the hiring mindset - marshberry · hiring plans by function 2015-2016. 6 march 2016 | counterpoint...

n MONEYBALL VS. EYEBALL: The Chase for Recruiting High Performing New Producers

n 2015 Insurance Agency TRANSACTION MULTIPLES

n Employee Marginal PROFITABILITY

M A R C H| 2 0 1 6

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The Hiring MindsetAgencies can achieve organic growth and perpetuation when they adopt an “always hiring” mentality and focus on recruiting people with the “selling gene.”

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n PG. 4 The Hiring Mindset

n PG. 6 Metric of the Month • Employee Marginal Profitability

n PG. 8 Moneyball vs. Eyeball: The Chase for Recruiting High Performing New Producers

n PG. 11 2015 Insurance Agency Transaction Multiples

n PG. 12 On the Horizon

TABLE OF CONTENTS

CONTRIBUTING AUTHORSMEGAN BOSMA, Senior Vice President

CANDICE ENSINGER, Director, Research

GEORGE HARB, Data Analyst

KYLE HOEFT, Consultant

ALBERT LLOYD, Executive Vice President

JOSH MORGAN, Unit Manager – Recruiting

DAN SKOWRONSKI, Senior Vice President

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March Spotlight

MarshBerry is excited to once again host the MarshBerry 360 Seminar Series.

These educational events provide a comprehensive packet of strategies that we feel insurance agencies and brokers should consider as they strive to maximize value.

The MarshBerry 360 Seminar Series is designed to help attendees understand areas of focus as they work to maximize growth, profitability and value. In 2015, more than 500 attended our four regional events, of which 76% were C-suite members of their organizations and 85% were new to the event. We think that’s pretty impressive.

For 2016, we’ve taken your feedback and have refreshed the agenda. This year, half of our time will be spent on the subject of creating transformational change within your organization. The conference will also focus on how to create and maintain a best in class culture, best practices of talent acquisition and development, how to drive predictable and profitable organic growth, an update on agency value and the M&A market and the impact technology can have on growing your business. The day will conclude with an interactive Q&A roundtable with attendees receiving key takeaways.

To learn more, and to register, log on to: www.MarshBerry.com/360

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4 March 2016 | CounterPoint

The Hiring Mindsetby Albert A. Lloyd, Executive Vice President440.392.6562 | [email protected]

Agencies can achieve organic growth and perpetuation when they adopt an “always hiring” mentality and focus on recruiting people with the “selling gene.”

People are the backbone of any business—they produce sales, retain clients and deliver services. They’re the source of growth, profit and perpetuation. Good people are a company’s greatest asset; and onboarding the right people is critical to an agency’s health today and ability to perpetuate in the future.

5CounterPoint | March 2016

But finding talent is tough. Without a plan to recruit, reward and retain employees, organizations will struggle to attract and keep professionals.We know that hiring is more of a priority than ever before with 75% of agencies planning to increase production staff by an average of 8% in 2016—that’s nearly double of prior years, based on the MarshBerry 2015 Organic Growth Trends Report.

Agencies that adopt an “always hiring” mentality and commit to basic recruiting disciplines, stand the best chance for industry leading organic growth. This is very timely as many firms are looking for organic growth now more than ever.

So, what’s the best strategy for hiring people who will fuel growth? Who are the producers of tomorrow, and what factors must agencies consider to tap top talent? Here, MarshBerry answers these questions, identifies important industry recruiting trends, and provides some go-to tactics for firms to take to the hiring market.

Growing a Sales Culture High-growth agencies that attract and retain top producers are focused on creating new business and recruiting people who have the discipline to develop and grow a book of business.

These firms prioritize new business rather than running “lifestyle agencies” who depend on renewals. To capture new business, these progressive agencies need outstanding producers.

However, we know that finding and keeping true producers is a challenge. Through our proprietary benchmarking system, Perspectives for High Performance (PHP), MarshBerry tracked 552 producers who were hired in 2014. After ten years, 20% (111) were still with the agency, and just over 3% of them (18) were owners. Eighty percent of the producers had moved on and were no longer with the firm that hired them.

