Incentive Plan Rework: 6 Questions to Ask
Every firm needs to determine the unique compensation plan that will work best for executives, staff and clients. Yet such plans present a challenge: At Cruz Consulting Group in San Francisco, the most highly requested engagements are for redesigning incentive compensation plans, noted founder Kelli Cruz In a recent column for Financial Planning.
She suggests that firms consider six strategic questions in determining a compensation plan that maximizes the value of their human capital. Click through to see the list, view the text-only version or read her full article here. -- Maddy Perkins
The purpose of a good compensation philosophy is to attract, retain and motivate good people. Considerations when developing your compensation philosophy should include: How competitive is the advisory services industry in your market? What is your firm’s cost structure and future financial outlook? Most important, how does your compensation philosophy fit into your overall business plan?
Compensation plans should be uniquely tailored to leverage a combination of rewards and objectives that will work best in driving your firm’s success. A good plan should include such elements as base salary, incentive compensation, benefits and retirement. “You’ll need to customize each of these to fit your firm’s strategic objectives and competitive environment,” Cruz says.
Consider allowing all of your employees to participate. Including all of your employees helps leverage their motivation to work towards driving the firm’s success. “Doing so uses the incentives to build a unified vision for the firm,” says Cruz.
While it’s good to include all of your employees in your incentive compensation plan, positions that require direct involvement with clients have a larger impact when it comes to achieving your firm's goals -- and should be recognized as such. "Positions with key client relationships should be eligible for a higher incentive payout," Cruz says.
Use a percentage of an employee's base salary to calculate incentives, Cruz suggests: "Positions that have the highest impact might be able to earn up to 50% of their base in incentives. Those with lower impacts might only get 5% to 10%."
Determine the potential cost of your compensation plan, Cruz says. Consider the implications of good years, bad years and great years, factoring potential future growth into your model. Certain funding options can help guarantee that the plan is self-funded: percent of firm revenue, percent of firm profit and percent of firm profit above an operating profit margin threshold.
“Clear metrics for success will help guide employees in aligning their efforts with firm goals, and building their skills for higher achievement,” says Cruz. Set baseline expectations, then help employees understand how additional performance and work toward the firm’s stretch goals can result in additional compensation. Incentive drivers can be based on team and/or individual performance, but Cruz recommends having no more than five performance metrics in a plan.
Reworking a compensation plan for your firm? Ask yourself these questions first.