ARE YOU ONE OF THE MANY OR ONE OF THE FEW?? COMBINING INCENTIVE COMPENSATION WITH EMPLOYEE EVALUATIONS

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1 PIPELINE ARE YOU ONE OF THE MANY OR ONE OF THE FEW?? For many years we have argued with the self-same agents who desire to identify their 'Points of Differentiation' from their direct writing and mass media competitors that their MOST IDENTIFIABLE Point of Differentiation should be the consultative approach to analyzing and helping their clients protect their assets. COMBINING INCENTIVE COMPENSATION WITH EMPLOYEE EVALUATIONS An Incentive Compensation Program (ICP) is designed to remove the subjectivity from the process of increasing compensation for performance. We have written and assisted many ICP's and suggest that you contact Agency Consulting Group, Inc, should you want to construct one for your agency. STRATEGIC PLANNING FOR INSURANCE AGENCIES - PART ONE Many readers understand that we strive to operate our consulting firm (and our personal lives) on the basic principles of The Seven Habits of Highly Effective People (Stephen Covey). We have found that if we focus on the basic principles that Stephen explained in his seminal work we are BOTH personally and professionally successful and, more importantly, our personal satisfaction with our efforts and results is very high. STRATEGIC PLANNING FOR INSURANCE AGENCIES PART TWO

2 . The Strategic part of Planning will expose your long term needs for your business in terms that can be measured and monitored over the five year period. The Tactical Portion of the Plan involves you as the owner of the agency AND your employees through whom you hope to achieve your goals. ARE YOU ONE OF THE MANY OR ONE OF THE FEW?? All agents are trying to make a living by selling insurance. Most agents are good people interested in helping others. Many agents combine their need to make a living with their desire to help people by concentrating on selling clients coverage equal to what they already have at lower cost to the customer. These are the 'Apples to Apples' agents. Some agents are insurance professionals who will analyze clients' insurance needs and recommend the proper coverage even if it may cost more than the 'cut-rate' insurance they have previously been sold. A few agents have achieved the 'Self Actualization' level of Maslows Hierarchy of Needs that satisfies the agent when he analyzes and recommends changes to a client's coverages regardless of whether or not he sells the client an insurance product. These agents qualify for the Asset Protection Model (APM) that makes them the ultimate insurance counselors and consultants. They also happen to sell at a much higher rate than the traditional pricequoters. For many years we have argued with the self-same agents who desire to identify their 'Points of Differentiation' from their direct writing and mass media competitors that their MOST IDENTIFIABLE Point of Differentiation should be the consultative approach to analyzing and helping their clients protect their assets. Anytime someone advertises products 'in a box' or over-simplifying insurance by stressing that lowering their cost should be their only concern it is an opportunity to convert a customer into a client by showing them any gaps in coverage that could risk their health, their family and their property for the cost of a few dollars. Clients are quick to blame agents, the insurance companies and the world when they have sacrificed critically needed coverage to save a few dollars. Of course, we should just as carefully keep from over-insuring customers as we do from under-insuring them. But Risk Assessment should be our goal and APM agents build their entire practice around the mantra that we Assess and Analyze Risk, not Sell Insurance. The result of this attitude taught to and managed through ALL agency employees (not just the owner or producers) is a group of clients who feel about their agents as loyally as they feel for their family doctors.

3 How do your clients feel about YOUR agency? Of course your largest and most loyal and long-lasting clients are probably (or have become) your friends. But the key to your future success is more how the middle group of you clients (those between your top 10 clients and your bottom 80% of clients) feel about you and about your agency. Spend time in an annual risk analysis with this group of clients. The end result will be more referrals, more cross selling opportunities, less stress to quote and a more satisfying career for you and for your staff as you and they are treated more as the professionals that you are than as quoting machines who are trying to get the most money from your clients for insurance that is 'all the same'. Your analysis will educate your clients in the personal and commercial lines of business that they have in their insurance portfolio. They will feel better that they are properly protected and will feel better about you and your staff as putting their interest above your own. COMBINING INCENTIVE COMPENSATION WITH EMPLOYEE EVALUATIONS An Incentive Compensation Program (ICP) is designed to remove the subjectivity from the process of increasing compensation for performance. We have written and assisted many ICP's and suggest that you contact Agency Consulting Group, Inc, should you want to construct one for your agency. ICP's are typically constructed based on advances in productivity (revenue per employee) combined with department and/or agency profitability. If the individual manages a larger book of business (service employees) or manages his/her function for a larger client base (i.e. administrative employees) WHILE their department and/or the agency maintain appropriate profit levels, raises are automatic and can actually be tracked by the employees, themselves. Wouldn't it be nice to have employees looking for more business to handle or helping to innovate to permit more work to be accomplished without the addition of staff? An ICP accomplishes that goal - but it takes a few years of education to teach the employees that this is really as simple as it sounds. If an individual is more productive AND if the department and/or the agency is profitable, that individual shares in his/her success through salary adjustments corresponding to the productivity increase. The "Merit Raise" system that in which we have been raised is often less concerned with merit than with management's perception of an employee combined with the frank realities of budgetary limitations. A variety of rating systems has been developed to establish some form of "objective" criteria under which the "merit" system is to operate. Unfortunately, those very numerical rating systems must be based on a manager's estimates of employee performance. The ICP is firmly based in budgets since agency growth (overall productivity) and agency profit predetermine the amount available for raises. A specified percentage of revenue is pre-determined to be the total staff compensation level. The employees earn raises by virtue of their productivity gains within the budgetary limits. The ICP also avoids the subjectivity of traditional merit raise programs. Evaluations become tools for employee development, rather than the rationale for the level of raise being given. The manager can not forsake his duty to evaluate employees' performance. The manager's job is to identify an employee's

