Here is an example of the problem:
Agency A seeks experienced P&C producers. It would prefer producers with an existing book of business since that revenue would offset much of the producer's cost to the agency while he continued to build a book of business.
The first problem is that most smart agencies are not interested in losing books of business built by a producer while an employee of the agency if a producer decides to leave. So they impose Restrictive Covenants Not To Compete with Non-Piracy clauses in employment agreements. Most valid Covenants will not stop an individual from continuing the pursuit of his/her chosen profession (i.e. insurance sales) in their home area, but will forbid the solicitation of the business that the producer built while with the agency. Meanwhile that producer has increased his/her standard of living by virtue of the income generated from an existing book of business. Should he find it attractive to leave the agency for other reasons, he are tied with 'Golden Handcuffs' since it would take years to re-build a sufficient book of business to sponsor similar compensation levels.
Meanwhile no new agency is willing to provide a compensation level similar to that which they left (since there is no book of business to support it). -- CATCH 22--
So the producers available to Agency A are limited to new producers, those whose success has been very limited (permitting them to work for relatively low compensation levels), or those whose personality or characteristics require frequent moves in their career. Only the new producer is an acceptable alternative and he requires time and effort to train that many agents can not provide.
The only other potential is the producers who have acted in a brokerage arrangement (owning their own book of business) or those who can contest their produced book of business due to lack of Producer Agreements or Covenants. Agents who have taken producers promises that books of business will not be contested even though Non-Compete Agreements are in place now often find themselves facing injunctions and expensive litigation. It's not worth it for a book of business covered by a Non-Competition Agreement.
On the other hand, "What's good for the goose..." What makes you think that a producer moving a book of business from one agency to yours will be stable in your agency? While you can enjoy the volume to satisfy your clients, there are costs attached. First, that book of business may require additional staffing. Even if it does not, it will strain your current staff and take time away from clients owned by your agency. There is no way for you to determine if that book of business is of the quality that will help your loss ratio or harm it. If the producer continues to own the book of business your only way of tying him to your agency is through agency or joint ownership of the book of business that he creates while working for you. That ownership issue along with your Non-Competition Agreements may not seem palatable to a producer who has found it necessary to move one or more times already. Why should he sign a Non-Compete now? If he doesn't enjoy your association, he will have less options than those he used to move to your agency in the first place? CATCH-22 AGAIN!
But there must be a way to attract and keep good producers and new producers who develop into good producers!
There is, but it involves sharing the wealth in order to build it.
We recommend that you consider developing an equity sharing plan that guarantees that you always hold a controlling interest in your company, but that rewards incoming and successful producers with equity positions in your agency that will sponsor 1) their retirement, 2) their estate plan should something happen to them, and 3) pay-outs in the event that they leave the agency in support of stringent non-compete clauses.
You bring a producer with an uncontested book of business of $200,000 (commission) into your agency. If your agency has $1,000,000 of revenue, it will be worth something over $1,000,000 in value (due to your goodwill, personnel, company relationships, etc.). However, an incoming book of business does not necessarily bring with it anything but its commission enhancement potential. So if, for our example, your agency is valued at $1,350,000, the new book of business would immediately increase its value by 12.9% to $1,550,000. The producer would sell his book of business to your agency for a 12.9% equity position. The determination of your agency value is for the year prior to the arrival of the producer. The determination of revenue growth due to the producer's presence is determined at the end of twelve months after his arrival (his produced book of business during that period). Your agreement also states that the producer can increase his equity through stock options generated upon his achievement of subsequent increases in his book of business at $100,000 intervals. However, the stock option provided is measured as the ratio of that $100,000 to the value of the business at the year-end immediately preceding the award of the stock option. Depending on your desires, the producer can either earn bonuses to pay for the acquisition of the stock optioned to him, or can be asked to pay for the stock. This method can also be used to reward successful producers as their books of business increase to better guarantee their long term association with your agency. In many cases these producers become part of the succession planning for the agency. Although they gain equity shares, your equity during this period ALWAYS grows faster than theirs, enriching you through their efforts.
I still recommend that you actually purchase an incoming producer's book of business instead of permitting him to continue to own it. Once he realizes that his future value depends on the enhanced value of his agency, rather than just that of his own book of business, he starts thinking like an owner. However, instead of stock options for growth, you may choose to offer the producers "phantom stock" instead. While they do not gain voting shares of stock, you guarantee them an equivalent increase in their value through a deferred compensation agreement that performs similarly to their benefit. You maintain voting control. They find that their future is tied to the future of the entire agency. Should they retire, die or become disabled the deferred compensation package is triggered. However, should they leave, the deferral amount is maintained for a specified period before payout to assure that their non-compete clause is honored.
Many agents try to provide equity positions to producers in their own books of business. While this is workable, it reflects the wrong message. The producer still thinks in terms of "mine" and "theirs" instead of "ours". And the option is always there for him to move his business with the new agency sponsoring the buy-out of your agency's share of the value of his book of business. We believe that equity sharing is the only way to attract, keep and build a core of successful producers who desire the same thing as you do -- to own a growing asset to support their eventual retirement.