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21st Century Compensation

The compensation plan that got you to today won’t get you to tomorrow

 

You can thank Henry Ford for our current broken approach to employee compensation.Ford is credited with popularizing hourly wages on a large scale. Before Ford’s time, most Americans were on a performance based compensation plan, mostly because of the number of rural families living off the fruit of their efforts.You plant.You harvest.You eat.

I understand this system because my father grew up on a farm.My grandparents went to the store two maybe three times a year. Every other day their compensation in the form of eggs and pigs for breakfast and chicken and potatoes for dinner was a direct result of their performance. But, as Henry Ford discovered, compensation completely changed as the population left the farm for the factories shops and other free market opportunities that move families from the farm to the city.

In Ford’s time, even factory workers, artisans and shop owners retained a type of performance based compensation. Assembly line workers made money because they produced products that created profitability for their employer.Artisans and shop owners were paid based on their performance by selling their products.

According to William Abernathy in his 1996 book, “Sin of Wages”, only about 17 percent of the population worked in information or service related jobs such as secretaries, teachers, insurance professionals and accountants.Just forty six years later that number grew to 60 percent.

By 2008, 77.2 percent of jobs were in the service sector according to the Bureau of Labor Statistics; and that number continues to rise. More people in service related jobs means the further we get from compensation related to performance.We now pay people based on the amount of hours and minutes they sit in their chair. Performance has very little to do with how staff gets paid – and that is a very costly problem.

Challenges with current compensation plans

The challenges of current compensation models are not limited to certain positions or responsibilities.The current compensation system is broken, including administrative staff, service staff and dedicated Producers.

Here are the three most significant examples.

CSR/Account Manager Compensation: Conventional compensation such as hourly and salary wages is entitlement pay.Owners agree to pay the full amount owed regardless of the work done and staff agrees to take their pay with no guarantee of delivering more than their attendance. Bonuses offer staff the option to choose. Staff participates depending on what is best for them, not what’s best for the agency.

Producer Compensation: Writing new business is at the Producer’s discretion. Producers can grow their book to the point where they can play golf three days a week and pay their bills. Producers have permission to earn what they need, not what the agency needs. Traditional methods such as a higher commission rate for new business and a lower rate for renewals places more value on new business but doesn’t necessarily mean Producers place more value on writing new business.

Administrative/Receptionist Compensation: Traditional compensation plans exclude support staff because they are unlicensed or their position is not customer facing.Owners either pay more to meet average compensation in their area or offer lower compensation and risk losing top talent.

Needed paradigm shifts

Everyone knows about paradigm shifts.Some people understand what it means. But few dedicate the time and energy to shift their paradigms. That’s why something Albert Einstein said is relevant to growing an agency. “We can't solve problems by using the same kind of thinking we used when we created them.”

How to rate employees: Let’s say you want to evaluate an individual on a scale of 1 to 10; with 1 being the lowest and 10 being exceptional.

Now let’s say an employee comes to work every day on time, meets all job requirements, has a good attitude and gets along with coworkers. How would you rate them?

The traditional paradigm is 8 to a 10. They sound like a great employee.

However, they deserve a 5, which is average. Why? The have simply done their job.Nothing more.Nothing less.

Our current paradigm believes if someone does their job they are exceptional. And staff agrees. If they do their job they are not only exceptional they deserve a raise just for doing their job!

Responsibility vs. Opportunity: The second paradigm in need of change is the idea that staff is offered “opportunities” to earn more money. “Opportunity” and “compensation” should never be used in the same sentence.

Several years ago I talked with an agency owner in Texas who said his staff were required to add new leads to their pipeline by asking customers for referrals. He had no doubt about staff’s responsibility to get customer referrals.

I asked, “Since it is their responsibility to ask for referrals, how much money will someone lose if their goal is not met?”

Oh, it’s not going to cost them any money” he said.

Then at what point will it cost them their job if they don’t achieve their goal?” Again the same answer.

I responded, “Then you do not have a responsibility you have a request.”

The owner needed a paradigm shift that “it is people’s job to do their job”.

