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Brokers give performance-based pay a thumbs-up


November 6, 2018   by David Gambrill



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This story is one in a series reporting on the results of 2018 National Broker Survey, conducted by Canadian Underwriter. The survey of more than 800 P&C brokers nationally was designed to identify the success strategies of both producers and principals. Find other instalments in the series here and our overview package in our October 2018 issue.

 

Performance-based compensation

Could you survive in a world in which you eat what you kill?

The phrase describes the all-or-nothing proposition of 100% commission on sales. In this model, there’s no salary to smooth over the bad days. No sales? No money. Simple as that.

On the flip side, huge performance means eating like a king on commissions. No benefits or security blanket? No problem. If you’re one of the good ones, you’ll likely be earning enough to pay for your own benefits in three years, and you won’t be limited by artificial caps on your salary.

In the most extreme form of performance-based compensation, if you don’t perform, you don’t get paid. But there are a million shades of grey, and there are a variety of ways to link payment to performance.

The question is: do performance-based pay structures actually improve performance?

Broker owners and principals across Canada seem to think so. They cited it as a best practice in the 2018 National Broker Survey.

In the survey, more than 250 broker owners and principals shared their thoughts about four different ways to promote higher sales production in the brokerage:

  • profit-sharing plans,
  • employee share-owning plans,
  • employee recognition programs and
  • performance-based compensation.

Survey respondents were asked “how beneficial have each of these practices been for improving the performance of your brokers?”

Performance-based compensation was the runaway favourite among the four. Of the 198 broker owners/principals who confirmed offering performance-based compensation, 66% rated the compensation method as a best practice (scoring it an 8-10 on a 10-point scale).

“Is it effective? Absolutely,” says Ryan Kirk, vice president of operations for eastern Canada at Surex Direct.

Surex Direct ranks as Canada’s fastest-growing insurance business with a 3,097% growth rate over the past five years. The co-founders of Surex Direct credit a 100% commission structure for the rapid growth at the brokerage. This pay structure applies to anything involving commissions on the premium of the client, including new business, renewals and endorsements. It lasts from the beginning to the end of the sales relationship.

“One of the reasons why it is so effective is we don’t hire our brokers as employees, we hire them as independent contractors,” says Kirk. “So, they look at their job as their own personal business in a sense, kind of like a real estate agent. Their efforts are rewarded and there’s no cap or limit on what they can earn. By being an independent contractor and not being capped in their commissions, brokers are actually excited because…they’re usually making more than industry standard if they are a good broker.”

The model is purported to be good for clients as well as brokers, because brokers are dependent upon keeping the customer happy if they want to keep earning commission. “The nice thing about being 100% commission is that the customer service level is much higher, because you’re 100% invested in keeping that client and you’ll do what you can,” says Kirk. “You need to go above and beyond to show them why, even if there is a better price out there, that your service is better than anything else.”

Some argue the same level of service may not be present in a straight salaried model. More precisely, detractors say a salary model fosters a mentality that it doesn’t matter whether a client comes or goes – the broker gets paid the same regardless of the outcome.

Not all would agree with that assessment, particularly those who see performance-based salaries as breeding competition between sales reps for the most lucrative business. Competition for business among employees in the office could actually harm customer service, depending on the compensation model, especially if some aspects of the insurance sales process earn more commission or bonuses than others.

Various types of compensation incentives are offered by brokerages across the country, notes Wayne Ezekiel, president of AA Munro Insurance. He says about a half-dozen brokers in his organization of 125 are on some kind of compensation or performance-based plan.

One option is for brokers to earn commission or bonuses based on policy sales. One example is a broker selling a policy and getting a percentage of that commission in the first year. Another may be to offer bonuses to producers who grow their books by certain target levels.

Another option is to compensate a broker for retention levels. For example, if the producer’s retention level is higher than 85%, he or she would get a certain percentage of the revenue of the book based on those retentions.

CSRs may get compensated for cross-selling. For example, a broker hands off a commercial account over to a CSR; the CSR upsells the client on a home or auto insurance policy and gets the bonus for adding the new line of business.

One wild card is the ability of brokerages to find top-notch, highly qualified talent. Owners and principals reported in the National Broker Survey that it is a challenge to find “highly-qualified” producers. If a principal finds the talent, will they run the risk of losing them if they enter a commission-based bidding war?

“What would happen if we give somebody a good compensation package, and then another brokerage comes along and says, ‘Hey, we’ll give you 5% more if you come with us’?” Ezekiel says hypothetically. “So, you lose the broker, plus you may lose other customers you had already accumulated, who may go with him.”

To remove or reduce this element of risk, a brokerage may opt to offer a highly-qualified prospective broker a good compensation package to start, in addition to an excellent team environment.

“Money is not always the highest motivator of individuals – typically, money falls down to sixth or seventh place on the list,” Ezekiel says. “It’s really about creating the environment – and an inclusive, people-focused culture – that allows [producers] to be the best they can be.”



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1 Comment » for Brokers give performance-based pay a thumbs-up
  1. Bruce Rabik says:

    Performance pay is a well studied phenomenon so the answer is quite clear. See Daniel Pink’s book “Drive” for a summary of the science regarding what motivates human beings or google the excellent YouTube video summary of the book. The answer is clear but nuanced – really it’s what is perceived as fair in the context of where the person works.

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