From the October 2010 issue of Investment Advisor • Subscribe!

When You Pay Too Much

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One of my current clients is so insecure about losing his employees that he constantly gives them unwarranted raises, for no good reason--without performance metrics, or job reviews, or even any compensation structure at all. Don't get me wrong; his employees are good, but they're not irreplaceable, if you know what I mean. What's more, they're not even unhappy, either with their jobs or with what they are currently being paid. He just wakes up one morning, worried about what he'd do if he lost Jack or Jill, and goes into the office and gives them a raise.

Of course, as an owner/advisor, those raises are coming right out of his pocket. When his already mediocre take-home pay goes down even further, he becomes unhappy with his business, and loses the motivation to go out in the community and network to bring in new clients, per his marketing/business plan. It's a classic case of a downward spiral.

To solve it, we're putting in place a rational compensation plan, based on realistic assessments of what his employees could make in the job market, and a bonus structure based on individual performance and the firm's success. We'll also conduct regular performance reviews that include progress toward goals that the employees set for themselves, for their own advancement, and a feedback loop for them to tell us how they feel about their job and the firm.

Once he's armed with the facts about the job market, a fair compensation plan, career tracks for his employees, and is monitoring their job satisfaction, my client's insecurities will decline (at least about his employees). His income will go up, as will his happiness with his firm.

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