Do yearly changes in the commissions that producers receive fluctuate in tandem with CEO compensation at the life insurers for whom they sell product? That’s a question I sought to answer as part of my research on producer compensation. I’ve had limited success.
An analysis of changes in total CEO compensation and commissions paid to producers between 2011 and 2012 is problematic, at least for the Top 25 companies featured in this issue. One reason: 10 of the 25 companies do not disclose CEO pay.
Also to consider are the myriad variables that guide CEO pay, many of them only indirectly connected, at best, with products sold or premium dollars earned. These include, for example, the short-term performance metrics of Basel III capital ratios, customer retention levels, credit losses and key operational/strategic accomplishments.
Yes, gains in new annualized premiums and sales of life insurance and annuities do factor into the mix at certain companies. But for most insurers, the earnings-related metrics used to guide executive pay — return on equity, net operating income and total shareholder return, among others — embrace revenue and profit centers to which life insurance sales professionals contribute only a portion (investment income contributing another, for example).
All of which makes perfect sense. What’s less clear is why producer commissions is not among the scores of performance metrics I learned about while researching my recent feature on CEO compensation. Therein, I compared life insurers within Prudential Financial’s “peer group” (companies of comparable of financial strength and market focus), which collectively use nearly 30 long-term performance metrics and 90-plus short-time metrics to fix CEO pay. Though sales-related variables are among these, commissions are nowhere part of the line-up.
It should then come as no surprise that I found little correlation in the percentage changes to compensation paid producers and company CEOs between 2011 and 2012. Of the 15 life insurers that reported CEO compensation, 10 companies paid their chiefs more in 2012 than in 2011. Seven of these 10 companies also boosted commissions over the two-year period.
However, percentage increases in commissions and CEO awards vary widely among this group. ING U.S.’ chief, for example, received 99.7 percent more in compensation in 2012 than in 2011, whereas aggregate commissions paid ING producers rose only 11 percent. Protective Life’s CEO also received more in compensation than the insurer’s producers (27.7 percent versus 14.5 percent), in contrast to Great-West’s chief, whose increase from 2011 to 2012 was less (12.2 percent versus 23.2 percent).
In other instances, the changes in compensation for the two groups moved in opposite directions. The most jarring example is that of Berkshire Hathaway, whose billionaire CEO, the philanthropist Warren Buffett, suffered a 13.8 percent decline in compensation over the same period that saw agent/broker commissions skyrocket 602.7 percent.
The challenges involved in comparing producer commissions and CEO compensation notwithstanding, there’s a case to be made, I believe, for including the former among the performance metrics used to guide the latter. One reason: Life insurance sales professionals directly affect their companies’ bottom line. The financial impact of the products they sell, and the premium dollars earned thereby, can be easily measured.
Adding commissions to the CEO’s pay formula might also act as a catalyst to more closely align an insurer’s strategic goals with the training and services producers need to succeed in the field. As many companies demutualized over the years, they migrated from career to independent distribution channels, enabling them to reduce the sales support provided to agents and brokers. This has led, among other things, to a decline in the number of producers with the skills needed to build a practice in an underserved middle market. Granted, making producer commissions one component among many used to fix CEO pay may not be a silver bullet to this longstanding industry issue. But it could be part of the solution.
For more on industry compensation, see: