Allstate Corp. pushed for growth eight years ago by bringing on hundreds of new agents. Now the insurer is seeking to boost results by encouraging many of them go.
The company is planning a major overhaul of its compensation structure that will increase rewards for its best agents while pushing less-successful ones out the door. The Northbrook, Ill., company says it will cut base pay for all its agents—who are contractors, not employees—by 20% so more money can be paid in performance bonuses to its top tier of agents. Allstate also has ramped up an initiative to give its better agents loans to help them buy up less-successful agencies and take over their client lists.
As of June, Allstate had increased its number of agency mergers fivefold from 2009 and was on pace to increase them by a factor of 13. The overhaul of the compensation structure will be rolled out over the next two years.
The push to consolidate agencies is a reversal from an aggressive push Allstate made to add agents from 2003 to 2007, which led to too many agencies that are too small to thrive. Allstate agents bring in an average of about $1.9 million in premiums each year, while the agents at State Farm Mutual Automobile Insurance Co., a larger rival owned by its policyholders, bring in about $2.9 million on average.
The new pay structure will reduce agents' base commissions to 8% of their premiums from 10%—but from these commissions they have to pay office staff, rent and other expenses.
The goal of the changes: to have a sales force better at finding and retaining customers and more capable of "cross-selling," or selling a bundle of products to each customer instead of just a single policy.
At stake is Allstate's spot as the second-largest home-and-auto insurer in the U.S. The company has been losing market share for years and ranks behind some of its fiercest rivals in recent customer-satisfaction surveys. The number of drivers buying its standard auto policy has fallen 4% in the past three years, while home-insurance customers have dropped 12% under an initiative to limit the company's exposure to natural disasters.
Chief Executive Tom Wilson is hoping a more-effective sales force will reverse the decline in policyholders and help return the company to the levels of profitability it saw before the financial crisis hit. The stock has fallen by roughly half in the past three years through Monday.
"If you're a small agency and you have 1,000 accounts, you can't afford the kind of support staff you need, you can't have the broad product knowledge you need, so you're going to have trouble being an expert" in all the products Allstate sells, Mr. Wilson said in an interview last month. "You have to have enough size and scale and revenue flow to invest in what you need to."
"We need to dial it up," said Allstate Chief Marketing Officer Mark LaNeve in a presentation to analyst and investors in June. "We need more agency scale."
That's where Allstate's loan program for agents comes in. Mr. Wilson said the company has internal measures of agent performance that show which ones will be successful, and it can lend those agents the funds to buy out underperformers.
Among the recent sellers under the program is Patrick Campbell, a longtime agent in Novato, Calif., who sold his book of $1.5 million in annual premiums last month.
"It worked out for us," Mr. Campbell said. But with a growing number of sellers and Allstate's veto power over sales, Mr. Campbell said he expects the price agents can get for their books of business will decline. "I think I got out just in time," he said.
Some agents also have sounded objections about the company's plans to alter the commission structure. In August, the National Association of Professional Allstate Agents voted to affiliate with the Office and Professional Employees International Union, a decision the group said was driven by anger over the changes.
The group's executive director, Jim Fish, said some agents see opportunity in Allstate's changes. "The top tier of agents is going to do very well," Mr. Fish said. "But in general, morale is very low. People want out."
Mr. Wilson, in response to an analyst's question on a conference call in August, said morale wasn't a problem. Many agents he had spoken to are "highly supportive of our strategy," he said.
The analyst who asked the question, Robert Glasspiegel of Langen McAlenney, a unit of Janney Capital Markets, said in an interview last week that the way the company implements the changes will be a key to its success. Increased sales can solve a lot of problems, he said.
"It all comes down to execution," he said. "Morale can be turned around by good performance. … They need better earnings … before anything can happen with respect to morale."
Erik Holm is a reporter for Dow Jones Newswires, where this story originally appeared. Write to him here.