If you’re like most independent advisors, you probably discontinued your employee bonus program at the end of 2008, when you realized you were committed to pay “performance bonuses” despite the fact that firm revenues were falling dramatically. For 2009, with revenues back up again, you may have paid your employees what I call a “spot” bonus at year’s end: an amount based on nothing more concrete than your assessment of what you could afford to pay and your feelings about what each employee deserved.
In 2010, now that the worst of the economic downturn seems to be behind us, it’s time to once again take a more serious approach to employee bonus compensation: first, by paying another “spot” bonus at the end of the first quarter; and by implementing a more formal bonus program, this time based at least in part on firm performance, to avoid being caught again with an empty bag at the end of the year.
Why pay another employee bonus so soon? Two reasons. First, that spot bonus you paid at the end of the year, while much appreciated by your employees, I’m sure, probably didn’t come close to the amount you paid out in years past–even though your revenues had almost recovered. That’s understandable: You’re still a bit shaken from the events of the past year, and are having a hard time paying out any money that you don’t feel you “have to.” But if you’re going to get your practice back on the path to prosperity during the recovery, you’ll need to put your fear of the past behind you, and make sound decisions based on your present circumstances.
Which brings us to the second reason for another bonus: Retaining your professional employees. As I’ve written before, many far-sighted advisory firms today see the recovery as a growth opportunity to attract substantial numbers of new clients shaken by the collapse of most major wirehouses and otherwise unhappy clients with the advice they got both before and during the Mortgage Meltdown. To do that, they need to replace professionals laid off during the past year, and/or beef up their staffs with young professionals to leverage older advisors so they can focus on bringing in new clients.
And where are they going to get these young advisors? That’s right: from firms who have failed to make their now much-more-experienced junior advisors feel appreciated for the sacrifices and loyalty they have shown over the past year. To make sure that your firm isn’t one of those, it’s time for another spot bonus: to show that now your business is back on sound footing, you’re more than willing to share the benefits with the people who helped you get through the tough times. Now is no time to get greedy.
Toward a More Rational Bonus Plan
Now that you’ve shared the wealth, and made your supporting cast feel how much you value them and their commitment to the success of your practice, it’s time to create a bonus compensation structure that will help you keep doing that, in good times and in bad. As I mentioned, one of the silver linings of the meltdown is that it exposed most “performance-” based bonus plans for the bad ideas that they are. Now you have a chance to create a more rational program.
The problem with performance-based plans is that they are typically dissociated from the success of the firm. Now, by “performance-based” I’m talking about bonuses that are based on specific accomplishments of an individual employee. They might be specific tasks, such as transitioning to a new CRM program. Or it might be attaining a new level of personal development, such as getting the CFP or improving client communication skills. Regardless of what the employee’s individual goal is, a performance bonus comes with two major drawbacks: the bonus isn’t tied to the fortunes of the firm, so regardless of how far revenues fall during the period under review, if the employee reaches the specific goal, you owe them the bonus, period. Worse, the bonus creates no incentive for the employee to work toward the success of the firm, only toward her own betterment.