From the January 2014 issue of Investment Advisor • Subscribe!

Advisor Pay Climbs as Talent Remains Scarce: FA Insight Study

Study explains how applying the right reward structure can help firms attract, motivate and retain team members

Our industry is in near-crisis mode with regard to assuring a reliable source of its most critical input—people. Personnel costs account for three-quarters of a firm’s expenses, and compensation costs continue to rise. Advisory firms are looking to significantly expand their teams, yet the current labor pool is challenged to just provide replacements for those retiring from the business.

According to our fifth annual industry study, “The 2013 FA Insight Study of Advisory Firms: People and Pay,” 75 cents of every dollar of advisory firm expenses is devoted to compensation, payroll taxes, benefits, training and other expenditures directly related to personnel. The survey found most firms were anticipating an expanded investment in people, with plans to increase total staff from a median of six full-time equivalents in 2012, to seven by the end of 2013.

Growing demand for experienced people, coupled with a restricted supply, is contributing to escalating compensation rates. From the first “People and Pay” study in 2009 to our current edition in 2013, advisor pay increased 5% to 10% depending upon the specific position.

[Click here to see all of our past coverage of FA Insight's People and Pay study.]

The human capital issues faced by the industry may not subside any time soon, but there are clear measures individual firms can take to mitigate this pending crisis and make the most of their available labor supply. For maximizing return on precious labor resources, one important area of focus for firms is the way in which team members are rewarded as a result of their work with the firm.

Rewards can be in the form of compensation as well as softer components of job satisfaction that cannot be directly measured in dollars. It is not enough to pay a market-rate salary and expect that good talent will remain loyal to a firm. Firms need to consider both financial and non-financial motivators for fostering inspired performance as well as long-term commitment from their team members. The mix of rewards associated with a job is a critical determinant for the ease in which firms are able to attract, retain and inspire valued team members.

For insight on how firms can best apply the right reward structure, we delve further into “The 2013 FA Insight Study of Advisory Firms: People and Pay.” This is the second of four articles in the 2013 “People and Pay” series where we explore key findings from the industry’s most comprehensive human capital study.

Reward for Work Starts With Compensation

Compensation is the primary reward for work. Level of compensation is an obvious measuring stick individuals use to evaluate a position with a new company and an important factor in determining an individual’s willingness to remain with a firm. It is only natural for individuals to desire a level of compensation commensurate with their skills and experience.

Compensation benchmarking studies can be a helpful resource for firms to set appropriate pay for a position and the level of skills and experience held by the individual that fills it.

Benchmarking data can be a valuable guidepost as appropriate pay levels are in a constant state of fluctuation based on economic conditions and shifting demand. Typical advisory industry pay will shift at rates that differ from other industries, and within the advisory industry, pay levels will move at different rates according to position.

Since our inaugural study in 2009, we have observed a steady rise in median total compensation (including both base salary and variable pay) for most positions, with compensation growth rates varying by position type. For example, among advisor positions, lead advisors saw slower growth in compensation over the 2009–2013 period than other positions such as support and associate advisors (see Figure 1). This suggests less experienced advisor positions are in greater demand as firms delegate less complex responsibilities away from lead advisors to release their capacity for revenue generating activities.

Median total compensation for advisor positions, 2009-2013

 

Performance-Based Pay Benefits Firms and Employees

Level of pay is important, but so too is the structure of pay. Pay can be fixed in the form of a base salary or variable in the form of performance-based incentive pay. Effectively structured incentive pay encourages team members to perform above and beyond the core duties of their jobs. Incentive pay can be a powerful motivator when based on specific, measurable objectives that a team member can influence. Further, incentive pay can help smooth profit volatility, as compensation costs typically decline during periods of weak firm performance and increase when firm performance strengthens.

Despite the clear benefits of utilizing performance-based incentive pay to reward team members, many firms do not. Approximately half the firms participating in 2013’s “People and Pay” utilize performance-based incentive pay for professional, technical specialist, support and administrative staff positions. Least common is the use of performance-based incentives for management positions, offered by 38% of firms. This is a surprisingly low percentage given the potential influence a manager can have on firm performance.

The overall use of performance-based incentive pay has gradually declined since the inaugural “People and Pay” study in 2009. In particular, availability of incentive programs for professionals dropped from 56% of firms in 2009 to 52% of firms in 2013 (see Figure 2).

Use of performance-based incentive pay falling

Firms without a well-structured incentive program miss a significant opportunity to drive performance. Reluctance to adopt an incentive pay program frequently stems from the perception that incentive pay is nothing more than an additional expense. A properly structured incentive program is a winning scenario for both team members and the firm, as the benefits of resulting performance should exceed the costs of the program. Firms can always apply risk mitigation tactics such as instituting a profit or revenue hurdle that triggers incentive payments only when the firm can afford it.

Employee Development Is a Potent Motivator

While pay is an important factor for attraction and retention, successful firms recognize that non-monetary factors are also critically important, particularly in terms of motivating current team members. Effective non-monetary factors include ample professional development opportunities and the ability to move up a well-defined career path.

Team members who are self-motivated want to increase their skills, allowing them to take on more responsibilities and eventually earn higher compensation. Firms demonstrate a commitment to personal and professional growth by preparing and overseeing individual development plans for every team member, helping them grow and succeed in their current position while preparing them for the next steps in their career. This support can be a potent motivator and retention mechanism.

Many firms fail to recognize the effectiveness of development and training as a low-expense strategy to not only improve the capabilities of their personnel but strengthen retention as well. Only 36% of firms surveyed maintain individual development plans for team members. Standout firms, those with a superior ability to grow revenue and generate owner income, are more likely than others to offer individual development plans for almost all firm sizes (see Figure 3). However, even for the largest Standout firms, only 56% offer development plans for staff.

Use of individual development plans for staff members

Development plans are most effective in combination with clearly defined career paths. Career paths enable team members to know definitively what skills and responsibilities they will need to acquire in order to move forward with the firm. Unfortunately, clear career paths are also woefully lacking within advisory firms. Thirty-seven percent of firms fail to offer an internal career path of any type. Only 18% of firms have a structured career path for all position groups.

Performance Management Programs Are Effective Complements

A performance management program, inclusive of all team members, will assure the most mileage from incentive compensation and development plans. While 74% of advisory firms have annual performance evaluations, only 25% consider them to be “very effective.” Not surprisingly, the industry’s largest firms are most likely to offer “very effective” evaluations (see Figure 4). Larger firms may have an easier time overseeing successful performance management programs because they are more likely to have dedicated managers who can spend the time guiding employees through their objectives.

Effectiveness of performance evaluations

Successful performance reviews require employees to have individual goals aligned with the firm’s strategic objectives. Employees should meet with management regularly throughout the year for specific feedback and performance tracking relative to their goals. By maintaining a continuing dialogue about performance, team members can make ongoing adjustments to stay on track, and the results of the end-of-year performance review are never a surprise.

Right Reward Structure Yields Impressive Benefits

Without question, people are the most valuable resource for an advisory firm. Firm management must be mindful that it is not enough to simply offer team members a reasonable salary and hope that they will remain motivated and committed to the firm. In tandem, incentive pay, training and development, structured career paths and regular performance feedback will engage team members and facilitate their progression to higher levels of responsibility and more significant contributions to the firm.

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