conditions, and is any post-termination commission conditioned upon non-violation of restrictive covenants?

Additional things to consider when determining the appropriate clauses include:

• State Law: What termination provisions you may or may not include are heavily influenced by state law and what type of employment relationship you have with your producer.  More specifically, requirements for termination and post-employment compensation change if the employment is at-will, W2, or 1099.
• Setoff: You may also consider including a setoff clause, allowing the agency to withhold unpaid commissions to cover any outstanding debts or breaches of agreement.

Confidentiality and Data Protection

Just by being on the inside, employees learn all kinds of things about a business that outsiders would not know. It is important to protect your agency’s information as much as possible. To do so, include a robust confidentiality clause that survives termination and prohibits:

• Data Disclosure: Unauthorized use or disclosure of client data, carrier contracts, pricing models, and proprietary software or systems;
• Information Retention: Retention of records or business information in any form (digital or physical) after termination; and
• Privacy Violations: Non-compliance with state and federal privacy regulations (such as GLBA or HIPAA, if applicable).

A return of property clause upon separation should also be included to mandate prompt return of all agency-owned materials, technology, documents, etc. Note that this section can be used in lieu of a separate NDA (non-disclosure agreement).

Succession and Assignment

We have discussed how an agreement can protect your business if an employee leaves, but it’s just as important for the agreement to spell out what happens if you leave or if the agency changes hands in a sale.  To help facilitate that, a strong succession or assignment provision should include:

• Transferability Clause: Include a provision that allows the agreement to be transferred to another party in the event of a change in business ownership.
• Successor Rights: Clearly state that the agreement and its terms are fully transferable or assignable to any successors or purchasers of the agency.
• Negotiation Leverage: While it doesn’t obligate the producer to stay post-transition, this clause strengthens your position in any departure or retention discussions—especially when paired with strong restrictive covenants.

Final Takeaway for Owners

Strong, enforceable producer agreements are more than just protective measures—they’re value drivers. They help mitigate legal exposure, preserve goodwill, and ensure continuity in the client relationship.

From an M&A standpoint, a buyer always evaluates the terms of any employment agreements. Are your contracts assignable? Do they restrict client poaching? Can you prove ownership of the book? These are critical questions that drive value.

All of this being said, an agreement is good, but people willing to work out any issues are even better. Ideally, a comprehensive and enforceable agreement creates a framework that facilitates potentially difficult conversations between you and your producers. Again, the idea is not to pull the wool over anyone’s eyes or get the leg up. The best agreements simply lay out a mutual understanding and ensure that all parties are, quite literally, on the same page.

If you’d like to review your agency’s compensation plans, we encourage you to schedule an introductory call.