Con. The relationship of compensation-to-production is measured only once a year. The other three options [below] include commission -- and establish this key relationship every single day.
 

STRAIGHT COMMISSION

Pro. Unlimited income potential. Employer need only compensate for sales that are actually made.

Commission levels need to be established for each policy and account type, both new and renewal. (Producer P&L™ walks you through this process.) The agency is still responsible for many sales-related and operating expenses that will be incurred, even if the agent doesn’t make a single sale. These costs may include ... employment agency fees, auto expenses, travel, entertainment, telephone, postage, additional association dues, E&O insurance premiums, and any extra computer-related costs. There’s also the expense of operating new business marketing programs.

Con. Few new inexperienced job candidates are financially able to accept employment under this compensation option.  It is best suited for veteran agents.
 

DRAW AGAINST COMMISSION

Pro. Agent has a level monthly income, plus unlimited income potential. Agency makes regular payments to a producer -- not as salary, but as a draw. A draw is a repayable advance against future commissions. (Tip: Make sure that your producer employment contract recognizes this key fact.)

This is a common compensation method for life insurance agents. Commission levels to be paid to the agent are established for each policy or account type. They may be similar or identical, to those levels set for straight commission compensation. The producer's actual earned commissions are compared against the draw amounts that were paid, usually on an annual basis. When the commissions exceed the draw -- the agency owes the producer the difference. The producer owes the agency -- when the draw amounts exceed commissions earned. (Producer P&L™ walks you through this entire process.)

Con. A producer may actually owe money he cannot pay at the end of a given year. The agency may also be taking on more risk than it expects, as there may difficulty in collecting what's owed -- especially if the agent was terminated or resigns before his draw is fully validated. However, you may be able to write off uncollectible draws -- if your producer’s employment contract was properly written.  Tip: Always check with your CPA and attorney for advice in such contractual matters.
 

SALARY PLUS COMMISSION

Pro. Like the Draw against Commission option, the producer is allowed a level monthly income plus the potential for unlimited income. And, the salary that he is paid is his to keep, regardless of the number of sales that he has actually made. This option is to the agency's advantage, since the monthly income paid to the producer will be a lower fixed amount than straight salary -- letting the agent make up or exceed the difference by the actual commissions that he earns.

This approach to agent compensation is very common in the P&C industry. Commission levels must be set for all policy and account types, covering new business and renewals. A base salary must also be set. (Producer P&L™ walks you through each required step.)

Con. There is an unfortunate tendency to establish too high a base salary and/or commission levels, making this method of compensation unprofitable for the agency.