Certain deductions should be made from the value of the total gross compensation. One
such deduction is compensation subject to recall on policy termination, which will occur
mainly on first year lapses where sales compensation has been annualized. Chargebacks
can also occur on single premium life and annuity policies where cash surrender takes
place within a stipulated period of time after issue, and on single premium credit loan
payoffs.
A debit balance or other indebtedness which is a lien on future compensation also
represents a deduction from value.
The value of future compensation should be reduced by the amount it costs to earn it. A
producer who incurs no expense would be making no effort to ensure the payment of
future compensation, and hence is likely to experience poor persistency and earn less
money. The larger the producer’s practice, the more it will resemble an agency devoted
to production and service. The valuation of the practice becomes, in effect, the valuation
of an agency, and general business valuation methods need to be utilized. (20.)
Some producer contracts provide for a collection fee to be deducted from vested renewals
after contract termination. Appropriate adjustments should be made for these collection
fees.
For a producer paying subproducers directly, the present value of
subproducer compensation should be calculated and deducted from the value of the
producer’s compensation. Subproducer turnover rates will need to be applied to any
nonvested portions of their
compensation.
