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The Value of Human Capital

Any firm that wants to grow needs to consider how to best manage one of its key assets—its people. Unfortunately, although most advisors are great entrepreneurs and visionaries, they are not necessarily good people managers. They know how to bring in and service new clients, but they often don’t realize that how they hire, train, promote, and pay their people are interrelated functions and not isolated activities.

As a result, advisors avoid or severely limit creating teams because they find that adding new staff and/or advisors creates as many problems as it was meant to solve: employees don’t do what you want them to do the way you want them to do it; teaching them how to do it “right” takes time away from rainmaking and spending time with clients; employees don’t live up to your expectations or seem invested enough in the firm; they expect raises and too often leave as soon as they’re good at their jobs.

The best way to manage these problems is to institute a sound human capital program. The goal of a human capital program is to align employee motivation and performance with the goals of the firm so that everyone is pulling in the same direction to create a successful, sustainable, profitable firm.All of the employees in an organization have expectations about what their responsibilities and roles are and what they should receive in return. Yet managing these expectations may be a nightmare unless everything is clear to all involved. The point of the program is to codify these expectations so that everyone understands his or her responsibilities and rewards.

Our research shows that neither top-quartile firms nor the 75 percent balance of firms are terribly good at implementing the components of human capital programs. Yet top-performing firms are slightly further along in these ways:

  • Have a higher head count, which better leverages advisor time.
  • Hire additional advisors to support owners and drive revenue growth.
  • Are willing to invest in additional staff and higher compensation spends.
  • Focus on hiring more experienced and licensed staff members.

Top performers can create sustainable and scalable growth by efficiently focusing their time and energy on revenue-producing activities.
We defined key elements that constitute a solid human capital program and listed them below:

  • Firm vision and goals. Building a team, whether it consists of 1 person or 100, begins with a clear vision and goals. Many advisors hire in response to a specific need (e.g., so they can stop doing administrative work) without thinking through the objectives and outcomes they want to achieve with their investment in new hires. In hiring, promoting, and paying people, advisors need to consider both their quantitative and their qualitative definitions of success.
  • Organizational model: An organizational model formally defines the framework, form, and functions of roles within a firm. This includes how the organization allocates relationships, rights, and responsibilities. A significant number of advisory firms lack formalized organizational structures and struggle to define the roles of, and relationships between, positions within the firm. Irrespective of firm size, creating clarity around roles and responsibilities encourages improved performance and establishes a clear path for how and when to hire as the firm grows.
  • Job descriptions. A job description is a list of duties, responsibilities, and functions attached to a specific position that, if spelled out properly, forms the basis for tracking job performance over time. Our research shows that a significant number of firms don’t have or fully use job descriptions as a business tool to measure, manage, and maximize job performance. Effective job descriptions should do more than define tasks; they should clearly define the outcomes expected of each position and create a yardstick to measure and manage ongoing performance.
  • Career ladders. Career ladders establish a path for advancement within a position and/or an organization. They define the responsibilities, pay range, and additional functions required to move up within that pay range and beyond it. Defining the roles, responsibilities, and rewards at each level creates clarity for both individuals and the firm, addressing many of the conflicts and the challenges firms face over raises and advancement.
  • Firm compensation plan. Compensation plans define, document, and formalize a firm’s compensation philosophy, policies, and practices. They spell out how the firm will distribute compensation to motivate employees, control costs, and ensure an equitable exchange between individuals and the firm. Effectively designed compensation plans create a common language to define and align goals, promote employee investment in those goals, and attach compensation rewards to achievement of desired outcomes.
  • New-hire process. Most advisors make new hires in reaction to some event at the firm and base their choices on intuition. A new-hire process formalizes a consistent methodology for choosing a new team member. It defines the steps to create a new position and the process for seeking out and evaluating candidates. Given the investment made in new hires and the hard and soft cost of mistakes, an objective process can help increase the probability that hires will be successful.
  • On-boarding and training programs. On-boarding is a new-employee orientation-and-mainstreaming process, ensuring that new hires are welcomed to the firm and eased into their responsibilities. Simple on-boarding methods help new hires integrate quickly and effectively.
  • Training programs provide a systematic way for new hires to learn their responsibilities so that they can more quickly perform them independently and successfully. The cost savings is considerable, given the potential cost of undermining new-hire success with the prevalent “just figure it out” approach to training.
  • Performance reviews. Performance reviews are opportunities to summarize and evaluate employees’ progress, motivate them to continue doing well in their areas of strength, and build up areas where they can improve. To be productive, the reviews should be two-way exchanges that promote the objective evaluation of performance based on job descriptions and career paths. Through this process, you are better able to determine raises, define expectations, and promote professional development. Reviews should reinforce open communication by clarifying expectations for both parties. Rather than alienating and confusing employees, performance reviews can make them feel valued and encourage them to want to enhance their contribution to the firm.

In our experience, regardless of size, services, or style, most firms want to create a positive work environment that promotes the success of both individuals and the firm. Defining and developing a human capital program that formalizes these key elements will help firms measure, manage, and maximize their teams to promote greater success and satisfaction.
Excerpted from The Power of Practice Management by Matt Matrisian (Wiley & Sons, 2013).

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