Developing a Plan - Business Management for Financial Advisers

There are four absolute truths about an effective compensation plan within a financial-advisory firm:

  • It must be aligned with your strategy.
  • It must reinforce the behavior you desire.
  • It must be affordable to the business.
  • It must be in harmony with the expectations of your staff.

Strategic Alignment

In financial-advisory firms, the most common example of misalignment relates to both client selection and product or service offering. Once we met a firm, the firm had built up its estate- and charitable-planning capability to be responsive to the complex needs of wealthy individuals, but the people filling these functions were idle because of the nature of the clients that were actually being brought in.

In many advisory firms, the incentive plan in place was reinforcing behavior contrary to the firm’s stated strategy. The process is to define focus.Sales compensation typically includes both fixed and incentive pay.

Incentive comp puts some earnings at risk but also provides the opportunity for greater rewards. Although commissions are the most common form of incentive for sales people, others include bonuses, stock options, time off with pay, trips, gift certificates and entertainment tickets.

The level of at risk compensation or payout formula is based on where your company falls on the “protection” versus “expansion” scale says Michael Maciekowich, national director of Astron Solutions, a New York City consulting firm that specializes in compensation.

Does the company need to aggressively introduce new product/services or expand into new markets? Or, is the business more interested in protecting market share and retaining current clients? Maciekowich likens companies focused on client retention to farmers who have invested a great deal of time and money into cultivating the land (and therefore are very protective of it).

This scenario lends itself more to a conservative approach to compensation, such as a higher percentage of base pay with an incentive for selling add-ons to existing clients. On the other hand, many companies need “hunters,” or aggressive sales people who can expand territories and continually close new business.

In this case, compensation should be equally aggressive, with a lower percentage of base pay and a much higher potential for rewards – motivating salespeople to be hungry for new sales. One approach does not necessarily preclude the other. A company can be aggressively pushing one product or territory, while focused on retaining sales for another.

There’s nothing wrong with creating two separate compensation plans to address the different needs - just make sure within a group there are not different programs for different people.

Compensation Philosophy at Kochis Fitz

The power of the compensation philosophy statement as a decision making tool is also significant. Every change in a compensation plan that an organization considers needs to pass through this filter. Beyond that, the statement can be an important measurement and evaluation tool.

As changes to the compensation structure are envisioned, the management team may weigh the value and likely success of suggested changes against the stated philosophy.

Reinforcing Behavior

The bad behavior of top managers can manifest as abuse to staff, dishonesty with clients, disrespect of management, or any number of behaviors that put the firm at risk and strain relationships to the breaking point. The compensation is tied solely to revenue production. Though compensation is not a substitute for active management, but it an important tool for keeping potential miscreants in check.

Plan Affordability

Many factors affect the appropriate level of base compensation and total compensation within a firm, including external benchmarks. However, one of the risks of relying on benchmarks exclusively, without regard to the economic reality of your firm, is that you could spend yourself into oblivion.That’s why it helps to relate compensation to productivity standards as well as to the firm’s profitability needs.

When affordability is of particular concern—say, in a start-up business or in a flat or declining economy—more compensation should be shifted from fixed (base) to variable (incentive) compensation, thereby sharing the risk and reward more evenly between employer and employee. But regardless of the variable/fixed makeup of the compensation, you have to make a profit after fair compensation to all staff, including yourself as the owner.

Staff Expectations

We’ve found that when the reward structure is out of sync with what the staff is expecting, it’s usually for one of several reasons:

  • The market dictates higher pay.
  • The nature of the pay is not in line with the employee’s needs.
  • The employee does not have a good understanding of the total pay package.
  • The employer and employee are not in sync regarding the job and its expectations.

The structure of the compensation—the how—can also be the source of a potential disconnect between employer and employee.


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