Compensation Shouldnt Be Crisis Management
Compensation is a hot topic in the wealth management world these days. A week doesn’t go by without meeting an advisor who’s amending a company's plan or thinking about it.
Sure, it's common to make changes: In practice a company wants to match remuneration to incentives and long-term goals. That, however, is not what is happening. Many times, compensation is reformulated when employees leave, threaten to leave or partners squabble.
Compensation shouldn’t be crisis management.
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Instead, wealth management firms should develop broad talent and compensation strategies relevant to their goals. The next generation needs to know they have a future, one with a clear path toward leadership and ownership.
Unfortunately, most firms have not had the time to develop broad strategies and have defaulted to secretive end-of-year subjective processes for assessing compensation. In many firms, employees tell us that they don't know how compensation, bonus, and equity decisions were made. In most instances, they view the partners’ decisions as subjective and divorced from employees’ responsibilities, contribution or work product.
A symptom of this is a lack of talent strategy discipline at wealth management firms. Only 29% of advisors, according to one report, have a clear succession plan.
SMART TALENT STRATEGY PLANNING
So, what should a talent strategy look like? It depends on a firm’s size and structure, of course. But I recommend that firms start by doing the following:
1. Develop a strategic plan with broad three-, five- and 10-year goals. Think about future assets under management, number of clients, demographics of client base, services offered and values.
2. Next: What’s needed to achieve these goals? You’ll need to consider how many employees you should have, and with what qualifications. Do you need to make changes to existing employee positions? Don’t forget to incorporate their desired career paths. And be realistic. Are you in a market where most firms have family office service that targets the over-$10 million client? If so, clients will be used to advisors who are CFA’s, or have MBAs, CFPs or JDs from top schools. And this typically translates into higher costs.
3. How much will it cost to grow out the additional operational resources, infrastructure, space and technology?
4. Define how you will retain your star performers and attract new ones. Are you compensating employees who develop new services and business lines? Will you compensate them for taking risk and innovating, and if so, how?
5. Create compensation tracks that delineate distinct roles and define career paths. Nowadays, compensation for rainmaking – bringing in clients – should be different than for solely servicing a client provided by the firm. Also, specialty builders may command additional compensation for their expertise.
6. Develop an assessment plan: Are you evaluating nonperformers and informal leaders? Are there repercussions for not performing? Are you realistic about the time it takes to develop new business lines? Are you committed to providing the necessary resources, patience, and support?
7. Create a clear path by which star performers (in all functional areas) can build wealth through a performance-based compensation and equity ownership. Variable compensation needs to be material AND achievable.
8. Develop a clear view of your local market. If RIAs are going to compete for talent, they must figure out a way to make their talent un-poachable.
9. Finally, answer this question – does this plan allow performers to build personal wealth through both compensation and ownership. Start over if the answer is “No” or “I don’t know.” If they can’t build wealth, why should they stay?
- Do not solely rely on compensation studies. They are a good picture of the marketplace as it was at the time of the study, but the industry is still very fragmented. We find that job titles vary quite a lot by company. Also, you must try to understand the study’s objective, scope, recruiter feedback and compensation offers at other financial services companies.
- Don’t punish employees through their compensation after a project cost too much money. Employees tell us many times that the company spent money chasing the greatest new pet project of the founder. Typical pet projects include foreign offices and plans to become the new star hedge fund manager/real-estate investor/private equity investor/technology investor.
- Many times, employers set variable compensation targets that they know are unreachable, so much so that employees feel it’s a waste of time and effort to try. Variable compensation should include an individual goal and a company goal. Sometimes RIAs focus too much on the individual goal, which leads to silos and lack of institutionalization of the business. To prevent this, companies who want to build enterprise value, should, over time, make sure that a significant portion of compensation comes from equity distributions.
- Equity means having stock that pays a dividend and has liquidity. Employees view equity that does not have liquidity and does not pay an attractive dividend as a broken promise. Also, in many firms, employees think that equity ownership equals management responsibility and control. It doesn’t. Equity needs to be structured as simply another aspect of compensation.
Ultimately, all of the above defines one tectonic change that is transforming the industry – the sharing of risk and upside opportunity. Historically, founders/owners bore the downside risk and retained the preponderance of the upside. Today, employees have the opportunity to capture a much greater percentage of the upside, but if the compensation plans have been structured correctly, employees are also sharing the downside risk.
Yvonne Kanner is President and COO of Fiduciary Network, which provides capital to registered investment advisors.