The Greed of American Family
Jury finds insurance company underpays agents, as execs get rich.
Last week a jury ruled that the Madison-based company, American Family Insurance, has grossly underpaid retirement benefits to its agents, and may owe them as much as $1 billion. Why would a company want to treat its agents, who are so critical to its success, in this way? The answer tells us a lot about the state of American business today.
American Family began modestly, as a small company founded in the 1920s that mostly provided car insurance to Wisconsin’s farmers, who were considered lower risks than city drivers because they drove less often. Over the decades the company gradually added other customers and other lines of insurance and today sells insurance in 19 states.
Despite that growth, the company remained a mutual company, meaning it is owned by its policy holders rather than stock holders. And the policy holders in turn have their closest relationship with the company’s insurance agents. As the company’s website notes, “American Family Insurance and its sales force of nearly 3,500 agents provide industry-leading service to customers… No matter how life changes, your American Family agent will be there, providing the caring support and dependable service you deserve.”
American Family began jacking up its executive pay, as a column I did for Milwaukee Magazine back then documented. CEO Dale Mathwich saw his compensation rise by 26 percent in 1994, rising from $681,192 to $856,121. The company now had 23 executives making more than $200,000, up from just two the year before.
Meanwhile, the agents, who worked on commission only, were being forced to take a 10 percent cut in commissions while increasing the amount of paperwork they handled for the company. In response, one agent named Dan Gadzinski organized a proxy fight, pushing American Family policy holders to elect a different slate of company directors.
Gadzinski had worked for the company for 29 years, supporting his two children and his wife of 32 years, was a U.S. Navy veteran, regular church goer, and seemed to embody the American dream of middle-class success. As an American Family policyholder, he was one of the company’s owners and felt he had a right to organize the proxy fight. The company felt differently and fired him.
In the years since then, compensation for corporate executives has, if anything, grown at an even faster pace. By 2014 CEOs were earning 331 times more than the average worker; that was more than twice the gap in Switzerland and Germany, about four times bigger than in Australia and five times bigger than in Japan, the business publication Bloomberg.com found.
At American Family, its top 10 officers earned $23.6 million in 2014, led by chairman and CEO Jack Salzwedel with $8.1 million and president and COO Daniel R. Schultz with $4.1 million. Salzwedel’s pay is 12-times higher than the company CEO earned back in 1994.
“We are totally startled at the HUGE increases the AmFam officers took for 2014. Absolutely FLOORED! “ wrote an analyst for the NAAFA, which represents insurance agents nationally. “The average increase for the top ten officers was 27.81%. Overall… our top ten officers cost the company 34.4% more in 2014 than they did in 2013.”
The analysis noted that American Family’s board of directors, which approved these huge raises, is well-paid by the company, with an average annual fee of $122,875 per member.
Certainly the company has been successful. In the mid-1990s it had grown large enough to join the Fortune 500 and today, with annual revenue of $8.7 billion, has risen to the 332nd biggest company on the list.
And how much of that success has been shared with the company’s agents, which its website tells customers is “your very own dream champion. No matter how life changes, they’ll be by your side, ready to support you.”
A jury has found that the company violated the federal Employee Retirement Income Security Act and owes money to 6,978 current and former American Family agents across the country, including about 700 based in Wisconsin.
If the judge agrees with the jury’s advisory finding, the company would be required to “restore and protect retirement benefits,” as the Milwaukee Journal Sentinel reported, providing full vesting for agents and creating a retirement fund that could cost the company more than $1 billion.
American Family claims the agents it touts as so critical to the company are actually “independent contractors” who needn’t be offered these benefits. But Dickinson noted that they are “captive agents” who cannot shop around for insurance from other companies for their customers, and can only sell American Family policies.
“A company cannot just call its agents ‘independent contractors’ to avoid following the federal law protecting retirement benefits and then insist on controlling how those agents do their work,” she told the media.
American Family spokesman Ken Muth told the media “We strongly disagree” with the jury’s finding.
As for how the company treats its employees, its website declares that “Our holistic approach to employee well-being goes beyond promoting physical health and nutrition. We focus on overall quality of life including mental health, stress management, mindfulness and emotional well-being, financial health, community engagement and social well-being.
There was no mention of retirement benefits in that description.
If you think stories like this are important, become a member of Urban Milwaukee and help support real independent journalism. Plus you get some cool added benefits, all detailed here.