That statistic speaks loudly about the rate at which agencies must hire to retain a solid staff of producers. Basically, an agency needs to recruit five new producers for every seasoned producer who plans on retiring in the next decade.

Meanwhile, according to MarshBerry’s PHP data, with 45% of an average agency’s producers in the 50-plus age group, who is going to replace these leaders when they are ready to retire? Not to mention, this senior group generates 35% of new business while maintaining 50% of an agency’s book of business, according to MarshBerry’s data.

The point is, agencies need to hire producers in their twenties, thirties and forties who will eventually fill the roles of those producers looking toward retirement. Otherwise, owners will wake up ten years from now, look around and wonder, “Who’s next in line?” Producer age stratification across the decades is critical, and talent acquisition is how this is accomplished.

Agencies always need to be actively looking for young talent. But what kind of talent should firms seek? Who are agencies hiring today? MarshBerry learned, in our 2015 Market & Financial survey, that just over 20% will hire value-added employee benefit personnel in Source: 2016 MarshBerry Market & Financial Outlook Report

Figure 1

PERCENT OF AGENCIES INCREASING THEIR HIRING PLANS BY FUNCTION 2015-2016


Source: 2015 MarshBerry Market & Financial Survey

METRIC OF THE MONTH

Employee Marginal Profitability = Revenue per Employee – Total Payroll per EmployeeEmployee marginal profitability improves when revenue per employee rises at a much faster pace than payroll per employee.

Employee marginal profitability has continued to show a steady upward trend from 2009 through 2015*. During the seven year time period revenue per employee has exceeded the average payroll per employee (in dollar terms) creating a positive uptick in employee marginal profitability throughout the respective years. However, payroll per employee has outpaced the growth rate of revenue per employee since 2013. During this time period, the average change

Employee Marginal ProfitabilityEmployee marginal profitability is a meaningful gauge of employee productivity. It is the difference between revenue per employee and total payroll per employee. It measures the contribution per employee to the overhead and profit of the agency.

2016, with the greatest hiring focus in loss control consulting and Human Resources support. We see more outsourcing of positions like legal services, regulatory compliance and payroll/benefits administration. Agencies outsource services to firms that specialize in those administrative activities so they can focus on what they do best: produce and retain insurance business.

But that goes back to the producer issue. Who will bring in new business? Some agencies are hiring account executives to service the books of retiring producers rather than assigning books to a new producer. That speaks to the challenge of finding good producers as well as cost savings. But, it’s not so easy to find good account executives either. Also, hiring account executives does less to promote a sales culture that will drive organic growth relative to new producer hiring.

The agencies who are thriving in today’s market are always looking for the next producer. They are committed to

both technical and sales training, and facilitating valuable mentorship programs. They’re investing in training to elevate producers’ skills - hiring is not cheap, and the revolving door continues to rotate. Remember, college graduates who take their first job don’t always plan on staying in one place until retirement.

Targeting ProducersSo how does an agency find good people, and how are job seekers looking for quality employers?

The answer: Online. According to a 2015 Pew Research study, 54% of job seekers have used the Internet to find a job, and 45% have applied for a job online. People are turning to the web to find quality employment. Pew Research shows that among Americans searching for a job in the last two years, 79% used online resources and information. About one-third (34%) of job seekers said the Internet was the most important resource.

Young talent is turning to social media for job leads, with almost 30% using specific social networking tools like LinkedIn and Facebook, according to a MarshBerry study. They’re also learning about jobs from friends and family (25%) and through mobile apps. In fact, we’ll see more use of mobile apps in job searches in the future — and this makes sense. Young people can search on their phones during a lunch break or while on the run. This is explained by the fact that individuals looking for a new job are not likely to sit at an employer’s desk and use a company computer to search. This ease of access provided by mobile apps will lead to additional job movement by individuals which translates to additional pressure on employers to retain talent.

