Many advisors view compensation largely as an expensive line item on their profit and loss statement. But compensation is, of course, an investment in your team that should drive success in your business. Many recent studies have shown that three key factors contribute to employee satisfaction and retention: having interesting and challenging work, enjoying the people you work with and feeling properly compensated.

Most bosses know that compensation is a tool for recruiting, retaining and rewarding the right people. Yet data from the new Quantuvis Consulting's Best Practices Study Series, Part 3: Human Capital suggest the majority of even the best advisory firms do not yet share this view. The "Plan Undefined" chart, below, shows that only a bit more than half of the top 25% of advisors have a specific compensation plan in place, formal or otherwise.

For those firms with a formalized compensation plan, 68% of the top quarter of advisors reviews their plans annually, while only 45% of others do so (see the "Annual Review" chart, also below). How important is formalized compensation planning in driving the success of top advisors? When we look at the prevailing trends across our Best Practices study series, we see that while top advisors do not overwhelmingly outperform their counterparts in business development, human capital or operational strategies, they do consistently outperform incrementally. These gains are what drive top advisors' substantially better performance.

MORE THAN JUST PAY

Best practice compensation plans go well beyond defining position compensation; they create a philosophy, strategy and structure around compensation that align the goals and expectations of a firm and its employees. Understanding that compensation, along with culture, is a key driver of behavior is important when developing a pay plan that motivates staffers, boosts performance and contributes to firm growth.

Philosophy is an important framework; it is the starting point for the strategy and structure that drive the effective development of compensation plans. While the form and function vary, our focus tends to be on three practical components: position compensation and benefits, incentive compensation and firm incentive. Each aligns different aspects of employee performance with firm goals and objectives to create a powerful force designed to deliver both individual and firm satisfaction, success and growth.

* Position compensation and benefits are the base of the pay pyramid, generally comprising the majority of total compensation. This component should compensate team members for satisfactorily performing the roles and responsibilities expected of their position. This tier also includes benefit costs, which historically adjust upward over time. For many advisors, primary compensation is often a variable or payout structure. While this may be considered incentive compensation, we've included it in position compensation.

* Incentive compensation is the next component in the pyramid. It is typically designed to reward team members for their individual performance and related contribution, separate from the performance of others and the firm (except to the degree that firm performance drives the amount of incentive pay available).

* Firm incentive is atop the pyramid. It commonly includes qualified and non-qualified retirement plan contributions and/or bonuses for the achievement of firm goals and objectives. This tier is intended to incentivize team members to contribute to firm goals, aligning their individual performance with firm performance.

Our best-practice advice to advisors is to design compensation plans that include all three components in a balanced way that clearly aligns with firm philosophy, culture and compensation parameters. Too often, our research has found a focus on only one or two components, creating alignment in one area but opening up chasms in others. Too much emphasis on individual incentive compensation can foster a "me versus we" mentality. Too much emphasis on firm performance can decrease motivation because many staffers either can't see or measure how their increased contribution makes a difference, diluting their initiative.

For example, a firm bonus is always welcome, but how can client service assistants recognize how their behavior contributes, when it is usually an advisor's performance that directly drives revenue? While it's a nice perk, will such a bonus truly promote different behavior on the part of the assistant? That's not to say firm-level incentives are inappropriate for these workers, only that the relationship and balance of the three components should be considered carefully when determining how to design a compensation plan that creates the desired outcome across different position types.

POSITION-BASED PAY

Most advisory firms create compensation parameters around a person, generally at the time of hire, rather than defining compensation for a position based on fair market value, competitive circumstances, firm philosophy, culture and caliber of talent desired. Given the variables to be considered, it should not be a simple matter of doing a query on position compensation and setting the price based on the results.