Editor's Note: Use the suggestions in the following article to lend support to agencies you serve when they are making hiring decisions. Depending on your level of involvement, you may wish to help them interview initial candidates.
Too often, adding a new producer results in failure for both the agency and the employee because a formal program of attracting, hiring, training, managing, and retaining producers was not developed and implemented. This article is devoted to helping structure and implement a new producer program.
AN EIGHT-STEP PROCESS
It is essential that any agency contemplating adding a new producer determine its needs accurately prior to starting the hiring process. This should include establishing why the agency currently needs a producer, the personality traits desired in the individual, how much the agency can afford to pay the person, and designing the selection process to find the ideal candidate.
STEP 1: DETERMINE IF YOU NEED A PRODUCER OR ACCOUNT EXECUTIVE
The first step in hiring a new producer is not to start the search for candidates immediately, but rather to determine if the agency needs a new producer in the first place. Many agencies find hiring an account executive instead of a producer fulfills their needs just as well, with less expense and risk.
Differentiate the roles of producer and account executive in the following manner:
Producer: Responsible for originating and producing new accounts and working on his or her own renewals.
Account Executive: Does not have the responsibility to produce new business; concentrates instead on handling the renewal and service of house accounts and accounts passed to the account executive from other producers (and owners).
A producer's primary function is to originate and retain new business. On small Commercial accounts and Personal Lines books, the customer service representative should handle all issues and renewals. On medium-size Commercial accounts (more than $5,000 annual premium) and large, complex accounts, a producer or account executive will have the ongoing service responsibility, renewal duties, and perform any remarketing activities necessary.
Generally an agency will probably not require a new producer if:
- The agency's total book of business is $200,000 to $225,000 annual gross Commercial lines commission or less. An agency of this size usually does not have the resources to compensate and support a new producer adequately and still generate a profit for the owner(s).
- The agency's average individual producer (and owner) has a book of business below the $200,000 to $225,000 gross annual commissions threshold. Producers need to meet or exceed this threshold to allow the agency to make a profit and validate their compensation and associated sales expenses.
Once the agency's producers exceed these average gross commission thresholds, there is an opportunity for the firm to consider adding another producer.
- If the agency's owners have individually developed large books of business and the time devoted to servicing becomes burdensome (especially combined with the time the owners need to devote to management of the firm), adding an account executive to support the owner's book of business service needs may be the ideal addition to the firm (rather than a new producer). By turning over existing account producer-service responsibilities to an account executive, the agency principal(s) can focus on new account production.
STEP 2: DETERMINE THE CHARACTERISTICS AND PERSONALITY TRAITS DESIRED IN A PRODUCER RELATIVE TO THE AGENCY'S PERSONALITY AND CUSTOMER/MARKET NEEDS
If the agency needs to add a producer, you should next determine the characteristics required in a successful candidate. Minimum characteristics should include a high ego drive, the desire to be financially successful, a high degree of empathy, good communication skills, and comfort when dealing with new people.
Also consider whether an experienced producer is desired, one who can bring in an existing book of business, or raw talent possessing strong sales skills and/or technical insurance knowledge. Part of the decision naturally will be based upon the resources available to compensate the producer (see Step 3) and the amount of time and effort the agency is willing (or able) to devote to help make the new producer successful.
STEP 3: ESTABLISH HOW MUCH THE AGENCY CAN AFFORD TO PAY A PRODUCER
Based on seeking a 15% to 20% pretax profit margin, the average insurance agency should determine producer compensation as follows:
Calculate the agency's income, target profit, and expenses to determine how much you can afford to pay the new producer. If the results differ significantly from the industry standard, review the expenses that differ, find out why, and develop action plans for correction.
If the agency's balance of commission dollars available to pay the new producer is substantially less than 26.5%, there may not be enough compensation for a new producer. The agency should consider addressing and correcting its income/expense and profitability issues before hiring a new producer.
There can be as many variations of new producer compensation plans as there are insurance agencies in North America. Any successful compensation plan must achieve three primary goals:
- Earn a profit for the agency
- Generate revenue growth
- Attract and retain quality producers
The most important goal of these three is, of course, to earn a profit. In many cases, producer relationships fail in an agency simply because the owner ignored profit as a primary goal of the producer plan. This often happens when an owner tries to match a competitor's offer of a 50% commission split to the new producer.
The principal overpays, the producer has incentive to underachieve (by amassing a comfortable income too quickly), and within several years the relationship dies because the owner is unhappy with the arrangement.
The primary reason any owner maintains a business is the reasonable prospect of first, generating a cash profit, and second, building the sales value of the asset (business). To achieve these goals, a profit must be built into any producer compensation plan. Overpaying a producer by rationalizing that the agency value will increase because of added commission volume is incorrect, as agency value is based on profit, not commission. If producers are overpaid and profits are low, agency value will be reduced as well.
As indicated, the average agency can afford to pay approximately 26.5% of a given commission dollar to the producer. However, if the agency's producers pay their own automobile, travel, and client- promotion expense, an additional 3% to 5% of commission can be paid to them. This means the agency should be paying its producers 30% of commission on renewals in order to generate a fair profit.
Based on the analysis above, the following new-producer compensation structure can be suggested:
Annual Base Salary: A minimum annual salary should be established for the first two to three years the producer is employed. This would be income committed to the producer and viewed as an investment; the producer will be paid the higher of the minimum salary or the commission split as indicated below.
As a standard commission split, the annual salary each Jan. 1 should be set at 30% of the prior year's total gross P/C commission on accounts originally produced by the producer. These will be "type "A" accounts. (If the 30% base salary application is less than the producer's current salary, continue to freeze the producer's salary for one year at its present level and validate it in the coming year.)