Some agencies target hires from college, or run internship programs so they can essentially “test” future employees to see if they fit the culture and possess the “selling gene.” We also

Revenue Loss Control Consultant

Wellness Coordinator

Client-Facing / Tech HR Support

Less than $5M 39% 6% 39%

$5M to $10M 50% 17% 33%

$10M to $20M 25% 6% 19%

Greater than $20M 54% 8% 8%

Source: 2016 MarshBerry Market & Financial Outlook Report

Figure 2

% OF AGENCIES PLAN TO HIRE SPECIFIC EB VALUE-ADDED POSITIONS


in payroll per employee was 4.8% compared to an average change of 4.0% for revenue per employee, resulting in a more flat employee marginal profitability. If this scenario continues and the spread widens, it would cause employee marginal profitability to taper. n

EMPLOYEE MARGINAL PROFITABILITY

*Trailing twelve months through September 30, 2015.

Source: MarshBerry’s Perspectives for High Performance

see firms going after prospective producers who are currently working in companies with great sales training programs.

But to find talented producers and to fill the recruiting pipeline, we need to look beyond the insurance industry for people who simply have that selling gene. You can teach a skilled salesperson the insurance industry— if they have the gene, they can sell just about anything. An agency then can provide technical training to teach the technical aspects of insurance industry; then sales training, coaching and mentorship to continue sharpening producers’ skills.

Mentorship programs are critical for showing producers how to find success in the industry. Once hired, successful agencies will work with producers for 12 months or longer to improve their chances of success. Remember, turn-over is expensive; retention through training can help protect your recruiting investment. They’ll report their calls to a sales manager, and get compensated through an activity-based plan. The point that first year is to make sure a producer can set appointments and close deals.

Only 30% of agencies have a mentor program in place, and those that do tend to have a stronger sales culture (Figure 3). They assign different mentors to teach new producers various roles. Also, agencies compensate those mentors for their time. There are closing mentors and sales tracking mentors. There are marketing mentors and education mentors. Some mentors play dual roles — and that’s fine.

Mentorship helps usher an “unvalidated” producer that has less than three years of experience, into a “validated” producer that has been with the agency for more than three years and can cover his or her compensation with production.

Meanwhile, agencies must keep in mind what type of compensation plans attract young producers today.

According to a MarshBerry study, only about 10% of those 35 years old and younger believe their ideal pay structure is commission-based. Producers in the 36- to 46-year age bracket (Gen-X) are more likely to prefer commission based pay (35%). These numbers show that the older group is likely more well suited to a producer position that demands some risk-taking and personal motivation to achieve goals.

Continued on Page 9

Mentorship programs are critical

for showing producers

how to find success in

the industry.

Source: 2015 MarshBerry Organic Growth Trends Report

Figure 3

Do you assign a mentor for new producers?

Moneyball, The Art of Winning an Unfair Game, written by Michael Lewis, tells the story of Oakland Athletics General Manager, Billy Beane. The book suggests the biggest problem he faced was a lack of budget compared to his competition. He was forced to evaluate players in unconventional ways to find valuable additions for his team. According to the book, Beane relied on Sabermetric analysis — the application of statistical analysis to baseball records in order to evaluate and compare the performance of individual players. This number crunching led to playoff appearances while spending half of what some other teams spend.

Many up-and-coming agencies are encountering their “Moneyball” moment. With limited recruiting experience and resources, how will they form a process to screen new producer candidates and achieve above normal success? Many use the “eyeball” method where if the producer candidate looks and acts the part—they must be able to do the part. The “eyeball” method, coupled with less than ideal post-hire mentoring, has resulted in success rates that hover near 22% for new producer hires retained after ten years.1

Agencies must seek to establish their own version of Sabermetrics. In other words, applying a risk management approach to hiring producers. For example, if such an approach were taken, it would forbid agencies from hiring new producers with no sales experience. After all, would you bet on a horse that has never entered a race simply because they look like a winner? As a risk management professional, the answer is likely “No.”