4 weaknesses and correct them through a development plan and to assist employees to further develop their careers to make them more productive for themselves and for the agency. Whether or not you choose to pursue ICP's in your business, the key to employee development and retention lies in a combination of fair and equitable compensation, fair and equitable evaluation and genuine appreciation for the efforts made by the staff. Please understand that appreciation is reflected by your actions, not your words. Some managers verbally express appreciation, then publicly criticize or demean employees. The employees recognize that managers actions truly reflect their feelings. Compensation can only be fair and equitable if the agency has the revenue and profit to afford raises AND if the employees understand the ingredients that result in their pay raise. If they believe that their raises are determined subjectively and that management is more concerned with enhanced profit than with fairly paid employees, no raise will be viewed without suspicion and no evaluation will be accepted as an honest evaluation of performance. In the past, all evaluations have been tied to pay raises. Management could not provide a glowing evaluation and a meager pay raise without using the agency's poor financial condition as the reason. Most of the time, the employees simply do not believe the agent since it appears that there is always sufficient funding available for the agent's discretionary expenditures. One of the reasons for the development of the ICP concept was to "de-mystify" the compensation game. The employees, themselves monitor their own progress and the agency should provide further input regarding its profitability throughout the year. If growth is not experienced, or if the agency is not profitable, they, themselves, can identify the reasons for lower raises than desired. Evaluations must be separated from pay raises. As long as evaluations are only done when pay raises are due, the employee listens to whatever critique is being offered with an ear that is listening for what the evaluation means to the pay raise. If compensation advances are determined by objective means, evaluations can be used for the purpose for which they were created - to evaluate historical performance and to further develop the employee's career. We suggest the following changes to evaluation programs: Evaluate three or more times each year (minimum twice) - Employees don't want to hear what they are doing right or wrong once each year. They would like to hear praise often and to hear criticism when it is used to help them, not to attack them. Evaluations are also one of a manager's most important roles. We may be insurance professionals, but the most successful of us are also management professionals. Just as you did not learn insurance easily, quickly or haphazardly, neither can you learn how to be a manager quickly, easily or haphazardly. Most managers feel uncomfortable evaluating performance because it is an event, rather than a process, so Make evaluations a process - The process of evaluation includes an analysis of historical performance (since the last evaluation) in accordance with the employee's job description. The job description should list all major activities for which an employee is responsible in his/her job and the measurements of success for each. The process also includes a development program that both attacks any weaknesses uncovered and determines the development path to further strengthen the employee in the future.

5 Make evaluations a shared process -- The best evaluations provide a form that includes the points of the job description, the success measures of each and a place to evaluate performance in each area. Both the manager and the employee should complete the form (independently) and compare and discuss the results together. Critique - Don't criticize - Most employees will be harder on themselves that will the manager. Your job is to critique their performance and help them improve soft spots and further develop strong areas. Remember that this is a development exercise having to do with them becoming better employees. It is not connected to pay raises. More important than the historical evaluation is the development plan. Another form should be developed for this tool. The form should identify areas of perceived weakness and areas of desired development. After the historical evaluation, both the manager and the employee should take the form and complete it individually. The results should be shared and will become a basis for future evaluation. The development plan to which both employee and manager agree must be implemented between this evaluation and the next. For this reason, evaluation development plans are between three and six months long (depending on how often you evaluate). The creation of non-threatening evaluation systems and objective compensation programs will differentiate the exceptional business from those who experience unexpected and frequent turnover. The excuse may be that the employee has moved for money. The reality is that the departed employee did not feel that their former employer was fair. That perception, whether grounded in reality or not, can be clarified through the auspices of an ICP and Employee Evaluation Program. STRATEGIC PLANNING FOR INSURANCE AGENCIES - PART ONE How to run your agency in a " 7 Habits" way to integrate success with personal satisfaction. Many readers understand that we strive to operate our consulting firm (and our personal lives) on the basic principles of The Seven Habits of Highly Effective People (Stephen Covey). We have found that if we focus on the basic principles that Stephen explained in his seminal work we are BOTH personally and professionally successful and, more importantly, our personal satisfaction with our efforts and results is very high. The fact that Covey's principles dovetail with most of the key business principles validates this work and simultaneously explains WHY Strategic Planning is a common sense way to progress your agency without the stress of overly aggressive goals without substantiation beyond simple growth. Creating a Strategic Plan documents your intention for your agency for the next five years. What we have found over 50 years of trial and error is that, excepting incidents like 9/11 or nuclear accidents, we can see about five years out for projection purposes (personally and professionally). Too much can change economically over 10