Creating a “Pain of Loss”: Anyone in sales understands the importance of creating a “pain of loss” in the mind of a customer.The objective is to paint a picture of what the individual will lose if they either do not do business with you or if they stop doing business with you.Effectively creating “pain of loss” determines the loyalty and commitment your customer has for your agency.

Since hourly and salary wages are “entitlement pay” staff has nothing to lose if they fail to do their job or chose to leave your agency.

Creating a 21st century compensation plan

A 21st century approach to compensation includes three distinct sources of income that should apply to all staff regardless of position, license or responsibilities. Let’s say an employee named Jack is currently making $30,000 annually and you want to increase his compensation by 10 percent.

Explain to Jack that his new compensation plan is $33,000. In fact, it’s Jack’s job to earn $33,000. If he fails to earn $33,000 it means he has not done his job. The increase is not an “opportunity” to earn more money. It is his “responsibility” to earn more money by doing his job.

Next, paint Jack word picture of what he can do with an additional $3,000. The objective is to create a “pain of loss” so Jack is willing to do whatever it takes to avoid losing what is “his”.

A CSR with an agency in New Mexico told the owner, “I hate these KPIs. They don’t do any good. But that is my money and I’m not going to lose a dime of it!” The owner told me he preferred a better attitude, but he was delighted she understood her “pain of loss.”

Follow these steps to create a 21st century performance based compensation plan

Hourly/Salary Income: Keep the current hourly or salary compensation (if applicable) in place without change.Staff will not accept the new compensation plan if they perceive paying their bills is at risk.

Performance Income: Performance income is based on achieving Key Performance Indicator (KPI) goals.A KPI is a business driver than defines and develops how you do business.At Catalyst we developed KPIs in categories including:

  • Accounting

  • Account development

  • Administration

  • Staff development

  • Sales process

  • Social media

Performance income is based the percentage of each KPI goal achieved.For example, let’s say Jack’s goal is to complete 104 quotes in a year (that’s two quotes a week).The let’s say this KPI is given a maximum score of 20 points out of a possible 100 points.

When Jack achieves 100% of his goal, he receives 100% of his maximum score. If Jack achieves 90 percent of his goal, he receives 90% of his maximum score.If Jack exceeds his goal, he still receives 100% of his maximum score. Each KPI stands on its own and staff cannot ignore KPIs that don’t want to achieve by exceeding goals for other KPIs.

Performance income is based on staff’s total evaluation score.Here is the matrix Catalyst uses to determine the amount of Performance Income.

  • 80 to 84 pays 25%

  • 85 to 89 pays 50%

  • 90 to 94 pays 75%

  • 95 to 100 pays 100%

Revenue Sharing Income: Revenue sharing is the most exciting aspect of performance based compensation. This income breaks down barriers between departments and creates stakeholders in the growth of the agency.

Revenue sharing is based achieving a combined Personal Lines, Commercial Lines and optionally Life Insurance agency goal. When the agency goal is achieved or exceeded each individual receives a percentage of total agency revenue.The term “Revenue Sharing” is used rather than “commission” because some staff may not be licensed.

Conclusion

Implementing 21st century compensation might seem overwhelming, but it requires less from owners than current compensation strategies. Most owners feel they have to “get” staff to do their job. According to Jim Collins in his business classic “Good to Great”, “The purpose of a compensation plan is not to get the wrong people doing the right things. The purpose is to help you get the right people on your bus and keep them there.”

Performance based compensation is the only strategy capable of achieving Collins’ definition because it places the burden of responsibility of staff, freeing management to lead staff rather than manage staff. Implementing a performance based approach to compensation requires management to truly believe that this type of compensation is good for employees and the agency.  Performance based compensation genuinely offers individuals more income than they will ever get from your competitors.The difference is that they have to earn the money rather than relying on their entitlement to receive it.

Performance based compensation offers staff more than monetary rewards.Recognition, achievement, personal growth and professional success are powerful motivators for top talent. By offering intrinsic as well as extrinsic benefits of working for you agency you become an employer of choice by building a team who is fully committed to the growth of the agency.


 

Catalyst is a software company providing technology, training and resources to the insurance industry/strong>

3301 Bucknel  Rowlett, TX     972-961-4798     tbaker@catalystinsurancesystems.com