Fee-Based Compensation: It Takes Money to Drink Good Whiskey

We have said this before, but it bears repeating as we all go into our year-end planning. Never confuse the difference between commission and fair compensation! There is no relationship between them. A commission is what an insurance company is willing to pay you to deliver their commodity and your compensation should be based upon the value you deliver to a client. The two are not the same.

We have said this before, but it bears repeating as we all go into our year-end planning.  Never confuse the difference between commission and fair compensation!  There is no relationship between them.  A commission is what an insurance company is willing to pay you to deliver their commodity and your compensation should be based upon the value you deliver to a client.  The two are not the same.

In many cases for you to provide value to your clients it will require a great deal of resources and effort outside the commission check.  It is imperative that your clients and prospects understand the value that you bring to the table.  Sometimes, that requires an additional investment on their part.

When speaking about this, I am reminded of one of the first lessons I learned as a very young person in this business.  I was negotiating a surplus lines placement with a grizzled veteran of the business.  When I complained about the price he was charging my client he looked at me above his nose glasses and growled, “It costs money to drink good whiskey, Ekern."

Simple enough, eh?  Now, how do we get fairly compensated without falling victim to the cannibalistic commission structure?  (i.e. the better the price negotiation for our clients, the less we make!)

The answer is to switch your top clients to a fee based, results and resource driven compensation system.  One in which you get fairly compensated for the resources you deploy and the costs your clients reduce.  This is the only win/win formula I know of.

So, if you agree, as most of you should, here are some additional thoughts on Fee Based Compensation.

  1. Your fee must be results driven.  It is not enough to simply tell a client that you intend to switch them to a fee.  You must answer the question of “what’s in it for them?”  The “wiift” is the fact that you will demonstrate a reduction in costs through your resource deployment.
  2. You must be prepared to manage the account.  This means that you and your organization will take responsibility for owning an outcome.  This goes well beyond simply placing the insurance policy and hoping that things work out.  You will need to provide the client with strategic planning and stewardship reports.
  3. Your fee should be higher than the commission.  Remember, the commission is based upon simply the insurance placement and does not reflect any of the client’s results or your efforts.  A successful Consultative Broker knows how to demonstrate the ROI and value proposition of their firm.  This is particularly true in a soft market when each year the premium or rates drop.
  4. Never use a fee to compete on price.  Your fee should not be used as a way to reduce a clients cost through removal of a commission and then a lower fee substituted in its place.   If you do this enough times, you will find yourself out of the business.

Of course there are many additional nuances to skillfully developing a fee based practice.  But for today, let’s all agree upon one thing.   The good whiskey costs money!  The commission compensation system does not account for the difference between aging in oak barrels versus aluminum vats!

- Rob Ekern

For more information on how to quantify TCOR, manage projects, build a value proposition, and consistently deliver stewardship reports and new business presentations to your customers, check out the Major Account Development System (MADS), an on-line consultative broker's toolkit. Available now!

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