6 years to validate longer Strategic Plans with the exception of retirement planning and Succession and Perpetuation Planning that should begin years before the expected incident. Mission and Vision Statements Using Covey's 2 nd principle, 'Beginning With the End In Mind', we create Mission Statements (a set of business goals and expectations) and Vision Statements (a set of personal goals of how we want to be viewed in the long term) WHICH ARE DIFFERENT FROM THE WAY WE ARE CURRENTLY ESTABLISHED. The reason we don't use today's view of the business or of our personal views is that the only thing we can guarantee is that THINGS WILL CHANGE. If not, your business or personal life is in entropy - also a position of change, but natural change as a process of degradation, personal or professional. If you look back to five years ago and find that your agency and your personal life is exactly the same as it was then, it is time to become alarmed because degradation always trends toward disorder and is just moving toward a tipping point - never a positive position and one in which you will lose or lack control over the future. Habit 3 is to Put First Things First. A MISSION STATEMENT defines how you want your business to change over the next five years. This dovetail the personal needs of the owners of the agency with the goals of the agency necessary to accomplish the goals of the owners. This is the statement that may be private or public and talks about your expected growth, profitability, staffing levels, clients served, territories served, product lines and mix, etc. Habit 1 is to Be Proactive. Proactivity is defined by Personal Vision. A VISION STATEMENT defines how you want to be viewed by your most important audiences, 1) Your Owners, 2) Your Staff (Yes, your staff is more important than your customers for a variety of reasons), 3) Your Clients, 4) Your Partner Carriers, 5) The General Public. These statements will address the quality issues, personal satisfaction, professionalism, community service, quality of clients (loss ratios), etc. STRATEGY DEVELOPMENT If you believe you are doing everything you need to do to arrive at the points of your Mission and Vision within the next five years either you have not stretched yourself sufficiently to reach your potential or you have no need for Strategic and Tactical Planning. But most agents who create Mission and Vision Statements that advance their businesses to achieve their personal goals for themselves and their families will need a set of Strategies. A Strategy is that which has to be done differently than in the past in order to accomplish your future goals. Each Action Step (an activity statement) of the Mission and Vision deserves one or more Strategies in order to assure you that you are doing all that is needed to achieve your Mission and Vision. LONG TERM GOALS LEADING TO YOUR TACTICAL PLAN A Tactical Plan is your Plan for the next twelve months. As you identify each Strategy you should determine what needs to be done in stages in each of the next five years in order to arrive at the point of the Mission Statement within that Strategy. The lowest level of goals for all of your Strategies should naturally become the Objectives of your Tactical Plan for the next year. If you look at the bottom level of goals for each strategy and cannot rationalize if and how you can accomplish those Objectives in the next year, you are obligated to temper your Strategies so that you reach a level of goals for each of the next five years that is achievable through your personal and financial assets. For instance, if you are a $1 Million revenue agency that has grown by 2%/year over the last five or ten years, and have created growth strategies supporting a goal of 100% growth to $2 Million within the next ten years, the Plan only works if you are willing or able to do that which is necessary to grow your agency naturally by 15% ( %) or artificially by acquiring businesses to build your business to its desired levels. If you can't accomplish the activities by year, your Plan is not realistic and you need to temper it down to levels to which you are willing to address your physical and financial assets. The Mission, Vision and Strategies define the Long Term Goals and actions needed to accomplish the goals of the business and of the business owner. The next article in the series will address the

