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Practice Management > Compensation and Fees

Why Now's the Time to Start Making Comp Plans

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Employee compensation isn’t a topic many independent advisory firm owners want to deal with until year end, but let’s tackle it anyway.

Typically, owners put off thinking and talking about compensation because it makes them uncomfortable — which is not unlike their clients’ feelings about financial planning.

As with financial plans, compensation plans usually turn better if the right amount of time and thinking go into them. This is why now — yes, in summer — is the best time for owners to start thinking about next year’s compensation plans.

Show Me the Fairness

Poorly designed comp plans are at the top of the list of employee problems, but it’s not because of money. Well, usually not. Employee unhappiness (and the resulting poor job performance) is rarely about money — even when employees think it is.

For most employees, the comp issue boils down to one issue: Is their compensation “fair”?

That typically boils down to: Is my pay at the same level as others in the firm doing similar jobs with similar success? And is it comparable to what people in other advisory firms get paid for the same job?

That said, poorly conceived comp plans can cause other employee problems. I usually ask firm owners if their current compensation structures are working.

This means, do the plans create incentives for the employee performance and behavior they are looking for? For example, do they contribution to the addition of new clients, client retention, greater efficiently, etc.?

If not, it’s time take a hard look at the current comp plan. What is your pay philosophy: salary, salary plus bonus, salary plus performance incentives?  Are these pay plans producing the behavior/performance you want? And, how do you tell if they’re working?

For instance, I’ve found that combining a salary and an individual performance-based bonus can actually reduce performance behavior like bringing in new clients and/assets.

This is because, for many people, the safety net of a fixed salary creates a level of comfort that can reduce the effort needed to increase the desired performance.

What’s more, salary/individual performance comp can cause confusion for an employee about priorities. It’s generally better to keep these two plans separate and give yourself the option of adding a bonus if and when you feel its warranted.

Usually, you can tell if your comp/incentive plan is working if the numbers you want are going up — AUM, profits, revenues, clients, etc. However, be careful about AUM; that is, factor out any large market swings that can make performance look better or worse.

Simplicity Works Best 

It takes time to gather information and process it. Making comp decisions too quickly can create a lot of problems — both short and long term

How do you know if you have comp problems? The tip-off is that you find yourself doing more micro-managing, as well as dealing with an increasing number of complaints and/or discussions about compensation. And, of course, there’s the failure to hit goals.

The best comp plans are really simple, get reviewed every year and are adjusted when the firm’s goals change. But to make your comp plans simpler, you have to do some work.

By starting in the summer, you have more time to make much better decisions about next year’s comp plan. This effort should make October budgeting a lot easier, too, and it can eliminate that year-end rush that leads to poor decision-making about a critical component of both your firm’s growth and its success.