Question

Does the compensation system insurance brokers create the right incentives? Should the system be changed?

Answer 1

ANS.

For many businesses and employees, the standard business model is for the employer to pay the employee a fixed salary based on a basic understanding that the employee will perform certain tasks. Compensation might be altered based on some variables like overtime, time not worked, annual pay raise or perhaps a periodic bonus system. This system works reasonably well and will likely be used in the foreseeable future.

Of course there are many exceptions to this system, most notably producers that get paid based on commission. Others that might get paid on a per-work-handled basis could include production line workers, doctors, telemarketers and home-based piecemeal workers.

The employee salary model works because it is easy to understand and implement. Its success, however, relies on the law of averages. That is, on average, employees are satisfied with their pay, and on average, employers are satisfied with the employees’ performance. Problems show up at the detail level — individual employee dissatisfaction with pay and individual employer dissatisfaction with performance.

Performance-Based Compensation

For some businesses, a good alternative is to incorporate performance-based compensation into the overall compensation model. The concept is that the employee receives monetary compensation for performing very specific measurable tasks.

es and the success of the business. The employee expects to get paid whether the business is making money or not. Also, most employees expect to get paid whether or not they performed their best.

The theory is that if the employee does A, B, C and D, then their overall job will be done properly and the business will be going in the right direction. This business model requires the designing and tracking of certain key performance indicators (KPIs), which eventually indicate the overall health and direction of the firm. What gets measured gets done.

Management needs to shift from only a big picture approach to incorporate individual performance, because they will be involved with tracking the numbers. It is also a very valuable exercise for business owners and managers to analyze the business and decide what the KPIs should be for each job. The good news is that the exercise will clearly show what steps need to be taken for the agency to be successful.

It also requires the business to hire employees that are willing to buy in to this model. Variable pay will not sit well for some people, especially at first. However, if designed correctly, performance-based compensation will allow top performers to shine and underperformers to go away. Not all people will fit in, so expect some attrition with the staff.

Some insurance agencies are already doing a little of this approach by offering incentive programs for the staff to sell new business or cross-sell existing customers. These incentives can either be a flat dollar amount or a percentage of the commissions. When the employee does X, they will earn Y.

The next level of performance-based compensation is to freeze salaries at the current level and then provide periodic (monthly, quarterly or annually) bonuses based on reaching goals or specific KPIs. This approach helps stabilize the cost of compensation and rewards behaviors that should then lead to an increase in revenue and profits.

The agency can afford to pay more when it makes more. It will also reward those that contribute to the success of the agency to make more money. Those that do the bare minimum will stay at the same compensation level.