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Brokers appear willing and able to stake compensation on performance. Of course, their enthusiasm for the arrangement varies, and all seem to have conditions.

The differences in opinion were made apparent recently at a meeting in downtown Philadelphia of the Delaware Valley chapter of the Risk and Insurance Management Society Inc. During the question-and-answer period, a risk manager of a regional convenience-store chain quizzed a panel of five brokers about their take on sliding-scale compensation and pay-by-performance.

"We're very comfortable with that," said Joanne Wankmiller, National Senior Care Practice Leader at Marsh. In fact, she said, such setups are in place for many of her senior-care clients.

The Willis rep at the event, Peter Austen, also expressed enthusiasm. "We frankly encourage it," he said. Willis has agreed to such contracts--though only in "out of the gate" arrangements.

That means, Austen explained later by e-mail, that these agreements need to be made at the time of engagement, with detailed metrics for service delivery based on "clear, measureable and realistic" standards.

Vincent Caracciolo, managing principal in Integro's New York office, responded to the risk manager's question by admitting, "It's not the majority of scenarios put into place." But he clarified over e-mail that Integro is "open to performance-based deals provided the stated performance goals are clearly measurable, and the deals are transparent as to the total compensation achievable."

The word "transparent" can be considered here synonymous to Austen's clear-cut conditions.

An important aspect of performance-based pay and brokers' willingness to play by those rules, then, is the need to have these setups very defined. And that leads to a difficulty with these arrangements, according to brokers--the difficulty to attain such clear-cut agreements--which explains the ambivalence on the part of some brokers for these arrangements.

Marc Armstrong, managing principal of Aon's National Sales and Marketing Group, addressed the issue of performance pay and the insurance transaction, both at the RIMS event and later in an e-mail interview.

"While the insurance transaction is a key component of how a risk manager should evaluate performance," he wrote, "it can be difficult to judge how much the prevailing market conditions or the client's own contributions impact the renewal terms versus the broker's skill and experience. This makes tying the broker's compensation strictly to the transaction a challenging adventure."

Austen might not be as enthusiastic about performance pay based solely on insurance transaction pricing.

"It's something we don't have complete control over," he said.

Michael Mitchell, a vice president with the Philadelphia-based broker The Graham Co., suggested problems can arise with claims too. Risk managers, he said, believe brokers can make the difference with a tricky claim, but he questioned how easy it would be to base pay on that claim's resolution.

It is for such so-called value-added services--not the day-to-day variety--that some form of compensation solution needs to be created, beyond what is already available. If performance-based agreements are too challenging, then what?

As Austen said, for all intents and purposes, broking has not changed for hundreds of years. What has evolved is the relationship between client and broker, the additional services that spring out of that new consultative bond--and the way to price those services.

"We, as an industry have not done a good job on how to do that," he said about such pricing. "There needs to always be an open dialogue between the broker and the client to ensure that services provided effectively match the client's needs, and are appropriately priced."

November 1, 2007

Copyright 2007© LRP Publications