By Nancy Doucette
This is the final part of this four-part series on innovative, but common-sense approaches to managing employees. The earlier parts of the series that examined testing, job descriptions and performance reviews, and training are available at www.roughnotes.com/rnmagazine/rnmagsearchndx.htm by searching for the author's name in the Management category.
"You have to spend money to make money," according to the time-worn maxim. And for some agencies, that means paying sometimes overly generous salaries to non-commissioned employees--account executives, accounting staff, the receptionist, and the person in the mailroom--and routinely increasing those salaries each year. But as we've learned previously in this series, accountability spurs productivity. Once an agency has developed specific job descriptions
and implemented ongoing training programs, employees can excel in their jobs, and meaningful performance reviews can be administered. However, money is a powerful motivator, which brings us to the next step: to initiate a new approach to compensation that is based on those performance reviews.
Agency President Bob Owens and the staff of the Owens Group in Englewood Cliffs, New Jersey, took that next step almost two years ago--when the commercial insurance market was still soft. For the area in which the Owens Group is located, payroll constitutes about two-thirds of the cost of running the agency. "You don't want to increase your overwhelming cost of doing business just because another year has gone by without it bearing a relationship to your income," Bob notes. So when industry consultant Virginia Bates, who provides advice to the Owens Group on an ongoing basis, brought up the idea of a bonus pool as a way to rein in those costs, Bob discussed the idea with the agency's management team. The idea made sense, they decided.
Through VMB Associates, Inc., her Melrose, Massachusetts-based consulting practice, Virginia offers management, technology and marketing strategies to agencies, brokerages and carriers. What she recommended to the Owens Group was that they discontinue automatically increasing salaries by 2% to 5%. Instead, she suggested initiating a bonus pool that would contain a percentage that approxi-mated what the agency would devote to staff salaries. The moneys for the bonus pool would come from the agency's net growth over the previous year. The amount in the bonus pool would be distributed to the non-commissioned staff based largely on their performance review. If the individual did well in his or her performance review, that person would get a good amount from the bonus pool. And if somebody didn't do well in his or her performance review, that person wouldn't get as much from the bonus pool.
However, she warns, "You can't put a compensation plan in place and expect it to be a management technique. The bonus pool has to be a complement to the management technique." So she urges agencies to do the groundwork--create job descriptions and service standards, set up an effective staff structure, and conduct regular performance reviews--before initiating the bonus pool. Otherwise, she explains, it would be like trying to put the angel on the Christmas tree without having the tree in place.
Depending on the inflation index, the agency will still review all salaries throughout the organization and will give everyone a cost of living increase, irrespective of performance. Currently those cost of living increases should occur every two years. But if inflation heats up, then those increases will occur annually.
Using Virginia's bonus pool model, the Owens Group decided to allocate 25% of the agency's total increase in income to its bonus pool. That included all commissions from every department, all profit-sharing bonuses paid by carriers, and all investment income that the agency earns. "We had a good year last year," Bob reports. At year-end 2001, the bonus pool consisted of close to $81,000, which was distributed among the
non-commissioned, non-contract employees. It worked out to be between 8% and 15% of each person's salary. "Compare a 2% or 3% cost of living increase paid over the year to one big check on New Year's Eve--people were very happy," he says.
In allocating the funds from the bonus pool, agencies also need to consider that different job classifications in an agency have different skill level requirements. A senior level marketer and a receptionist, for example, both have important jobs, but one requires more experience in the insurance industry.
So Virginia encourages agencies to consider an individual's performance and job skill level when allocating the bonus pool. She says that most agencies assign a point level between 1.0 and 3.0 to each job in the office. Generally, the receptionist position will be the base at 1.0. The senior level marketer might be a 2.8. Presuming both receive exceptional performance reviews, the senior level marketer would get more from the bonus pool than the receptionist would. "Once it's explained, everybody understands it. It gives everybody a feeling of fairness and equity," Virginia says.
In distributing the bonus pool last year, Bob Owens says the bonuses ranged between $8,000 and $800. Recalling the "old" approach of automatic raises, Bob notes that the person who received the $8,000 bonus would have received $1,500 which would have worked out to about $30 per week. "This is a better compensation method," he says.