Add to this 20% of the prior year's gross commission on house accounts assigned to the new producer by the agency. These will be "type B" accounts. These accounts can be accounts that owners and high-volume producers can pass to the new producer.
New Business Bonus: A bonus equal to 40% of all new account, P/C commissions paid to the agency on new accounts written by the new producer during each calendar quarter will be paid during the quarter.
Growth Target Bonus: Each new producer will be given an annual new commission growth target, such as $25,000 gross commission in the first year, $35,000 in the second, and $45,000 in the third year. If the target is reached, an additional bonus of 10% of all new commissions will be paid to the producer.
Automobile and Client Promotion: Producers will be responsible for paying their own automobile and client-related expenses out of their commission split. This way the producer can write off the expenses on his/her personal taxes and the agency is not burdened with excessive receipts and accounting tasks.
Education Expenses: The agency will pay all education costs and travel costs related to education, with prior approval.
STEP 4: START THE SEARCH PROCESS
By now the agency has established its need for a producer, the type of person desired, and the size of the agency's investment. Other than having an employment search firm do the recruiting for you, where can you find candidates? Sources include:
- Marketing representatives, underwriters, and claim representatives from carriers
- Producers at other agencies
- Producers/account executives at public brokers
- Proven salespeople in other fields or industries
- Graduating college seniors with a marketing degree
From these resources, construct a hit list of five to 15 potential candidates to interview.
STEP 5: INITIAL INTERVIEW AND TESTING
Interview and test every candidate on your hit list. Use this first meeting to ask background, qualifications, skills, and experience questions. Determine if the candidate possesses the personality traits desirable in a producer.
At the conclusion of the interview, have the candidate complete a personality profile test. These tests usually are administered by outside psychological-testing firms and can be valuable in identifying personality traits, levels of energy, and work conduct. They also can contribute to your judgment factors relative to the chances for success or failure of the producer candidate. While they should not be used as the sole criteria for any hiring decision, they can help you identify the necessary aptitudes needed for producer sales success.
Also, it is worthwhile to have more than one agency owner/manager interview the candidates to get a better overall judgment on them.
During the initial interviews, consider asking the candidates these questions to obtain a better understanding of their business experience and qualifications:
- What have been your three best or biggest business successes?
- Describe your three worst or most disappointing business experiences.
- How would you change the circumstances should your worst experiences occur again?
- Who was your best boss or supervisor? What were his or her characteristics and business practices that earned your regard?
- Who was your worst boss or supervisor? What earned that individual this dubious honor?
These questions can help gauge the candidate's expectations, whether the agency's management style will be a fit, and provide insight into the individual's perspective on his or her success and failure experiences.
STEP 6: REALITY CHECKS
Once the list has been pared down to two or three ideal candidates, arrange to meet with each potential producer two or three additional times. These meetings should take place under the following circumstances:
First, the meeting should occur away from the agency premises in a social setting atmosphere-attend a ball game, play golf, meet over dinner, etc.
Second, another meeting should occur in a business setting-calling on a new prospective client, a renewal visit, or a service call. After the business meeting, review the meeting events with the candidate regarding how he or she felt the meeting went, what could have been done differently, and what he or she would do as a follow-up or try to accomplish during the next client meeting.
The purpose of these meetings is to obtain as complete a picture as possible of the candidate's personality, experience, reactions, and behavior in social and business situations. These are important factors since the producer will be representing the firm in both positive and negative social and business settings.
While the investment in time and effort at this stage may seem considerable, remember it is very important to select the right person. The cost to replace an underachieving producer is high (both in dollars and time).
STEP 7: SELECT THE RIGHT CANDIDATE
By this stage, you should have a good feel for which candidate best suits the agency's needs and has the aptitude and profile for success. When making the final selection, keep in mind the budget constraints established when the new producer's pay was determined (Step 3).
If the ideal candidate is beyond the agency's current financial reach, do not feel compelled to bring in the producer under the assumption he or she will bring in the necessary additional revenue to justify higher salary demands.
More often than not, paying a producer more than the agency can afford leads to failure for the producer, as the sales goals necessary to validate the producer and still develop a level of profitability for the agency usually cannot be met.
Obviously, no program can guarantee that the agency will hire the correct individual every time. The only way to know the right person is in the right job is to observe them in the actual work environment. Devoting quality time in the selection process will greatly enhance the chances of success for both agency and producer.
STEP 8: SET A GAME PLAN TO VALIDATE NEW PRODUCER
At the end of three years with an agency, a producer should be handling a book of business and developing a gross commission level that when multiplied by the agency's standard commission split equals his or her base salary. For example, if a new producer is hired at a $30,000 annual base salary, at the end of the third year he or she should be handling at least $100,000 in gross annual commission ($100,000 x 30% [the agency's standard commission split] = $30,000).
When hiring new producers, it's important for the firm to put them on a structured program to validate their base compensation level by the end of three years. Otherwise, the agency's investment in the producer becomes too costly. All producers should know their target level of gross production to be handled. For most producers, this will be accomplished through a combination of new accounts produced during their first three years, plus a certain level of house accounts passed to the producer for servicing.
Attracting, hiring, training, and retaining high-quality new producers is a challenge every independent insurance agency faces at some point. An agency's investment in people, especially producers, is very costly and every effort should be made to (1) solidify the requirements for a producer, (2) determine the agency's ability to compensate the candidate properly and profitably, (3) choose the right candidate, (4) establish a sales and validation game plan, and (5) manage the individual producer's sales activities to ensure success or detect early potential for