Producer Incentive Compensation Reimagined
Producer incentive compensation is a hot topic that perplexes many agency owners. Historically, significant innovation around this topic has been minimal.
In an effort to reimagine the producer incentive compensation paradigm, let’s explore a fresh, new creative way to leverage production talent to create a win-win incentive plan for both producers and agency owners.
If you are fortunate enough to have found a producer that is worthy of ownership, the chances are pretty good you will want to figure a way to retain this individual. An incentive compensation plan that combines equity bonuses and equity purchases just may be the answer. Here is how such a plan could be tailored.
A producer's book of business must achieve a predetermined level, by a predetermined time frame, to qualify.
- For example, this book of business level can start around $500,000, depending upon location, and should be achieved during the third year of employment to qualify.
- The incentive plan begins after year three and runs for five consecutive years.
- An equity bonus, equal to a predetermined percentage of the book of business, is bonused each year over the next five years assuming certain benchmarks are met (e.g. book size, objective and subjective criteria, etc.).
- Each equity bonus vests over five years with the equity bonus in year five vesting over five additional years. Because of this feature, the incentive plan runs for ten years from beginning to end.
- If the producer terminated employment during the vesting period, all unvested equity would be forfeited.
The incentive plan allows the producer to purchase up to the amount of the equity bonus accepted.
- For example, if a producer can not purchase equity equal to the amount bonused, the equity bonus is scaled back to the amount the producer can afford to purchase.
- Done properly, the producer has the incentive to grow their book of business for a larger equity bonus.
- Additionally, they have the incentive to keep their lifestyle in check so saved funds are available to purchase equity at future points in time.
The producer is responsible for all payroll taxes on the equity bonuses. However, distributions and/or dividends may be used to help the producer cover payroll taxes on the equity bonuses. To be safe, the maximum equity bonus for a producer in each year should be limited. This is a critical component of the plan to prevent a star producer from getting awarded a higher level of ownership than was initially contemplated. Ultimately, all decisions to offer this type of plan are subject to owner and/or management approval.
While some owners may resist an equity bonus being paid, it is important to recognize the producer needs to achieve certain production thresholds to receive the equity bonus. These production thresholds may also influence the opportunity to buy a like amount of equity. Calibrated properly, both the producer and owners benefit.
Looking forward, this model can potentially help determine who may or may not be a future perpetuation candidate. Likewise, it sends the message that additional ownership is available. This in turn creates a market for the agency’s equity. Executed properly, this plan can also be used as a differentiator to attract new production talent.
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