The Owens Group provides its staff with a bonus pool update each month via an agency staff newsletter that's e-mailed on Monday morning. As of August 2002, the bonus pool is as big as it was last year. But it does fluctuate and because staff is more in tune with the income side of the operation, they understand more clearly that when the agency loses an account, an account of comparable size needs to replace it to maintain the bonus pool. However, Virginia notes, because the bonus pool is funded by the net revenue growth of the agency, retention--and service--is every bit as important as new business.
"Everybody has something to do with the income of the business," Bob notes. "Are we retaining clients? Bringing in new clients? Maximizing the commission we're earning with each carrier? Negotiating a good profit-sharing deal? The bonus pool helps everyone stay focused."
And because everybody does have something to do with the income of the business, Virginia advocates that the bonus pool should be spread over the entire agency like an umbrella. The account executive in the personal lines department should benefit from the referral to the benefits department. The commercial lines account executive should benefit when the president of a commercial account is convinced to move the family's personal business to this agency. The receptionist should benefit when the agency writes her dry cleaners' account, based on the lead she provided. "It's sometimes tempting for personal lines to have its bonus pool and commercial lines have its bonus pool," Virginia observes. "But if an agency were to do it this way, where do the accounting people fit in? Having the pool spread over the whole agency is an incentive for cross-department referrals."
House business--those accounts that aren't commissioned--can also enhance a bonus pool arrangement. To increase that business, Virginia suggests taking an analytical look at a retiring producer's book of business. When a producer is preparing to retire, the agency should get a list of that producer's accounts from the management system. Then discuss with the producer which accounts need a producer from a production standpoint, and which accounts the account manager can handle. She says in most instances about 90% of the retiring producer's book can be handled by the account manager. "In reality, the account manager has been handling the accounts already," she says. "So you take the few accounts that really need a producer--to help with the risk management work--and you assign them to the right producer. With house accounts, the agency isn't paying commission to anybody, so with a higher proportion of non-commissioned business, the agency is more profitable, with a higher equity value."
The same but different
Costello & Sons Insurance Brokers, headquartered in San Rafael, California, was the first of Virginia's clients to fight back against the soft market conditions that were keeping agencies in a constant game of catch-up--where salaries were going up, income was staying the same, and therefore profit was going down. Three years ago, the agency implemented its bonus pool; but in doing so, the management of Costello & Sons modified Virginia's bonus pool model to fit the agency vision.
About two years before implementing the bonus pool, though, the agency began to sharpen its focus by limiting its marketing activities to a select group of niches: technology, non-profits, general business, and personal lines. Bryan Costello, Costello & Sons' CEO, recalls that the agency was changing, but some key people weren't changing with it. So it was apparent that the next step was to sharpen the staff's focus. But before that could happen, Bryan had to be certain the right people were in the right jobs. "I started to evaluate people's strengths and weaknesses, and I discovered that some people were managers because of tenure, not because of management capability," he recalls. Some difficult decisions regarding long-time staff needed to be made--and were. In the three years since the agency made those tough decisions, agency revenues have doubled.
Job descriptions and performance reviews--which weren't consistently administered previously--brought clarity and focus to the staff. And with that groundwork in place, the bonus pool could be implemented. Although technology is one of the agency's niches, Bryan says the bursting of the dot-com bubble hasn't hurt the bonus pool. "We just paid out $75,000 in bonuses in June," he reports, "and we're on budget to pay approximately $100,000 in bonuses in December."
Costello & Sons does a complete performance review at year-end and has a mid-year check-in, so the bonus pool is distributed in June and December. "The mid-year bonus is a thank you for the work that's been done over the past six months, and it's a motivator to say it can be bigger six months from now," Bryan explains.
Rather than base its bonus pool on the increase in net revenue, Costello & Sons budgets for anticipated growth and allocates 10% of salaries to the bonus pool. So if salaries were $1 million, the agency would set aside $100,000 for the bonus pool. The average bonus is about 10% of a person's salary. "It's an easy formula," Bryan says.
Costello and Sons also includes commissioned staff in the bonus pool. "Because the bonus pool is distributed at a social event where the entire staff is present, we include a nominal bonus for the producers as well," Bryan says.
"Handing somebody a nice-sized bonus is a marketing opportunity within your own organization," Bryan notes. "Everybody understands that they have a part to play--that no job is more important than another. We're all interconnected. But that's been ingrained in our staff over time. It's what we do--just like the bonus pool is part of what we do as an agency." *