As the end of the year approaches, many firms may be pondering a change to their compensation structures for next year.
Although it is extremely critical to develop a salary plan that is profitable for the firm, consider the broader business context first when making changes.
This involves reviewing the company’s strategic priorities, the product and service mix, and the approach to finding new business and retaining existing clients. Analyzing these elements will help determine which incentives and pay rewards should be offered.
At its core, a compensation plan can be a recruiting tool, a retention tool and a communication tool for expressing what is important to the organization. As a tool, compensation should reward employees who live and breathe the culture of the firm, the vision, values and strategies that make the firm different from the competition.
Beyond reflecting the core values of the firm, a compensation plan needs to be effective.
Firms should ponder the following questions:
- Is the compensation plan competitive?
- Are the compensation levels affordable and equitable?
- Does the plan reward individual performance, behavior and key contributions to the firm?
- Does the plan reinforce teamwork and cohesiveness?
- Does the firm tie compensation to the expectations of an individual’s role and position?
- Is the individual’s compensation aligned with the goals and key initiatives of the firm?
The compensation plan needs to engage and motivate employees and attract new ones. This means moving from a traditional benefits-based plan to a more competitive values-based plan to engage the millennial generation.
Misunderstanding millennial employees could have a devastating effect on a business, according to new research from insurance brokerage Hub International Limited. As the largest generation, millennials present a growing influence in the workplace.
This is what the research found:
- More than 60% of respondents ranked competitive base pay as their No. 1 factor for staying with their employer. More than 80% ranked competitive base pay first, second or third. Survey respondents ranked merit increases as least important.
- Although competitive base pay was the top factor, 45% ranked career opportunity, interesting and challenging work, and incentive opportunity as first, second or third.
- Almost 50% of survey respondents expect to change jobs within the next six months because of a lack of competitive base pay, career opportunity or interesting work.
- Most survey respondents (92%) agree that competitive base pay and being paid for the value they bring to the company are important. The majority (90%) indicated that understanding how their job affected the success of the company was very important (56%) or important (34%).
- Seventy-five percent of respondents said incentive or bonus programs fail to use individual performance results in calculating payouts.
Most advisory compensation plans provide base salary, incentives, paid time off or vacation and such traditional benefits as a retirement plan and medical and life insurance. Largely, these plans have been created by the founder or owner, who is most likely of the baby boomer generation.
Variable or nontraditional benefits are what millennials deem as competitive, such as flexible work schedules, telecommuting or working from home, subsidized training programs, maternity/paternity leave, subsidized meals, bonus days off, wellness benefits and college tuition/assistance programs. Firms should look to understand what motivates millennials and best serves their compensation desires in order to attract them as prospective employees.
Base salary is fair compensation for an employee’s roles and responsibilities. The plan should define a salary range for each position, based on the value of the position to the firm and the market value of the position.
Firms should regularly revisit the salary range and adjust as needed with market changes.
There are some caveats to keep in mind, such as, move employees within the salary range only as their job size, responsibilities and skill sets change.
Beware of cost-of-living adjustments, as they increase a firm’s fixed costs and are not tied to measurable results that have a positive impact on the firm. Most employees are not actually motivated by cost-of-living adjustments and tend to regard them as an entitlement or a guaranteed benefit.
Don’t pay base salaries that are below the industry average in exchange for offering more in profit sharing or retirement benefits. Although this approach may be motivating for highly compensated staff members, it can lead to turnover in among the support staff or entry-level employees.
By contrast to base salary, incentive compensation is variable pay for meeting or exceeding goals that are tied to the overall strategy and vision of the firm. Incentives illustrate to employees the financial partnership between their individual efforts and the results of the firm.
Incentive plans are not a replacement for performance management and should not be used to force a certain behavior, replace active and open communication, or fix a firm’s culture.
Advisor incentive goals are usually based on an individual’s total revenue production: new revenue and total revenue that is managed for existing clients. In addition, advisor incentives should include client production, new clients gained through referrals and the retention and satisfaction of existing clients.
In client retention, the advisor must retain at least 95% of clients during the year. In terms of new revenue, a reasonable expectation is for the advisor to obtain $50,000 of new annualized revenue from external sources and referrals from clients personally sourced to the firm during 2017.
Support staff roles tend to be more difficult to incentivize, as these positions have less impact on the client and results can be harder to measure. But here are a few examples of potential projects or initiatives for support staff that can be measured: client segmentation projects; client events; marketing projects; technology projects; client service delivery improvements; developing new skills and attaining certifications.
Team incentive metrics can help motivate and reward groups of employees who are responsible for accomplishing larger firm initiatives. Examples of such team initiatives are selecting and implementing a new software system; updating the firm’s website; taking part in social-media campaigns, client newsletters and other communication projects; and moving to a new office or expanding the existing office space.
The key concept is that the members of the defined team are eligible to receive the incentive as long as the goal is achieved. This motivates the group to work together to accomplish the project within specified time frames.
Finally, whether a firm has decided to completely overhaul an existing plan or just make some adjustments and tweaks, once the plan is complete, ensure that a process is created for tracking and monitoring the results to avoid any problems in determining the final payouts.
This story is part of a 30-30 series on savvy ideas on modernizing your practice. This story was originally published on Aug 11.