Numbers Game

The right time to increase your firm's investment in staff and pay

When people account for 70% of expenses, you can't afford to make compensation and staffing mistakes

Apr 16, 2015 @ 12:01 am

By Matt Sirinides and Ellie Zhu

The typical advisory firm spends 57% of its revenue on staffing and compensation. That accounts for over 70% of a firm's total expenses. When it comes to people, there is little room for error. It's no wonder, then, that some firms will push productivity to dizzying heights before making new investments in staff.

As we field our 2015 InvestmentNews Compensation and Staffing Study survey, we revisit one of the outstanding questions our colleagues at The Ensemble Practice posed in our 2014 benchmarking report: "There are clouds on the horizon; are we under-investing in staff?"

(More: Take the 2015 survey, now open for participation)

A clear trend, highlighted again and again in our primary benchmarking studies, is that firm evolution comes with concerted investments in staff. In the chart above, highs in staffing expenditures come at the $1 million, $5 million and $15 million revenue milestones. It's no coincidence that these inflection points in the data closely track the evolutionary firm stages described at length in our series. In order for solo practitioners (average revenue, $650,000) to successfully build a team and grow their practice into a thriving ensemble (average revenue, $2 million), they must invest in staff — note the staff spending plateau at $1 million in revenue. Similarly, for an ensemble to develop into an enterprise ensemble — a firm that begins to look more like a business than a practice, with average revenue of about $7 million — another staff spending spike occurs first, typically around the $5 million revenue mark.

As we evaluate results of the 2015 InvestmentNews Compensation and Staffing Study survey later this spring, the question we hope to answer in definitive detail is: Did the top-performing firms — those who showed the highest profits, revenue growth and productivity — earn their success on the backs of highly productive owners or did they make the necessary investments in staff? It's those investments that will truly sustain the future success and value of a firm. In our last study, top performers on average spent 10% less on employee compensation and staffing expenses: a sign that the extraordinary gains at top firms may only last while the current leadership is in place.

Does your firm have an established strategy to develop both administrative and professional staff? How do owners measure their worth, value their business and manage the development of future owners of the firm? Has the industry matured in its compensation and staffing practices?

Participate in the 2015 InvestmentNews Compensation and Staffing Study — the industry's longest-running benchmarking survey — to find out.

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