2018 Best Practices Study

These people and resource investments are likely to show up in several expense categories, but are most likely to impact an agency’s overall compensation expense load. Since compensation expenses typically make up a significant majority of an agency’s overall expense structure, it is the most important driver of overall agency profitability and one to be managed very carefully. Some of this profit margin pressure is simply the cost of doing business in the hyper-competitive middle- market in which most Best Practices agencies operate. The Best Practices Study is an invaluable resource to measure whether an agency’s compensation expense load is in line with its peers, who are facing the exact same competitive pressures.

Primary Agency Expense Categories

Total Compensation as % of Net Revenue

Key Differentiator Metric

Compensation

65.5%

Selling Expenses

62.0%

60.6%

57.1%

53.6%

52.9%

Operating Expenses

<$1.25M $1.25-$2.5M $2.5-$5M $5-$10M $10-$25M >$25M

Administrative Exp.

Total Pro Forma Compensation as a % of Pro Forma Net Revenue

Agencies must continually manage the trade-off between growth investments, which reduce profits in the short run, and maintaining high profit margins. Therein lies a dilemma - which metric is more important to generating shareholder returns: growth or profitability? Without growth investments, an agency will find it much easier to achieve high profit margins. On the other hand, if organic growth is the name of the game with no regard for profitability, it will be relatively easy to buy the growth desired, in the form of new producer hires, severely impacting profitability. How then to best to balance growth and profitability? To address this question, the Best Practices Study relies on the Rule of 20 metric, which provides a quick means of assessing an agency’s unique combination of growth and profitability and whether or not that combination is leading to strong shareholder returns. As it turns out, from a value creation standpoint, organic growth is roughly twice as important as agency profitability in generating high shareholder returns. This is reflected

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