by Kevin Stipe, March 2004

National Underwriter

Do you know a producer looking for a way to increase his personal income?  Surprisingly, the best way to accomplish this might be to reduce his commission rate.  Yes, you read that right, reduce it!

The Best Practices Study data has for years revealed a peculiar paradox:  The producers who are paid the lowest percentage of what they produce tend to earn the most money.  Of course there are exceptions, but generally speaking, the lower a producer's commission rate the higher his income, and vice versa.

Why is this? It's because a producer's commission rate is the second most important variable in determining his income.  The most important variable is the size of his book.  The key, therefore, to maximizing a producer's income is to maximize the size of his book, while paying him a commission rate which is competitive in light of the organizational resources he is provided.

Data from the Best Practices Study shows that as an insurance agency grows, the commission rates it pays to its producers will normally decline. 

Is this due to increasing greed on the part of the owners?  No, it is typically a strategic response to the needs of its top producers as they begin to "hit the wall" and can no longer grow their books. 

These producers have hit a breaking-point where, as victims of their own success, they are spending their time servicing accounts and have no time left to sell. The agency must at that point reduce commission rates and simultaneously reinvest the savings in more sophisticated sales tools and support structures.  To the degree these reinvested dollars are wisely spent, and to the degree the additional resources are then leveraged by the producers, everybody (including, most importantly, the customer!) wins. 
 
Table 2 shows graphically how producer commission rates decrease as the level of resources provided to those producers increases.

As anybody who has tried to do it before will acknowledge, reducing producer commission rates is not for the faint of heart.  But it is a natural and necessary part of any growth-focused agency's development. The need to reduce commission rates and reinvest the savings typically occurs when two or more producers reach a level of performance that constitutes a breaking-point.  If it is not done when the breaking-point is reached, then the agency's pace-setting producers will quit growing their books, and their income.  For Best Practices agencies this is intolerable.

When do these breaking-points occur?  While levels vary widely based upon a host of factors, in our experience, the first major breaking-point for a mid-size agency is when its top producers begin trying to grow beyond approximately $750,000 in annual commissions.  The breaking-point occurs because these agencies are structured around the needs of their average producers, who likely generate revenue of roughly $400,000.  These levels are typical for mid-size agencies with total revenues of between $2.0-$10.0 million.  Average commission rates paid to producers in these firms are typically in the 30%-37% range.

For firms at this breaking-point, a key challenge is to persuade all of the producers to start selling again despite the fact that some have spent years comfortably servicing their own accounts.  In order to continue growing, producers must be free enough to focus on new business development, and remain involved in ongoing client servicing only where necessary.  The rest of client servicing must be delegated.  This shift can be especially difficult for producers who are accustomed to selling their personal capabilities, rather than the capabilities of their agency or team.

Many firms have taken "baby steps" in this progression by setting up a separate Small Business Unit ("SBU") and then either requesting or requiring that accounts under a certain size be serviced there.  Over time, the thresholds typically increase gradually, as producers are encouraged to apply their valuable experience to writing progressively larger accounts.

Beyond the creation of the SBU, the real retooling usually begins with an investment in a new, higher level of dedicated customer service support.  For example, we have seen an increasing number of firms recently providing their top producers with the support of an account executive, which is a hybrid position that resembles a "servicing-producer."  Other equipping that often occurs at this break-point might include assistance in the areas of marketing (placement), claims, prospecting, technology, and occasionally risk management/loss control. 

A second fairly common breaking-point occurs when a firm has two or more producers heading north of the $1.0 million commission level.  The pace-setters have outgrown their firms' service structures because their firms are oriented toward supporting their average producers whose books range between $600,000-$800,000.  These firms are typically over $10 million in annual revenue. Average commission rates paid to producers in these agencies are normally between 25%-30%, which averages perhaps 5-7 percentage points below their smaller, less-resourced competitors.

Because these agencies typically cater to larger customers, the sales tools and the support capabilities provided to their producers look very different.  In addition to those noted earlier, these larger agencies often employ a team approach to selling and servicing.  This approach enables them to leverage in-house experts from several different disciplines, including specialty lines (such as professional liability) and specialized functions such as alternative risk solutions development, risk control, and in-house claims management.

If your agency is on a continual quest to determine the "optimal" commission rate structure for your producers, perhaps you'll find the experience of the Best Practices agencies helpful.  On one hand, they've discarded as fantasy the notion that there is a perfect long-term structure for their agency since it is a constantly moving target as their agency grows.  However, as they attempt to modify it over time, there are two key criteria that any structure must live up to.  It must enable their pace-setting producers to continue to generate new business equal to 15%-20% of their book each year, and the rate/resource combination offered to those producers must be competitive in the local marketplace.

Kevin Stipe is a senior vice president and principal of Reagan Consulting, Inc., an Atlanta-based management consulting firm that developed and produces the "Independent Insurance Agents and Brokers of America Best Practices Study."  The Best Practices Study may be accessed free of charge at Reagan Consulting's website www.reaganconsulting.com.  Kevin may be reached at
(404) 233-5545 or by email at Kevin@reaganconsulting.com.