Based on our experience, the first step to creating such a program would be to gather a set of initial screening questions. The goal is to determine if the candidate has done similar activities that the job of a producer requires. To move beyond the first step in your interview process, they should be able answer affirmatively to all (or most) of the questions below.

1 Has the candidate sold business-to-business products or services for at least three years?

2 Has the candidate followed a sales process similar to your firm’s? 3 Have they called on companies which have the same size profile

as the companies your firm targets?4 Have they called on Chief Executive Officers, business owners,

and other executives?5 Did their previous sales positions involve long sales cycles?6 Are they accustomed to making 100+ cold calls or attempts2 per

week using numerous methods? 7 Have they endured a large volume of rejection?

If you can answer affirmatively to each of these questions, then you are likely considering a viable candidate. n 12015 MarshBerry Organic Growth Survey2MarshBerry defines an attempt as part of our “Seven Levels Of Prospecting”


For the Record

by Josh Morgan, Senior Search Consultant 440.392.6579 | [email protected]

Moneyball vs. Eyeball:TheChase for Recruiting

High Performing New Producers

One thing is certain — if agency owners continue to hire producers simply based on their perceived personality, then their agencies will continue to experience the same mediocre results.


Continued from Page 7

Always HiringCreating a sales culture requires that agencies constantly hunt for fresh talent to fuel new business and to replace producers who are retiring or simply not making the cut.

The “always hiring” mentality ensures that agencies do not miss out on top talent. Sporadic hiring is costly and often times produces mediocre results.

If you’re not looking for the next best producer, someone else is. Consider creative ways of keeping your agency’s name out in front of prospective employees. Think about how you reward the producers on your team today. It is a fact that producers will talk about the incentive they just earned with their friends, neighbors and others. Incentives do not always need to be cash – get creative and play to a producer’s ego. For example, would a watch, entertainment system or premium

car lease go further than a cash bonus? A producer would be more likely to share how happy they are with others when they can physically “show” their earned incentive to others. Your current producers and their success can be the best advertisement for your agency.

Above all, understanding today’s recruiting environment and what young producers are looking for is critical for attracting top talent. Take a good, hard look at your training program and compensation plan. If your agency is a revolving door and retention is a problem, ask why. Remember, if you don’t fix the problem, someone else will.

Recognize the importance of age stratification with producers and aim to hire professionals who can grow with your agency so perpetuation can be a reality. Just as important as hiring strong producers is knowing when to let go of the weak ones. They’re taking up seats that could be filled with salespeople who can drive new business. Again, this underscores the importance of “always hiring” so you can cultivate a prosperous sales culture.

At the end of the day, in any business, it’s all about the people. Finding and hiring the right employees is critical for agencies that plan to organically grow, profit and perpetuate. n

Peer Exchange Network NewsHave you ever identified “culture” as a commitment or action item in your strategic issues group? Join us at MarshBerry’s Agency Peak Performance Exchange (APPEX) in Las Vegas in April as we focus the conversation on establishing, defining, and evolving your culture.Jon Wolske, Zappos Culture Insights leader, will address the audience in a keynote entitled, “Infectious Happiness, Infectious Results.” Other sessions include MarshBerry’s Best of the Best in Industry and the Zappos Cultural Experience.

The Zappos Cultural Experience includes a tour of Zappos’ corporate headquarters in Downtown Las Vegas, providing a glimpse of the Zappos culture and allowing you to feel what it’s like to walk in the shoes of your fellow Zapponians’.

Interested in learning more about our Peer Exchange Networks? Contact Tommy McDonald today at [email protected]

Dealmaker’s Dialogue

2015 Insurance AgencyTransaction Multiplesby Dan Skowronski, Senior Vice President440.392.6552 [email protected]


2015 results showed the third consecutive year of robust increases in purchase price multiples, with the average transaction price characterized by a strong Base Purchase Price, and with a higher earn out opportunity than seen in recent years. As a multiple of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) the average Base Purchase Price increased to 7.78 times EBITDA, a substantial rise from 7.14 times in 2014. Including the Realistic Earn Out, the average deal was 8.73 times EBITDA in 2015, up from 7.86 times in 2014. The earn out potential in 2015 if the Maximum Earn Out is achieved was significant, resulting in an average maximum purchase price of 10.23 times EBITDA, an additional 1.0 times that seen in 2014 (9.22 times) and nearly 2.0 times higher than 2013 (8.33 times).

