Profit Pools
Maximized gross profit per WSE within the PEO industry is heavily dependent on the number and margin of a PEO’s profit pools. While admin fees are typically the number one profit pool within a PEO’s GP$ mix, admin alone will not yield optimal GP$ per WSE results. PEO’s that maximize profitability do so by expanding existing and new profit pools. This article will provide a brief overview of typical profit pools available to PEOs.
Common Profit Pools
Below is a list of the most common profit pools we see within the PEO model. While this list doesn’t cover every available profit pool, the below 12 items will help leadership determine if they are capitalizing profit pools available to their bottom-line.
- Admin Fees: margin charged on a percentage of payroll or PEPM basis to cover PEO services.
- SUTA Arbitrage: delta between client charges and PEO remittance for SUTA in PEO reporting States.
- FICA/FUTA Arbitrage: delta between client charges and PEO remittance, or pricing remaining post tax caps.
- WC Arbitrage: delta between workers’ compensation client-level charges and carrier remittance. May also include high deductible yields based on good losses, carrier kickbacks for good loss years, captive dividends, etc.
- BenAdmin Charges: with appropriate arrangements and CSAs, BenAdmin charges can mirror the market for what a 3rd party would charge for benefits administration.
- Broker Commissions: PEO master insurance plan commissions from carriers.
- Ancillary Benefits: markups on ancillary products at an employer level.
- Markup Charges: markups on various service components such as delivery, background checks, drug screens, time and attendance, etc.
- Ad Hoc Charges: charges for special projects, special reporting, ERTC filing, etc.
- 3rd Party Vendor Fees: markups on 3rd party vendor add-ins such as technology plugins.
- Setup Fees: fees charged to cover the cost of setting up a client.
- Minimum Premium Benefits Plan: fronting carrier guaranteed cost health program with backend mechanism for potential profit based on good loss years.
Level of Profit Per Pool
Each pool will not carry the same level of profit available. The top five most robust profit pools we typically see are as follows: Admin Fees, WC Arbitrage, SUTA Arbitrage, BenAdmin Fees, Tax Arbitrage. PEO profit mixes vary by PEO, but hopefully this article will provide your team with some insight into how to maximize its profitability.
Diversification and Economic Cyclicality
Having diversification within your profit pools helps protect against economic cyclicality. Here are a couple of examples.
If unemployment spikes, SUTA arbitrage will erode. If your PEO is heavily reliant on SUTA arbitrage and not diversified in its profit pools, this erosion will have a material impact on the PEO’s overall GP$.
If workers’ compensation turns to a “hard market” WC arbitrage may erode. However, if your PEO receives broker commissions on its master WC program, with premiums increasing, so will commissions to the PEO.
Ensuring that your PEO has diverse profit pools will not only expand your GP$ per WSE but also protect against material erosion in down economic seasons.
Conclusion
Profit pool expansion is key to any PEO that desires to scale. As your PEO grows and your COGS become more favorable, maintaining client level pricing creates increased profitability to your PEO. Consider the categories within this article and review whether or not your PEO is optimizing its profitability.
Author
Rob Comeau is the CEO of Business Resource Center, Inc. a business consulting and M&A advisory firm to the PEO industry. To learn more about how to increase your PEO’s profit pools, visit www.biz-rc.com