Compensation Consultant

Deloitte & Touche's Michael Herman consults with firms on all of the hot topics reinvention, branch management and broker compensation. Here's what he and senior managers discuss. Michael Herman, head of the financial services unit of Deloitte & Touche's Human Capital Advisory Services Practice in New York, consults with a number of brokerage firms on compensation and management issues. Herman was

Deloitte & Touche's Michael Herman consults with firms on all of the hot topics — reinvention, branch management and broker compensation. Here's what he and senior managers discuss.



Michael Herman, head of the financial services unit of Deloitte & Touche's Human Capital Advisory Services Practice in New York, consults with a number of brokerage firms on compensation and management issues. Herman was formerly a retail broker at Gruntal & Co., and led the retail financial services group at consultant Sibson & Co.

RR: Your consulting work focuses on broker compensation.

Herman: Right. The three key success factors in this industry — distribution, revenues and costs — are driven by people. That's why compensation issues have been brought to the forefront.

RR: My readership is thinking, “Uh-oh, here comes another pay cut.”

Herman: Well, I think firms can actually increase productivity and decrease their cost of sales. In the brokerage community, there isn't a performance management system in which you sit down with your manager every quarter and talk about what you're supposed to be measured against. I don't think firms have done a good enough job yet at segmenting their sales force and saying, “Hey, I've got low performers, middle-range performers in two segments and high performers. And I'm going to treat all four of those groups differently.”

RR: But they do that now.

Herman: Not enough.

RR: They pay lower producers less.

Herman: Right, but not enough. They still haven't differentiated pay at a low enough level so people who have not been productive realize this isn't the right line of work for them.

RR: Do you think firms should segment their customers better, too?

Herman: It will be interesting to see who's going to step up to the plate and really get this right by offering multiple options to multiple customers, such as a basic fee structure in a customer relationship model, a call center for the trader, a service specialist for insurance and so on.

People always talked about channel conflict. I call it channel complement these days because people want to spend their investment dollars differently. And the firms that understand their segments and how these segments purchase will collect a larger share of wallet.

RR: Are customers really demanding that?

Herman: I think so. Merrill Lynch's ads say you can basically do everything with them. Insurance companies are looking at this as well. Firms have to completely change the paradigm. It's completely about the customer now.

RR: Isn't it really about the broker? That's why the customer is doing business with the firm.

Herman: Well, the customer is doing business with the firm for two reasons. One, the broker, but two, the ability for the broker to serve. Those two have to be aligned with the customer. We've got all these products and services, but how do we integrate them? And what's the point of interaction with the customer? We're still working in silos. I think that's one of the industry's biggest challenges — figuring out multiproduct, multichannel sales.

RR: Sounds like product pushing to me.

Herman: It could be product pushing. But how do you build a relationship? How do you structure your organization to build the relationships that support multiproduct, multiservice lines?

RR: Very carefully.

Herman: Right, very carefully. And a lot of that deals with building the necessary management infrastructure and the necessary rep infrastructure. It's going to call for different skill-sets from reps. Because of that, you will have to hire differently, train differently, manage differently and pay differently. The relationship manager is going to be compensated much differently than a product service rep. The interesting thing is this might decrease a firm's compensation costs and increase customer service.

But it's going to take a lot of change. The question is, who's going to be the guinea pig?

RR: That's what my readers are worried about. What do you think is going to happen first?

Herman: First of all, firms are going to look at simplifying pay plans. With the Merrill pay book, it's like, where's the Rosetta stone?

“Compensation is not the only thing. Companies have to focus on increasing their branch management talent.”
Michael Herman, Deloitte & Touche

RR: It's us. We decipher it for readers. Let's talk deferred compensation. You've done a lot of work on these plans, and you don't always like what you see.

Herman: A firm could be wasting money with qualified plans. They are basically handing money over to someone. With a rolling vesting schedule, people leave a little bit on the table. But the recruiting firm makes up the small leftover portion. And look what's happened to the value of deferred comp at firms that use equity as the main driver in their programs.

Nonqualified plans are good because they're really high-hat plans, meant for higher-producing people. And those are the people you want to attract and retain. The deferrals are much lower so it's a no-brainer. The firm can match on top of that, based on performance. The numbers are astonishing.

The great thing [for the firm] is that a $500,000 producer could potentially have $300,000 or $400,000 in the account, but not a lot is vested. So is it worth leaving? A lot of people say no. If I've got $300,000 in an account and can get $500,000 to move, it's not worth $200,000 to get my book out, especially if those numbers are going to continue to compound.

RR: But I'm going to leave if I can't stand the manager. I don't care what it costs.

Herman: Right. Compensation is not the only thing. Companies have to focus on increasing their branch management talent. I always say compensation is the third thing on the list for rep satisfaction. No. 1 is the branch manager. That is the person who is going to make me, the broker, do the million bucks in business, who's going to teach me marketing skills and show me how to serve my clients.

RR: The problem is that many reps have had four 30-something managers in the past three years.

Herman: Exactly. The rotating system doesn't work. They need to keep the managers around. The focus has been too much on the reps. Firms are not paying enough attention to the managers.

RR: Why is that?

Herman: Because a lot of firms haven't grappled with determining the right competencies for managers. Who has the right skills to manage a brokerage branch? Where do we find that person? How do we train and manage him? Sometimes managers don't really want to manage. And should they be producing? That's another big question.

Rotating 30-year-olds is a quick fix, but that's just the sourcing. That's not the process. They haven't worked on the process yet.

RR: Is any firm doing a decent job of building management talent, or at least attempting it?

Herman: Not many that I've seen. But I think a lot of companies are starting to focus on it. The idea is to establish criteria for manager prospects. Who — out of a younger group or people at the end of their broker careers — is capable and fits the criteria? How do we get them, train them and put them in the management program? This has not been done yet.

RR: Isn't it really about a corporation — any corporation — wanting to control things? They want managers who effectuate company policy rather than sit in Newport Beach for 20 years, build their own power base and take all the brokers if they ever leave. Firms don't want that.

Herman: Right.

RR: They want a guy who falls in line to push a new product or program.

Herman: I think that's caused by middle management. I don't know how. If you talk to senior execs at the firms, that's not their vision. But some of the business executives are pushing that.

RR: They're the ones who seem to win.

Herman: Right. They have a P&L to focus on. Maybe the overall business metrics throughout the organization need to change.

RR: Maybe you need to blow up the metrics and focus on the human resources part. Say, “Hey, a happy, productive broker is a broker who has a good manager who supports her.”

Herman: Let me explain a little model I built about broker retention. I think these are fair assumptions. Let's say you have 500 reps, average production of $400,000, average payout is 40% and the turnover is 20% a year. At the same time, you're replacing brokers at a 20% rate, and the replacement cost on the Street is 100% of production. A quarter of those you outsource to a recruiter, and you pay accelerated payouts to some. It takes each recruit two years to catch up to what they did in the past.

“The relationship manager is going to be compensated much differently than a product service rep.”
Michael Herman, Deloitte & Touche

In five years, you've lost roughly $30 million to $40 million in production. Now, here's the scary thing: In order to replace that lost production, it's going to cost two and a half times what you lost — $80 million to $90 million net. These numbers are staggering.

RR: So spend money on getting better managers instead of new golden handcuff schemes.

Herman: The focus has to be teaching managers how to support brokers and how to train brokers to sell effectively and expand their businesses. But firms don't do this or bring in the right type of people. The messages from above have not been along these lines.

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