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.
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.
Standard components should be blended with those that reflect the unique situation, talent needs, financial means and goals of any firm. Those components include:
* Position level
* Experience and tenure
* Competencies and skill set requirements
* Firm size (revenue, assets and headcount are common drivers)
* Market demand
* Required education, licenses and designations
With all of the variables, it can be difficult for advisory firms to set compensation ranges confidently. Our research is centered on compensation by position; we consider this a key consideration, but not the only one. Other important sources are:
* Industry studies. Data is available in our reports, as well as from other industry resources, such as the FPA.
* National and regional websites. Numerous resources are available online, such as Salary.com.
* Job postings. One way to get a pulse on compensation is to research what other firms are offering.
* HR and consulting firms. These organizations can provide help in compensation planning.
* Commonsense and job demands. Some firms are harder to work for, some positions are harder to fill and some firms compete with big corporations for talent. Generic study data cannot be counted on when it comes to compensation.
* A firm's place in the industry. Each firm's situation, cash flow and needs vary, and these factors tend to be essential in defining compensation ranges.
* Compensation philosophy. This varies significantly from firm to firm. We've worked with executives who believe they should "hire the best and pay them better than anyone else," as well as firms that believe in average compensation, but with a flexible, friendly and familial environment. The key is finding your philosophy - and staffers who share it.
* Other benefits. Often more than firms realize, people value more than just their paycheck. Benefits, time-off, flexibility, nature of work, environment and ability to advance are key drivers of employee motivation, satisfaction and retention.
* Firm performance. A firm's top and bottom lines are top criteria for what it is able to pay, along with what it is willing to pay.
Our most recent research found the top 25% of advisory firms are pay leaders, spending more than twice the amount per staff member than other firms. This median data includes firms with part-time staff.
This is a real chicken-and-egg scenario. Do top firms get better people - and thus performance - because they pay better, or do they have better performance, and pay, because they have better people? Our consulting experience and research suggests it is some of both. Firms of all sizes have their own advantages and attractiveness when it comes to recruitment and retention, and each should seek to leverage those strengths to the utmost when it comes to attracting, keeping and paying their staff.
Stephanie Bogan is CEO and Natalie Doss is research manager of Quantuvis Consulting. For a discounted copy of Quantuvis' Best Practices Study Series, Part 3: Human Capital and a free Human Capital Dashboard with customizable benchmarks, visit quantuvis.com and use promo code HCS50.
IN PRACTICE: A COMPENSATION PHILOSOPHY
We begin designing a firm's compensation plan by defining the firm's philosophy, aligning both the quantitative and qualitative components to drive the design of the pay strategy and structure. The initial response often is not overwhelming appreciation.
Yet with some discussion, firms tend to broaden their view. They recognize that a clear philosophy allows the firm to recruit and retain employees who are personally and professionally aligned in their beliefs regarding culture, contribution and compensation.
It's not an exact science, but building a compensation philosophy begins with defining the key attributes and values that will drive the firm compensation structure. These are a few examples of philosophies we have come across:
* "Compensation is the primary reason people stay with a firm."
* "We value education and professional development."
* "We value and reward motivation and an 'above and beyond' attitude."
* "Environment is the primary reason people stay with a firm."
* "Highly satisfied employees are key to long-term success."
* "It is our goal to attract bright and motivated people who strive to excel."
Tying a firm's philosophy to a set of values that are driven by performance allows them to correlate an outcome with that thinking and the related compensation. The ultimate goal should be to measure against defined outcomes, such as:
* Client satisfaction (retention, referrals)
* Continual improvement (growth and development)
* New client generation (firm growth)
* Client retention (continuity of revenue)
* Firm productivity (enhanced performance)
Designing a compensation strategy that supports a firm's philosophical framework while also acknowledging its financial resources and goals helps ensure an effective plan that promotes the growth of people and profits. -SB and ND