Platform agencies are typically larger, sophisticated, high-performers, and considered a foundation for the buyer’s insurance operations in a given geographic region. Platform agencies continued to command premium pricing in 2015 with a Base Purchase Price at 8.49 times EBITDA plus an additional 1.07 times in Realistic Earn Out to equal a Realistic Purchase Price of 9.56 times EBITDA. However, this lower Base Purchase Price and higher Realistic Earn Out compared to 2014 may be evidence of risk-averse pricing behavior creeping into the market with the shift of risk

Buyer demand, especially for size, growth and quality continues to drive deal multiples.

from the buyer to the seller. An additional 1.69 times in earn out equals the Maximum Purchase Price of 11.26 times EBITDA, a decrease in the Maximum Purchase Price of 2% compared to 11.44 times in 2014. We see this as further evidence of more controlled pricing creeping into the market, with the lower Maximum Purchase Price sometimes driven by lower caps in place by the buyers, or higher growth hurdles required to achieve the Maximum Earn Out.

The Best 25% of the average transactions, based on the realistic purchase price as a multiple of

Source: MarshBerry proprietary database of transactions in which we were directly involved, those from which we have detailed information, transactions in the public record, our knowledge of the marketplace, and discussions with active buyers and sellers. Value illustrated is net of a working capital requirement, if any. Past performance is not indicative of future results. Multiples are averages and do not imply that all deals fall within these parameters.

Figure 12015 TRANSACTION MULTIPLES



BASE PURCHASE PRICE: The dollar amount Paid at Close, plus the Live Out the seller will receive.

Paid at Close: The amount of proceeds paid at the closing of a transaction, including any escrow for indemnification items. Live Out: The amounts a buyer may initially hold back, but which are paid as long as the seller’s performance does not materially decline, or which may be paid at closing, but are subject to a potential adjustment.

REALISTIC EARN OUT: The dollar amount the seller is likely to receive in the future based on a number of factors including actual historical seller performance and buyer/seller review and discussion of earn out metrics.MAXIMUM EARN OUT: The maximum possible earn out payment based on future performance. EARN OUT: The earn out represents the potential amount the seller can potentially achieve following a deal closing based upon the achievement of certain goals, typically related to growth of revenue and/or EBITDA.

EBITDA, achieved very strong multiples for a third straight year. The Best 25% averaged a Base Purchase Price of 9.14 times EBITDA, with a total of 10.70 times possible under the Realistic Earn Out, and a total of 12.29 times if a seller is able to hit the Maximum Earn Out. However, while buyers continue to pay higher valuations for larger agencies, many have communicated that they are looking to blend the average multiple paid across all of their acquisitions, and thus can support selected higher multiples if balanced by other transactions where they pay far less. We believe this dynamic speaks to the decline in the average valuation of the Lowest 25% of the average deals.

The number and variety of active buyers in 2015 and today illustrates a continued interest in the insurance distribution space. Current market activity leads us to believe that large, sophisticated, organic growth-capable sellers with a solid bench of perpetuation candidates should have leverage to negotiate strong deal multiples in the near term. However, our experience indicates that sellers without these attributes may not achieve the most favorable deal multiples and/or transaction structures. n1The average reflects deals completed by all buyer segments, including public brokers, private equity-backed brokers, banks, and independent agencies.Securities offered through MarshBerry Capital, Inc., Member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, Inc. 28601 Chagrin Blvd., Suite 400, Woodmere, Ohio 44122 (440.354.3230).

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the hiring mindset - marshberry · hiring plans by function 2015-2016. 6 march 2016 | counterpoint...

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