The calculation is deceptively simple: revenue per employee minus compensation per employee.

That operations metric—otherwise known as “spread per employee”—has been the gold standard in measuring independent agency productivity since the Big “I” and Reagan Consulting began the Best Practices Study more than 20 years ago.

“Interestingly enough, that spread as a percentage of agency revenue has really remained very stable over the 20-year period,” says Shirley Lukens, who has been involved since the advent of the Best Practices research as a staffer of both the Big “I” and Reagan Consulting.

What has changed in two decades is the workforce—what workers are doing and how they’re doing it. Today, technology has slimmed down staffs while making each person more productive. “What’s in there is different because of technology,” Lukens says. “Even though we’ve got fewer employees, we’re having to pay those fewer employees better wages than we did back then to keep them.”

The constant? “Compensation expense is still the big nut for agencies,” Lukens says.

Calculating the Spread

Every agency should know the cost per hour to operate, according to Brian D. Bartosh, president of Top O’ Michigan Insurance Agency with locations throughout Michigan. “All expenses to the agency along with the intended profit margin must be part of the number,” he says. “Your attorney and accountant know their cost per hour. As an agency, we should too.”

The agency’s spread, Bartosh says, is the best determination of productivity for the agency service staff—which is why management should understand the cost per activity and the activity performed by each employee. “That is not to ‘micro-manage,’ but to understand those employees who are more productive and deliver services at a lower expense,” Bartosh explains. “Then the agency can focus on how to improve others for total agency profitability and efficiency.”

Keith Mangini, vice president, commercial loan officer with InsurBanc, a bank specializing in serving agencies, has an outsider’s view on performance. He says measuring compensation per employee against revenue per employee can “gauge whether an agency is becoming more efficient, less efficient or essentially treading water and only supporting increased employee compensation.”

William P. Kliewer, managing partner of Best Practices agency Bigham Kliewer Chapman & Watts in Killen, Texas, tries to tune his agency to a spread of 40% of revenue. “When we started looking at revenue per employee, $120,000 was really good,” he says. “Now it’s hitting $400,000 per employee. That involves the kind of business you write. The mix of business is key to low expense levels per employee.”

Michael Carroll of Carroll Insurance Group in Toledo, Ohio views expense results at his Best Practices agency as an objective management tool. He views the spread as the driver of performance from goals set by management down to employees knowing their true value.

“It is no longer a grade in ‘conduct’ or ‘effort,’ which is a glorified opinion, and instead a quantifiable tracked measuring way to do business,” Carroll says. For him, the ratio is: For every dollar spent on staffing, you should receive a return of four dollars.

Limitations of the Spread

Beware the “average.” Jim Bailey, president of Best Practices agency Pritchard & Jerden in Atlanta, likes to use metrics like expenses or compensation per employee to compare the agency against peers and benchmark its performance over time.

But he notes that expense per employee is just an average for the agency. “There can be wide variations requiring you to drill down on the detail,” Bailey says. “That is generally where you find the issues and opportunities.”

What do customers think? McClone Insurance, a third-generation family agency in Wisconsin, measures its expenses per employee with and without producers quarterly—and uses it as a measure of productivity.

The non-financial metrics provided by customer surveys are key, says Ryan McClone, executive vice president. “Customer satisfaction measures are paramount to us—they would trump any efficiency numbers,” he says. “Although not a financial measure, we believe [customer satisfaction] is a strong leading indicator, whereas the other measures are trailing indicators.”

The agency does evaluate the spread between revenue and compensation per employee because it’s a good barometer for where the agency currently stands and how results are trending, McClone explains. “But we are very sensitive to making sure that this is not at the expense of our customers,” he says. “If the spread gets better but customer satisfaction dips, it would be a very bad thing.”

Don’t be too general. In Albany, N.Y., at Best Practices agency Austin & Co., Inc., Kelly J. Valmore, corporate controller/treasurer, prefers to have more granularity to the specific expense classification and compare it to a percentage of revenue as opposed to an expense per employee. “We find the comparison to revenue more applicable in our agency,” he says.

Gunning for Growth

T. Scott Kennedy, president and chief operating officer of the 70-employee Cherry Creek Insurance Group, a Best Practices agency in Greenwood Village, Colo., agrees that the expenses-per-employee calculation is meaningful. But it’s not the only one the agency uses (see sidebar for other metrics Best Practices agencies track).

“That factor will ebb and flow as to whether we’re investing in our organic growth model, which we’re doing now,” Kennedy says.

By analyzing expenses in three groups—compensation, selling and operations—Kennedy says he is able to keep tabs on where the agency stacks up in terms of compensation.

“If we’re going to attract talent, we’ve got to be very aware of how we measure up to attracting new talent,” Kennedy explains. “That’s important for onboarding new staff and retention. What you want is a balance. You can get overloaded on expenses. EBITDA pays the bills and provides opportunity to fund growth in years ahead.”