Producer Compensation…More Misleading Statistics

In the past, articles in industry publications have incited much concern from anxious agency owners. The articles were, unfortunately, very misleading because each inaccurately concluded that big agencies paid producers better than small agencies.

The articles were based on a study which found that producers in big agencies (agencies with more than $10 million in revenue) were paid an average of $116,487, while producers in smaller agencies (less than $2 million in revenue) averaged only $47,170. These averages would be news if they had significance, but in our industry they do not. They are worthless statistics that can lead readers to several wrong conclusions such as: big agencies pay more for the same work; producers should not work for small agencies because small agencies do not pay enough; larger agencies can afford to pay more and smaller agencies need to pay producers more to keep up with the larger agencies.

These conclusions are not accurate because they are based on the wrong measurement. For example, consider the first error: big agencies pay more for the same work. The study actually points out that large agencies pay between four and 12 percentage points less commission. If producers in small agencies average a 35% commission rate, four to 12percentage points less equals 11.4 to 34.3% less wages for the same work. How can anyone claim large agencies pay more when producers in large agencies are paid a lower commission? By focusing on dollars when percentages are the more important measure.

Percentages are the more important measure because most producers are paid commission. By comparing dollars earned instead, a reader could easily infer that producers at big agencies are paid more for the same results, but the real reason they make more is because producers in big agencies sell more. Producers in big agencies average at least 147% more in commissions than producers in small agencies and when a percentage is applied to a larger number (like bigger books), the result is more money. The reality is producers in large agencies, while they make more, are actually paid less.

A producer’s compensation is not like that of a staff person’s. If one CSR gets paid a salary of $50,000 and another gets paid a salary of $25,000, one CSR is paid twice as much as the other. “Paid” and “make” are synonymous when discussing staff compensation—they are not synonymous when discussing commissioned sales people.

What do big agencies do to enable their producers to sell more? The simplest and often overlooked difference is they are big. Big accounts like doing business with big agencies. Other important factors include more carriers, more alternative markets, more support staff and better management. This is like a great running back—no matter how good he is, he will gain more yards behind a good line than a mediocre line.

The purpose here is not to tout the benefits of large agencies over small agencies. Such a statement would greatly over-simplify the situation. Numerous factors other than size contribute to a successful agency. Nor is the purpose to suggest that all great producers work in large agencies—that again would be a grand over-generalization. The purpose is to stress the importance of taking a logical look at producer compensation.

Producer compensation is the key to small agencies’ success and survival, so when a headline screams that big agencies pay producers more, many small agency owners will conclude they need to pay their producers more so their producers do not leave for the big shops. Rushing to pay producers even more only compounds the problem because most small agencies already over-pay too many lousy producers.

Chris Burand (chris@burand-associates.com) is the president and owner of Burand & Associates, LLC.