Every firm should have a well-documented compensation plan, which covers a lot more than just how much you pay people. A thorough compensation plan is designed to make the most of your “people investment” — by attracting and retaining good people; by motivating them and boosting their performance; and by directly tying performance to delivery against the firm's business plan and goals. That may seem like a tall order, but the most aggressive, competitive firms in the industry take just such an approach. In fact, firms that don't take a comprehensive approach to compensation planning may be at a significant disadvantage.
From a practical standpoint, a comprehensive compensation plan should have five key components, but each of these will need to be customized to a firm's strategic objectives and competitive environment:
• Base salary
• Incentive compensation (short- and long-term)
• Benefits and other nonfinancial rewards
• Retirement plans
• Equity/ownership
In this article we will take a look at salary and incentives, as these are the primary cost centers in the compensation program. Data from our
2011 IN/Moss Adams Compensation & Staffing Study indicate that a combination of salary plus incentive is the rule rather than the exception. The majority of employees — both professional and nonprofessional — receive a combination of base salary and incentive pay. Think of base salary as fair compensation for an employee's roles and responsibilities, while incentive compensation should be geared towards meeting or exceeding stretch goals for the firm and/or individual.
You should define a base-salary range for each position based on the value of the position to your firm and the market value of the position. Make sure to revisit the salary range on a continuing basis and adjust as needed with market changes. Move an employee within the range as his or her job size, responsibilities and skill sets change over time.
Variable compensation is a bit trickier. The goal here is to leverage employees' own motivation to improve behaviors and practices that drive the firm's success. Thus, incentive plans should be tied to specific objectives and outcomes — showing employees how the incentive is a financial partnership between them and the firm. We also recommend using incentives to build a unified vision for the firm by allowing everyone to participate.
In practice, incentive plans can have multiple components and will look different at different firms. Examples of incentive programs include: business development incentives, investment performance incentives, firm profitability incentives, client retention incentives, team performance incentives, and individual-performance incentives. Many firms use multiple incentive programs to help drive a range of behaviors, and the structure of these programs can be as different as the firms themselves. For example a business development incentive can be split: allocating the bulk of it to an individual incentive, for the adviser bringing in the business, but allocating a portion to a firm-wide incentive, in recognition of the value created by the investment and client service teams in building the firm's reputation and brand.
I recommend staying away from paying discretionary bonuses, which are generally paid without regard for measurable criteria. They are less effective in motivating behavior since they do not define a clear tie between pay and performance. They can also foster an entitlement mentality for employees no matter what type of year the firm is having financially.
How a firm combines fixed and variable compensation will depend on each employee's role in the organization and the strategic priorities of the firm. For example, roles that have more business development/sales responsibility should have a higher percentage of incentive compensation (variable). Roles that are more focused more on client service, operations, or administration should have a higher percentage of base compensation (fixed).
In general, incentives will be more important for roles where the individual has a greater opportunity to deliver more value to the firm — as the firm can better drive motivation by making a higher bonus dependent upon delivering higher value. In the same vein, funding incentives is best done through profits, with a performance trigger for payout. These two safety valves ensure that the firm is paying out incentives only when appropriate goals have been met, and only when it can afford it.
Finally, a key part of the salary and incentive program, which is often missed by firms, is the need to have documented job descriptions and objectives. All compensation — even base salary — should come with a specific set of expectations, often set out in a formal job description. By documenting the firm's expectations, employees know what specific tasks and results are expected as a baseline, versus what additional performance and stretch goals will result in a higher compensation. Having clear metrics for success will help guide them in aligning their efforts with firm goals, and building their skills for higher achievement.
The formula for determining the exact mix of salary and incentive for each employee is more art than science. Each firm must find its own optimal mix, with the understanding that all compensation to some degree needs to be tied to objectives and performance against those objectives — that's what maximizes the value of your most important investment ... your people.
In future columns I will get into more detail on compensation practices, as well as hiring and staffing, career development, succession planning and owner transition strategies. Please stay tuned, and let us know what topics will best help you move your firm forward.
Kelli Cruz is the director of research and consulting for IN Adviser Solutions. To contact her directly, please Email Kelli here.
