Put a compensation strategy in place

With many firms projecting growth this year, it is a good time to consider compensation strategy.

There is no simple formula for determining what to pay employees. Salaries vary widely by market, job level and experience.

That is why an underlying philosophy regarding compensation is so critical. It is the how and the why employees are paid that really make an effective compensation program — and help to drive engagement with the firm.

Here are five steps to take in designing an effective compensation program for firms that are just starting out, as well as established firms that are interested in strengthening their compensation programs.

1. Review your vision, strategy and goals. The first step in creating a compensation program is to analyze where advisers want to take their businesses over the short and long term. This will help inform decisions about how compensation might be used to attract and retain desired employees, and drive the performance and behaviors needed to accomplish the firm’s goals. Linking the strategy for how to attract and retain top people to the strategy for business growth can help connect the efforts of employees to what is important to the firm.

As advisers review their business vision, strategy and goals, they should consider how to identify their client value proposition, revenue strategy and other top business priorities, and articulate them in language that employees can understand and embrace.

2. Assess organization and talent implications. The next step is reviewing the firm’s operations strategy — the structure, roles, skills and experience needed to implement the business strategy now and in the future.

This involves looking at what key attributes of the firm’s culture an adviser wants to reinforce and reward, and the organizational characteristics and functions that are most important to the firm, including where it has potential vulnerabilities.

3. Define compensation strategy. Information gathered from the review of the business and operations strategies can be incorporated into an integrated compensation strategy. This describes how compensation will be used to support the firm’s business plans and how it will align with the organization’s characteristics.

This ensures that principals have defined a philosophy for compensation and have documented a compensation strategy, including how pay will be used to attract, hire, retain and motivate employees.

4. Develop and implement compensation plans. Just as the business and organization strategy review was the foundation for creating a compensation strategy, so is the compensation strategy the foundation for creating individual compensation plans and making pay decisions. Plan designs don’t have to be complex to be successful.

Developing and implementing compensation plans includes creating formal job descriptions, benchmarking compensation to market data and ensuring that all details of incentive plans are documented. This should include the coverage period, pay components, incentive criteria, amounts, timing of payments, and other administrative details. A formal incentive plan makes clear to the staff that individual pay decisions are based on how critical the job is to the firm, skills and experience, and past performance.

5. Link to performance management. Naturally, the true measure of the value of a compensation plan is reflected in its effects — does it lead to the desired business and financial results? A pay-for-performance culture includes an interactive process established to set employee goals at the start of each year, engaging in performance coaching and feedback throughout the year, having a performance review for each employee at the end of the year, and linking compensation and rewards to performance.

Compensation is a critical component of the interrelated system I have just illustrated.

Connecting the compensation strategy and business strategy, and following a process for developing and communicating compensation plans, help increase effectiveness in hiring, developing and retaining emplo- yees with high performance levels.

Linking pay to performance can help improve an employee’s understanding of pay decisions and perceptions of pay fairness. With compensation costs representing such a large portion of overall business expenses, implementing the approach may help a firm pay competitively, manage compensation costs and create an expectation that all team members pull in the same direction and focus on performance and results.

David Canter is executive vice president for practice management and consulting at Fidelity Institutional Wealth Services.

Related Topics: Practice Management