Advisor Pay Climbs as Talent Remains Scarce: FA Insight Study

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.

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).

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.

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.

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.