7 ACTIVATION of the Strategic Plan through the Tactical Plan - that which must get done in the next year in order to achieve the stepping stones toward the position you desire in five years. We at Agency Consulting Group, Inc. stand ready to guide you through the process of Strategic Planning or to facilitate your organization's plan. Either way our goal is to educate you and your staff to create, evaluate, and manage your own plan so that you can use our services supporting your objectives rather than re-organizing your team to accomplish them. Call us at with questions or for assistance. STRATEGIC PLANNING FOR INSURANCE AGENCIES PART TWO TACTICAL (ANNUAL) PLANNING TAKING YOUR PRIVATE GOALS FOR SUCCESS AND MAKING THEM PUBLIC The first three of the 7 Habits of Highly Effective People (Stephen R. Covey) and private victories that allow you to define your personal goals into goals of your business. The Strategic part of Planning will expose your long term needs for your business in terms that can be measured and monitored over the five year period. The Tactical Portion of the Plan involves you as the owner of the agency AND your employees through whom you hope to achieve your goals. OBJECTIVES - YOUR ANNUAL (TACTICAL) PLAN Once your Reality Test your Mission and Vision by determining whether you are willing or able to activate your Strategies you are ready to take the lowest levels of goals for each of your Strategies and construct them into a realistic Tactical Plan for the next year. The lowest level of long term goals for each Strategy becomes the Objectives for your Tactical Plan. If you find yourself with short term objectives that do not fit within the Strategies that will get you to your Mission and Vision for the future --- why are you pursuing an objective that doesn't support your long term goals?? Each objective needs an owner who is responsible for measuring the results monthly (see Benchmarking, below) who may or may not be instrumental in the activation of the Objective. ACTION PLANNING Creating a list of Objectives for the next twelve months does not accomplish them, it just documents where you want to be in each critical category by the end of the next twelve months. Most organizations (large and small) fail in their Planning because they identify what needs to be done but do not identify HOW the objectives can be achieved. Even if Action Plans are created, they are never triggered. In order to activate the Objectives you must identify one or more Action Plans for each Objective that, if accomplished, would reasonably result in the achievement of the Objective by the end of the next year. An Action Plan must meet the ROAM requirements (be Realistic, Objective instead of subjective, Achievable, and Measurable). If not, the Action Plan must be revised to meet these requirements. BENCHMARKING

8 Most Plans fail simply because the Action Plans are never triggered or are dropped at the first sign of stress. A solution for that issue is to use the Plan as the management tool for the agency. In order to do that, we must estimate the position at which the Objective should be achieved, by month. These BENCHMARKS are established subsequent to the validation of the Objectives and Action Plans as realistic. Benchmarks for each Action Plan are constructed by month and reported publicly by the "owner" of each Objective after the conclusion of each month. These Management Meetings are the baseline for managing the agency. If the Benchmarks are not achieved, the reporter is to simply report the results each month of the quarter. RE-PROJECTIONS The Tactical Plan is a LIVING DOCUMENT, meant to change as the year progress in order to identify the year-end financial results of the agency as early in the year as possible. In agencies in which we have participated in the facilitation of the Strategic Planning process each year, the year end results can be fixed (within a few percentage points) by mid-year every year. Re-projections are made after the first and second quarter. The re-projection at the end of the third quarter is usually the lead-in to the next iteration of the Strategic and Tactical Plan. After the first year, the process includes a Year-End Projection based on the prior Tactical Plan as well as revision or validation of the Mission and Vision Statements and Strategies and the creation of the next year's Tactical Plan Objectives, Action Plans and Benchmarks. BUDGETING When all is said and done, every agency is a financial based business requiring a level of Return of Investment to the owners sufficient to achieve their personal goals. While most smaller agencies do not budget, all larger agencies either do or should work within a working Budget to assure they have sufficient revenues to cover their expenses and a fair return to the owners. The Tactical Planning process is a perfect way of establishing and managing to a budget to assure that sufficient income is generated to cover expenses or that we know when it isn't in order to allow for mid-term adjustments to minimize any negative results. One the Tactical Plan is established (Objectives and Action Plans), the agency's revenue should be identified (New and Renewal) by department (i.e. PL, CL, L&H) and projected for contingency income based on the agency's history and its objectives for growth and retention. Expense budgets are best created from a zero base by the agency's financial manager including all expenses derived from the Action Plans submitted and accepted as necessary to sponsor the agency's revenue expectations. Budget reporting should be Actual vs. Budget, vs. Prior Year by month and YTD. Revisions required in Quarterly Planning Meetings are often derived from revenues and expenses above or below expectations from original budgets. Budgeting is revised monthly or quarterly but a BUDGET can only be cast once a year. All revisions after the first Budget are Forecasts and will become more accurate as the year progresses. The activity of Strategic and Tactical Planning is actually more important than the accuracy of the results. The activity requires and results in changes in performance activities that promotes growth of the individuals and of the organization. Agencies who plan are the highest performing agencies in the country, whether large or small. We encourage you to initiate Strategic Planning this year. The planning process is not limited to your fiscal or calendar year-end. Many agencies initiate their plan mid-year in order to avoid particularly busy times within the agency. Call us at with questions or for assistance.

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