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Why colleagues should know — and help set — each others’ pay

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Compensation discussions are often an awkward tap dance. Advisors want to know what others are earning and how that pay is determined. Meanwhile, concerns about pay inequality for women and minorities add to the consternation of the conversation.

“Everyone should be rewarded when new clients come on board,” Carolyn McClanahan writes.

Yet firms often don’t have a consistent method of determining compensation for employees that is transparent, objective and promotes equality across the board. Small firms without human resource departments face even bigger challenges.

That’s why I’d like to suggest a compensation method that’s completely open. It’s a method that supports equality and aligns employees’ incentives with the firm’s goals.

In our firm, everyone has access to QuickBooks. We take a team approach to decision-making, setting our firm’s budget and revenue goals together.

With access to QuickBooks, employees can easily see what everyone is being paid. But even better? We all set the pay for each other and use an objective formula for determining our quarterly raises. Admittedly, this method is easier in a firm of six people than it might be at a much larger firm. But I believe the same process can work at large firms when executed within smaller teams.

How it works: Our compensation is based on roles — not job titles — within the company. That distinction is important because at small firms like ours, one person often fills multiple roles.

Consequently, job titles that may be common at larger firms might not necessarily reflect a person’s full responsibilities. For full-time employees who are well integrated in their roles, we determine how much of the employee’s time is utilized for each part of his or her job. For example, I spend about 60% of my time as a senior advisor, 20% on firm public relations and 20% on other CEO duties.

Next, we use compensation studies from custodians and consulting organizations to determine the appropriate pay for each of those duties.

These reports have a wide variation in pay scales, including base pay and bonuses for each position within a firm. We align that data with each of the responsibilities performed by our colleagues and then weight them accordingly.

Our goal initially was for our pay to match the 75th percentile for our area of the country. When I made my first hire of an investment manager in January 2009, our pay was about the 25th percentile compensation level. Because he believed in the company, our culture and our open-architecture pay scale, he was willing to take a pay cut from his previous job. I was very lucky. Subsequent employees hired later came in at a higher level.

Every quarter we receive a raise based entirely on revenue growth. We charge flat fees based on complexity, so our revenue stream is very stable. If we receive $40,000 recurring revenue in a quarter, 25% goes to overhead and the remaining $30,000 goes to the pool for raises.

Each raise is determined by a formula based on the employee’s current pay scale compared with the 75th percentile. However, raises for newer employees can’t exceed the raises for longer-term employees. The newer employees came in at a higher percentile than our investment manager and me, so we make certain our raises get us to goal sooner.

Our discussion on raises occurs as a team and we all make certain the numbers plugged in are fair to all employees. Recently, we hit the 75th percentile mark for all employees, so we have moved the bar to the 100th percentile going forward.

We also have a part-time hourly employee, and we recently hired a young associate advisor. His initial pay was set at the average rate for his experience and training. He has additional training incentives to get him to the 75th percentile by the end of one year. After that time, he will be placed in the formula for future raises.

Peace of Mind
Overall, I prefer our approach to the more traditional one that relies on annual employee reviews and individual bonuses as incentives.

Very few people enjoy annual reviews, and there is often subjectivity to that approach. Plus, bonuses that are based on individual goals or employee production (how many assets or new clients the employee brought into the firm), often foster an “eat what you
kill” mentality.

Firms that reward individualistic incentives may have difficulty getting employees to work as a team to achieve company goals.

So what are our incentives for rainmaking, then? I believe the traditional business development methods are no longer useful. The key to bringing in new clients is to deliver excellent service and provide true financial peace of mind through education, authenticity and a problem-solving attitude.

Each employee is expected to be their best, and we have weekly meetings to make certain we are all functioning at a high standard. Under this approach, everyone should be rewarded when new clients come on board.

When I was solo, my initial clients were people I worked with in medicine and my friends in the running community. Additional clients came from my work in the profession and the press. A majority of clients for the past decade come from referrals. And the beauty of our referral process? We never ask clients for referrals — they ask if they can send people to us.

At one point, our waiting list for new clients was a year. By raising our minimum fee for new clients, the waiting list is down to about three months.

The happiness of our team and the great work we deliver to clients is all the rainmaking we need, and I credit our culture of transparency around pay to part of that happiness.

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