Financial advisers tempted to reward star employees with raises should think twice and instead offer them one-time bonuses, according to practice-management experts.
Many advisers are eager to reward employees who have gone without raises and bonuses for more than a year, and they see the stock market rebound as an opportunity to increase salaries.
But practice-management ex-perts warn that such a move could be premature.
“I tell them to consider a bonus that's the equivalent of 3% or 4% [of a salary], said Stephanie Bogan, president of Quantuvis Consulting Inc. of Redlands, Calif., which works with more than 20 advisory firms.
Taking back a raise is extremely difficult to do, she said.
Still, before handing out bonuses, all firms need to decide for themselves the basis on which employees will qualify for them.
Too often, advisers fail to establish guidelines for awarding bonuses or for increasing compensation, said James Barnash, a consultant with Stride Consulting Inc. in Chicago, which works with about 30 advisory firms.
When determining the criteria for awarding a bonus, advisers should review the roles and responsibilities of employees and have them track their activities for a week, said Maureen Wilke, founder of Wilke & Associates Inc. in Glen Ellyn, Ill.
The purpose is to ensure that bonuses are based on quantitative goals rather than subjective attributes.
That is a significant change from before the financial crisis, when bonuses were often tied to a firm's profits, an approach that was criticized because even subpar em-ployees received the payments.
“No one [knows] why or how they earned it,” Ms. Bogan said.
Financial Management Group Inc. of Cincinnati hasn't handed out bonuses since the second quarter of 2008, said Robert Siegmann, the chief operating officer and a senior adviser for the firm, which manages $150 million in assets.
The company hopes to restore its bonus program in January. The payments will be based on how well employees meet personal and departmental goals that were set during the annual performance evaluation, he said.
“In the past, it was more subjective, and I think fairness was called into question,” Mr. Siegmann said.
Tying bonuses to achievement is one of the best ways to reward people, said Sal Zambito, a San-Diego-based senior vice president of business consulting for LPL Financial of Boston.
To be sure, fear of losing top employees is a factor in the decision to pay performance bonuses, he said.
“Losing one person in a small advisory office is a huge hit,” Mr. Zambito said. “We've had recent experiences where a small branch has lost a key person, and it's been devastating to them.”
But another factor is that in small offices, employees are considered part of the family, so advisers want to make sure they are well-paid, said Matt McGinness, principal of Best Practice Research, a San Diego-based consulting firm.
“Most owners have a very close relationship with their staff, and [they] are very concerned about treating them well and en-suring they're happy with the firm,” he said. “It's understandable that they won't want to cause them any financial hardship.”
Firms that cut compensation or benefits need to restore those items before they can consider adding new incentives, McGinness said.
“For those firms, getting salaries and benefits up to where they were is very important,” he said.
E-mail Lisa Shidler at [email protected].
