Just Rewards

The cartoon strip Dilbert by Scott Adams terrifically captures the essence of business life, and the motivation/demotivation dichotomy is often satirized. In a recent cartoon, Dilbert’s colleagues were invited to a training session from Dogbert’s School of Management. The lesson was teaching employees how to do the impossible. Dogbert gave each

participant a large rock which he instructed them to “throw in the air and demand that it stay there without falling, offer some non-monetary compensation to incent it, and if the rock refuses, try yelling at it.”

Many advisors probably recognize the parallels to management practices in their own firms. How great it would be if we could hire talented people at the lowest possible cost, and not share any rewards with them. By contrast, how annoying it is when they don’t sustain a focus on what we want of them, and become disloyal, disinterested, and impervious to our exhortations to work.

The fact is that as employers we create many of these problems ourselves. By viewing our employees as a cost to be minimized, we set up an adversarial relationship that also minimizes motivation, loyalty, and job satisfaction. In contrast, consider how different it would be if we treated employees as investments whose potential can help us grow our practices.

Thinking of compensation as an investment rather than a cost is an even bigger challenge today with the acute shortage of talent. According to the 2006 Moss Adams Financial Performance Study of Advisory Firms, salaries and benefits in many practices are causing both direct and overhead costs to rise faster than revenues. As a result, both gross profit margins and operating profit margins are getting squeezed. There are many sources of this constriction besides rising employement costs, including declining productivity and pricing that has not kept up with the service offering. More often than not, however, we find this pattern of eroding profitability emerges when the compensation plan is misaligned with the behavior that owners seek from employees.

The problem arises from the fact that advisory firms design their compensation plans based on what are perceived as “best practices,” or simply borrow one from another firm. As business owners, we like to rely on what others have done and outside data because it seems objective and defensible–two key elements in getting employees to accept what we offer. However, at Moss Adams we often caution against relying solely on market benchmarks and plans developed by your peers because your values may not be the same as another firm’s.

Benchmarks are generated to help frame a compensation strategy, not to define it. On the surface, many advisory firms look the same, but there are also many variables, including the market a firm targets, the nature of the advice it provides, the client experience it creates, and the owners’ vision for the future.

Goals, Roles, Behaviors

When designing a compensation program, it’s important to know what you want to accomplish as a business; what each individual’s role should be in fulfilling those goals; and what individual behavior you seek to reinforce. With these objectives clear, you can begin to craft a compensation philosophy that is much like an investment policy statement: It outlines parameters and defines expectations in a sensible framework for managing a complex part of your practice.

Compensation has six basic components. Each plays a role in reinforcing behavior and demonstrating your values:

1. Base
2. Short-term incentive
3. Long-term incentive
4. Benefits & perquisites
5. Retirement plans
6. Equity

Most advisory firms use some combination of base pay, short-term incentives, retirement, and benefit plans. As practices become larger and more complex, they often will look to long-term incentive plans such as phantom stock, employee stock ownership plans, deferred compensation plans, or opportunities to purchase equity.