For financial advisors who own their firms, the largest expense is often human capital, or the costs associated with compensating employees. Despite the importance of compensation, many advisors don’t spend sufficient time assessing their human capital costs and developing compensation strategies that will both grow their business and keep their employees invested in the firm’s success.
Here are the considerations advisors should take into account when deciding how to pay their employees:
Tie compensation to business goals
First and foremost, advisors need to take employee compensation seriously and build a plan focused on leveraging compensation in a way that helps the business achieve its goals. To take that a step further, every employee’s payment structure should be organized in a manner that will motivate them to improve their performance.
Balancing salary with additional incentives
There are many different compensation plans that advisors should consider for their practice. Too often, advisors simply create a structure for employees with a core base compensation and then a loose bonus plan attached. At a minimum, one should consider the base salary or hourly wage that the employee is guaranteed, as well as potential short-term and long-term incentives when creating a compensation structure. Short-term incentives could include revenue sharing and quarterly or annual bonuses. By contrast, long-term incentives could include retirement benefits and offering equity participation in the business. These incentives are not only an effective way to build the practice and encourage productivity, but they also present an opportunity to reward key contributors and secure their loyalty to the firm.
Regardless of the type of incentive one offers, it is helpful to provide employees with a document that outlines their total compensation at year-end, including base salary, bonuses and benefits. This ensures that employees fully understand the total amount the firm is contributing towards their overall compensation, which could be higher than they realize.
Different models for different positions
At the end of the day, it’s critical to use different compensation models for different types of employees, based on their specific role and overall value to the business. In the case of key decision-makers like operations managers or C-level executives, they have significant influence over the company and its expenses. As a result, it’s critical to tie their bonuses to revenue growth and firm profitability, since this will make them more thoughtful about how they spend the firm’s resources while encouraging them to manage expenses in a responsible manner.
With regard to operational and administrative staff, the vast majority of their compensation should be comprised of their base salary. However, there is an opportunity for firms to also offer these salaried employees incentives in the form of bonuses based on specific performance goals or even firm revenue.
One underused lever for encouraging better performance from top employees is offering equity incentives. To be strategic, this type of incentive should be offered only to those who are heavily responsible for growing the firm and who are already invested in its success. These employees are extremely valuable to the firm, and therefore it’s important to prevent them from defecting and potentially taking clients with them. Examples of equity incentives include providing voting stock, or even phantom stock, which allows employees to “cash out” at a designated point. To protect the company, advisors can also attach financial penalties for leaving the firm to these benefits. Offering equity incentives can also be effective in allowing advisors to look at their succession plan and be strategic about how they transition ownership in the firm over time.
Advisors should use compensation as a tool to build their business and retain top talent. To do so, it is critical they approach compensation decisions in a thoughtful manner and develop strategies for long-term success.
Matt Matrisian is Senior Vice President, Practice Management & Strategic Initiatives at AssetMark, Inc. @AssetMark.