Value is All About Dollars & Sense

Value is All About Dollars & Sense

According to MarshBerry’s proprietary financial management system, Perspectives for High Performance (PHP), compensation expenses are most likely, single-handedly the largest category of expenses that an insurance firm will incur throughout the year, nearly 3.5 times the amount spent on non-compensation related expenses. This should come as no surprise. Yet, leaders continue to let compensation expenses manifest into a profit-minimizing, value eroding monster that simply cannot be tamed.

Compensation expenses can be bucketed into several different sub-categories including; department payroll (executive, production, service, and support) and benefits (retirement, employee insurance, and payroll taxes).

For the average firm, can you guess how much money is attributable to compensation expenses for every dollar of revenue that comes in the door? You guessed it. Two quarters, one dime, and a nickel, or sixty-five cents.

If one of the foundational goals of every firm owner is maximizing shareholder return (and it should be), and shareholder return is driven by increasing value, and increasing value is driven by a predictable, profitable earnings stream, then how will the firm achieve a 30% EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) margin with a mere five pennies to spend on non-compensation related costs? The dollar will never stretch.

Value Is All About Making ‘Cents’ of a Dollar

In our experience, high-performing firms drive a predictable, profitable earnings stream in excess of 30% EBITDA, achieve total compensation expenses of fifty-five cents or less, per dollar of revenue, and have the fortitude to make tough decisions.

This will help drive profitability, culture, and ultimately value in the marketplace, should a firm decide to explore strategic alternatives.

Here are four ways to get there:

1. Establish a Small Business Unit and Threshold

Small Business Units (SBU’s) are dedicated departments within an firm specifically designed for servicing small accounts. These units must be small enough to be automated, but have enough scale to exercise control over factors that may affect the unit’s long-term performance. Accounts within the SBU are not comingled with producer books of business and producers do not receive renewal commission on the accounts. These units often-times include specialized business and a distinct value proposition. Every SBU has a Minimum Account Threshold that represents a dollar ($) value threshold on an account, under which producers will not receive renewal commissions. Firms that do not employ an SBU likely refer to these accounts as “House” business.

2. Market Renewal Rate

While we often encourage firms to be innovative with their compensation plans, the renewal commission is not necessarily the place to flex your creative muscles. Establish a renewal commission in the range of 20%-30%, which in our experience is customary in the marketplace. A renewal rate more than 30% can lead to indirect consequences such as less focus on new business production and producer complacency.

3. Eliminate Reducers

Producers generate new business and by the very definition…produce. Reducers on the other hand tend to maintain an existing book and detract from an firm’s sales culture. Reducers are most commonly spotted in a legacy compensation environment that offers no new business requirements, no consequences for missing goals, no incentives, and little disparity between new and renewal commission paid.

4. Book Movement

If a firm's compensation plan is set correctly and a firm has established an SBU, then producers should happily understand that book movement is beneficial and welcomed. Transitioning the bottom 10%-15% of a producer’s book to the SBU should instantly add capacity that will allow them to write more business and increase their W-2 income. By the way, both of those benefits are beneficial for the firm too.

Ask yourself, does your dollar make sense?

Specifically designed for the insurance industry, RevGen is a comprehensive training program designed to help new producers build a sustainable sales process. After kicking off the program with a two-day learning seminar, we continue the relationship with the producer, along with the mentor, to ensure results.

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