Why Rushed Year-End Comp Plans Are a No-No

What’s really urgent in business? Rarely successful management strategies and especially compensation structures.

In December, my firm gets a lot of calls about creating comp plans. The firms reaching out usually want new plans for the next year, and they want them before the holidays start.

This represents two common trends among advisory firm leaders: a desire for new comp plans and waiting until the very last minute to build them.

The first trend is basically harmless. It doesn’t really matter when one introduces a new compensation plan. However, moving to do so at the end of the year, though, runs the risk that you are interfering with staff members’ holiday plans; usually a new fiscal year is a better time to implement such change.

But the second trend — leaving a major project to the last minute — is much more widespread and is very detrimental to the success of many advisory businesses. Plus, it’s one of the most common ways firms leaders set themselves up to fail.

What’s the Problem?

I’ve given this trend considerable thought over the years, but I’m still not sure why advisory firms fall into this pattern so frequently.

Maybe there’s a fear of failure, and by leaving projects to the last minute, leaders create a built-in excuse for failure, if/when things don’t work out. Then they can say, “It’s because we didn’t have enough time.”

Most firm leaders and owners start down this slippery slope on a project when they create urgency in situations that don’t require any urgency at all.  Compensation plans are a perfect example; they don’t need to be created at any time in particular.

This means leadership can give itself as much time as it takes to do the task right: a month, a quarter or even a year.  The point is that, like many projects in an advisory business, doing them well is way more important than doing them quickly.

Procrastinate Much?

The second most common reason for the “need” to do things ASAP concerns firm leadership  waiting too long to address a well-known problem — creating more urgency in the process.

Common areas where this often happens are tied to trends that tend to be ignored, such as increasing employee turnover, increasing client turnover, falling profitability, slowing revenue, etc.

With such issues — which can have severe consequences — owners tend to feel even more justified in taking urgent actions. And once more, the urgency typically results in major mistakes.

First, the leaders sense of urgency doesn’t give them enough time to get the help they need to effectively solve the problem(s).  Serious problems typically require serious solutions, and that usually entails taking a decent amount time to understand and learn about what’s wrong and to then make good decisions.

Instead, by giving into the “urgency” of serious problems, owners may throw randomly conceived solutions at the problems. And that often causes more problems and doesn’t fix the original one.

A Good Rule of Thumb

The bigger the problem, the longer it’s going to take to find a successful solution for it.  So, don’t panic, and don’t rush.

As for December requests for year-end comp plans that need to be ready to go on Jan 1, my answer these days is: “No, you don’t. You need time. And if you won’t take that advice, then I can’t help you.”

A good comp plan needs three to four months to create. It needs to include guidelines and responsibilities for each employee, and clear, realistic roles and responsibilities tied to a firm-wide base salary table and incentive structure.

After these steps, there should be time to collect feedback on the proposed plans and obtain buy-in on the final plan.

If you don’t create a reasonable, understandable and fair plan, you’ll start to see negative changes in employee behavior, like a loss of focus and wasted time.

In the worse cases, you see greed. This results from giving the wrong incentives for certain behavior, and it means you’ll spend the next year (and sometimes even two or three) trying to fix the resulting problems (which you created from your urgency).

You and your business will be a lot better off if you take the time to get a new comp plan right the first time—and stop worrying about arbitrary (and self-imposed) deadlines, which set you up for what you were trying to avoid in the first place.

Compensation plans are not the place to tolerate (and accept) failure. We are talking about people’s livelihoods and the success (or failure) of your practice.

Urgency creates stress. Stress creates fear. Fear creates paranoia. Paranoia creates greed. Greed is failure.

When you wait to long to solve a problem and react in urgency, you’ve already gone too far. Being proactive is solving your problems efficiently, not speedy. Think tortoise, not hare.