Incentive Compensation
Rusbuldt Responds to Willis CEO, Joe Plumeri
Controversy over incentive compensation reappears at RIMS conference.

This week at the recent Risk and Insurance Management Society (RIMS) 2010 Annual Conference, Willis Group Holdings Chairman and CEO, Joe Plumeri, took aim at the payment of incentive compensation with the same rhetoric he has repeated since he announced in October 2004 that Willis would no longer accept contingency payments from insurers. He has launched a public awareness campaign to educate risk managers about the inherent conflicts of interest created by contingent commissions, and urge buyers to “use their wallets to send a strong signal against the controversial payments.” Mr. Plumeri contends that “ignorance is the biggest obstacle in getting our message across on contingents” and that brokers should “not [be] putting profit before principle.” When asked whether Willis negotiated higher standard commission rates to make up for the firm’s lost income from contingent compensation, Mr. Plumeri responded, “Of course, we have. Just because we won’t accept contingents doesn’t mean we don’t expect to be paid for our services.”

I take serious issue with Mr. Plumeri’s assertion that the higher negotiated commissions Willis is paid result in a better outcome for the client. He unfortunately has confused legitimate incentive compensation with the steering, bid-rigging and other illegal practices that Willis and other firms were accused of in 2004.  In fact, incentive compensation is used effectively in virtually all sales environments to reward excellence in service and productivity. It doesn’t matter if the compensation is blended in to a higher percentage of standard commission or paid separately after the fact. The effect is the same—it rewards sales and service performance. Willis says the higher standard commissions it receives are “certainly not enough to influence the placement decision.” But yet, Willis objects when others—who don’t have the market clout to get them up front—receive the same payments at a different point in time.

Many would argue that the payment of higher compensation up front might diminish attention to client risk management. Having some portion of compensation depend on the performance of the risks placed serves insurance buyers well—it encourages appropriate attention to risk management, thoughtful design of coverages and care in selecting deductibles. When producers meaningfully and favorably affect loss ratio and cost effectiveness for the client, the client benefits. Producers are driven by retention and growth of business with the client over the long-term, not a payment at the end of a year.

The reality is that Willis, as the world’s third largest broker with 17,000 employees, can take this position because their enormous size allows them to. Public policy and perception, however, must not lose sight of the fact that agency size and clout does not determine quality customer service. Main street agencies all over the country are part of the bedrock of their communities and provide outstanding benefits to clients day-in and day-out, all year long. The fact that they lack the size and clout that Willis enjoys does not mean that they have less integrity or provide less service—it simply means that they lack the scale to negotiate for all their compensation to be paid at one time.

Mr. Plumeri’s express target is competitors who have not negotiated higher up-front compensation. But he is silent about the role of carriers who pay incentive compensation after the end of a sales year. It is not clear why he would want Willis to support carriers with more business when he objects to those carriers paying incentive compensation. The Big “I” supports the right and ability of insurers to choose how to pay producers for strong sales performance, including up-front fees like Will has negotiated and other lawful payments like incentive compensation paid after the close of a sales year.

Willis made a thoughtful and conscious decision to stop accepting incentive compensation, and it expects everyone else to follow the same course. In the five plus years since Willis made that decision, under the guise of saying it wants to “level the playing field,” it has sought to convince others that incentive compensation is improper. But since Willis confirmed that it has negotiated higher standard commissions to make up for the lack of incentive compensation, it is unclear what about the playing field is unlevel. Willis now knows it will receive all compensation, regardless of its performance. If other agents and brokers can’t earn incentive compensation and can’t negotiate higher commissions up-front, then the result is anything but a level playing field.  In fact, many independent agencies may be unable to survive, leaving customers fewer choices from which to obtain the services they need.

I will close with a challenge for Mr. Plumeri. I support the right of Willis to negotiate its compensation arrangements upfront, taking advantage of its size, reputation and relationship with insurers. But I take issue with the theory that its compensation approach is the only appropriate way to conduct business in an attempt to force its decision on the entire industry. If Mr. Plumeri is truly interested in transparency, he would instruct all Willis producers to publish the firm’s commissions on the policies they offer, along with industry information on the average commissions for that line of coverage. At that point, insurance purchasers will have the information they need to evaluate value and cost, and that will be to the client’s benefit.

Bob Rusbuldt (bob.rusbuldt@iiaba.net) is Big “I” president & CEO.