Insurance brokers are under pressure to cut costs, but are being hamstrung by contractual bonus payments to high-performing staff which mean that redundancies are their only option.
Willis, the global broker, is cutting 200 jobs after posting a net loss of $446m (£285m) in 2012 compared to a 2011 profit of $204m. The redundancies come after a review by the broker’s new management team, installed by Chief Executive Dominic Casserley, who assumed the post last October.
Casserley said the move was to “pave the way forward” for the company.
A look at the firm’s compensation costs reveal why it felt the need to cut – they were $957m in the fourth quarter alone, an increase of 89.6% on 2011. They were bumped up by a $252m cost for the accrual of 2012 bonuses. Comp expenses amount to a relatively high 59.1% of revenues.
Even at rival Marsh, which posted a 12% year-on-year rise in profits, compensation accounted for nearly 60% of revenues.
Broking is a people business, and firms add new product lines by poaching teams from rivals. These teams are brought in on contractual bonuses, meaning that they will be paid a certain amount provided they reach a specified revenue target, said Mark Grice, a partner at accountancy firm Mazars who specialises in insurance broking.
This is fine in the good times, but in the current tough market, firms are looking for ways to cut costs and this invariably means redundancies.
“Insurance brokers are likely to cut more jobs, since it’s very difficult for them to reduce compensation costs simply by reducing bonus payments,” said Grice. “On the one hand, brokers may have invested in a new team only for the expected revenues not to materialise. On the other, they need to cut under-performers to allow for the payment of contractual bonuses.”
Insurance brokers are also making efforts to stop staff defections by increasingly deferring bonus payments over a number of years, he says. From an accounting perspective, however, all compensation costs are booked in the year they are awarded.