December 16, 2010

Revenue-Based Employee Bonuses at Advisory Firms: The Best Laid Plans . . .

I've received a fairly large number of responses to my December Investment Advisor column on revenue-based bonuses for employees of advisory firms. Most of the writers have asked about the specifics of how to implement such a bonus plan.

I’m always happy to help advisors improve their practices, but in this case, I’m a little bit concerned about introducing a new bonus plan into an advisory firm—even one as effective as revenue sharing—without making sure that the firms’ organizational structures can fully support highly motivated employees.

It is true that revenue-based bonuses work, and work very well.  But it’s also true that in order for these bonus structures to work as well as you want them to, you have to build an organization that supports revenue bonuses. Which means you have to first do the hard work to create an organizational structure that enables—and even, empowers—highly motivated employees to fully contribute to the success of their firms.

When I say the word, “organizational structure” most people believe that I am really saying is “create an org chart.”  Thanks to the proliferation of management gurus, virtually very advisory firm today has an org chart.  But an org chart is merely a map of the hierarchy of the firm: who reports to whom. That’s great if you’re running IBM, since there you couldn’t do business without one. But in a small business, such as an independent advisory firm, most org charts don’t have to be any more complicated than everyone really reports to the owner(s).

When I say “organizational structure” I am saying the true foundation of a business.  That means that building a firm organizational structure is like building the foundation of a house.  In order for a home to withstand the daily beating it takes, it has to be built on a solid foundation.  If you have a cracked foundation in a home…well, you get it.  An organizational structure is the foundation of human capital management

Organizational structures are a map of each of the functions that have to be done within a firm, and who is responsible for doing them. In advisory practices, those functions break down into but a few categories: financial planning, investment management, client service, IT, and marketing.

To really be effective—and maximize their contributions to the firm—everyone in the firm has to be very clear about what they are responsible for:  what is their primary job, and what’s their secondary job. Only after you’ve sorted out exactly how everyone is expected to contribute to the firm’s success can you successfully introduce a revenue-based bonus program so that they can share in that success.

In my experience, you can’t successfully overlay revenue-based bonuses on a foundation that is cracked.  If you do, you are going to get some warped support walls…(oh heavens, Angela)!  Okay, that was taking the analogy a little too far, but hopefully you get the point.

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