In my consulting practice, I frequently get asked the same question: What are the ingredients that go into a compensation plan?
Similar to when you’re preparing a new recipe for the first time — following the directions to the letter, doing the steps in order and adding all of the ingredients — the same regimented process can be important to creating a compensation plan.
Here is my secret recipe:
Step 1 — Determine the firm's compensation philosophy: Before determining salary ranges and creating a compensation structure, first determine your approach to compensation. Ask yourself this question; what mindset drives my pay decisions?
A firm can choose from three general compensation philosophies: to lead, match or lag the market. Being a market leader means you pay more for talent than your competitors. Typically, the goal is to gain an advantage by attracting top talent away from others.
If you decide to match the market, it means you pay roughly the same as your competitors, and if an employer lags the market, it is paying less than market rates. Generally, an employer rarely chooses to lag the market as a conscious pay strategy. Instead, this practice is either discovered after conducting market research, or it may be the result of a limited compensation budget. A company's attitude toward compensation will drive its decisions through the rest of this process.
An effective compensation philosophy should pass the following quality test: Is the plan equitable? Is it defensible and perceived by employees as fair? Is the plan fiscally sustainable over time? Are the compensation policies legally compliant? Can the organization effectively communicate the philosophy, policy and overall programs to employees?
Once the firm’s compensation philosophy has passed that test, you should identify ways to align compensation with the firm’s broader goals. Some of those goals may include reinforcing teamwork, putting clients first, creating full transparency, providing prudent financial advice and developing long-term relationships.
Step 2 — Rank positions in the firm: Creating a clear hierarchy can help define the value or worth of each job in comparison to other jobs in the company. As a general rule, I believe that roles that have the most impact on end clients should also have higher compensation opportunities. For example, advisory roles that include direct interaction with clients should offer the highest compensation.
What about support staff roles? With roles such as client service administrators, portfolio analysts or operations managers, it’s best to focus on how critical their job function is to servicing and retaining your existing clients.
Step 3 — Establish market ranges: Labor costs are usually the largest expense for organizations, and identifying market rates for core positions is important for a variety of reasons. First and foremost, it guides your decision-making on hiring, promotions and your firm’s broader budget.
Consult industry benchmarking reports. Be sure to always compare job descriptions — never titles alone — when deciding whether a survey job is a good match to your roles. Titles vary widely from firm to firm in terms of scope, size and responsibility.
Read through the report findings for the latest compensation trends. About 90% of RIAs participating in the 2017 compensation study by Fidelity Clearing & Custody Solutions reported giving salary increases as well as bonuses last year. One-third said raises ranged from 2% to 4%, while half reported increases of 4% to 10% or more.
Understanding these trends can help you make the right investments with your compensation dollars.
Step 4 — Decide on individual compensation levels: Using survey data, develop guidelines to map out your compensation structure.
For example, an inexperienced person who is starting a new role should probably be positioned in the lower 25% of the salary range, whereas more seasoned incumbents may fall around the median. Only the most senior-level experts — those who truly exceed expectations — should be in the 75th percentile and above. Unless a competitive labor market warrants increasing the bases above the 75% range, other pay opportunities should only come in the form of incentive pay.
In referencing years of experience of new hires or incumbents, remember to focus only on experience that relates to the employee’s current role. For example, if you hire a junior-level advisor who previously worked selling medical equipment, you would not count the years working in the medical field as related experience.
That said, there are some gray areas. For example, let’s say you have candidate “A” who has some related work experience that makes them more attractive than candidate “B” without any work history. Bringing in candidate “A” would mean paying them within the median. Bringing in candidate “B” would mean paying them in the bottom 25% to compensate for their lack of work experience. It would be up to you to decide if work experience is of more value than saving on your bottom line.
Step 5 — Don’t forget geographic differences: How can you finalize your compensation recipe?
Most of the available salary data consists of national averages, but some geographical locations, like San Francisco, New York City and Chicago, will be above the national average and others may fall below. Adjusting for the cost of labor in your area is an important step in determining whether or not your current pay practices are competitive. If your firm falls within an area that is at or below the national average, consider whether there is an additional premium that you need to pay to recruit and retain talent in certain positions. For some firms, that may be a 10% premium or even higher. It’s important to keep in mind that this premium is applied to not only the new hires to the firm, but also to incumbents who have proven their performance over time.
Beware of internal equity issues: Bringing in new hires during talent shortages (and thus, when labor prices may be at a higher rate) may lead to animosity among longer tenured employees. If your current compensation practices haven’t kept up with market pay rates, adjusting pay for existing employees is an important step to solidifying internal pay equity.
Finally, it also goes without saying that your firm should pay fairly for experience, knowledge and credentials, regardless of an employee’s gender, race, color, religion or national origin.
Research shows (and my own consulting experience confirms) that much of the gender wage gap occurs because women tend to work in lower paying jobs, whereas men tend to work in more senior, higher-paying jobs. This is certainly true in the financial industry, where women are still far less likely than men to make it to the highest ranks of leadership. I highly recommend firms offer developmental and career progression programs to all employees and align compensation accordingly.