Establishing an Incentive Compensation Plan - Business Management for Financial Advisers

The senior directors of Total Compensation Solutions (TCS) are experts in bonus and incentive compensation. TCS will help you determine whether your bonus and/or incentive plans are competitive and appropriate. TCS can review and design your incentive plans which could include any of the following:

  • Annual Bonus Plans
  • Short-term Incentive Plans
  • Long-term Incentive Plans
  • Equity Incentive Plans

When effectively applied, incentive planning provides a strong link between organization goals and strategies and compensation. It can be an effective tool for motivating employees to increase both individual and organizational performance and recent market trends reveal that incentive planning can be effective in a not-for-profit environment as well as a for-profit environment.

The process for establishing an incentive compensation plan is as follows:

  • Develop organization business strategy
  • Link business strategy to overall goals and objectives
  • Identify prospective plan participants
  • Establish individual goals and objectives
  • Evaluate market practices and determine target awards
  • Assign performance objectives to award levels
  • Communicate plan elements to staff.

Over the past decade, incentive planning and the concept of variable pay have gained widespread attention. Employers recognize that this is a method of motivating employees to perform at higher levels. Employees recognize that they can affect the value of their own total cash compensation package by accomplishing the performance objectives set forth in a formal incentive plan.

Incentive compensation planning is a formal method of rewarding staff for achieving specific levels of performance "above and beyond" their normal duties and responsibilities. Each incentive plan is unique to the organization, whether profit driven or success driven in a not-for-profit environment. Each incentive plan is individually tailored to the staff and provides an excellent compensation solution for organizational performance.

The Role of Incentive Compensation in the Overall Plan

A number of factors affect whether a position will be eligible for incentive pay and what proportion of total compensation the incentive will represent:

  • Relationship management (higher percentage variable pay) versus client service (lower percentage variable). Who is accountable to the client?
  • Solving problems (higher percentage variable pay) versus analyzing problems (lower percentage variable). What is the level and nature of the work being performed?
  • Revenue generation (higher percentage variable pay) versus facilitation of revenue generation (lower percentage variable). How much influence does the person have on business development?
  • Hard, quantitative measures (higher percentage variable pay) versus soft, qualitative measures (lower percentage variable).

How is the position’s performance measured?

Those positions that have greater influence on the success of the business typically have more compensation at risk—a higher incentive portion —and also have greater upside potential. This is the risk-reward relationship at work. An administrative position might have 0–5 percent of total compensation as incentive, whereas a purely business-development position might have 50–75 percent or more of total compensation as incentive.

Determining Performance Measures

Incentive plans in the most successful firms are moving further away from strictly revenue-based drivers and working to incorporate additional measures. Although personal productivity is still measured and rewarded for professional positions in most firms, some additional performance measures driving compensation include:

  • New clients in a target market
  • Total firm revenue
  • Revenue within a target market
  • Revenue within a target product or service area
  • Firm profitability
  • Client satisfaction/client service
  • Commitment to developing staff
  • Events or milestones
  • Special tasks or projects

We recommend having no more than five performance measures or goals per position. It’s best to focus and emphasize the most important factors and have those be the ones that affect incentive compensation directly. It’s also important that measures not be conflicting, too broad, or too difficult to measure or evaluate.

Communicating and Implementing the Plan

The most important thing to do first when communicating a new incentive compensation plan is to communicate the underlying philosophy. Even people who deliberately and carefully develop a plan tend to get caught up in the mechanics when they describe how it works.

Before you start talking calculations and mechanics, make sure that you’ve clearly described the philosophy the plan is built on and how the plan relates to your overall business strategy. Do not forget that even the best compensation plan in the world will not allow you to relinquish active management.

The Role of Equity Participation

In addition to cash compensation in the form of base and incentive pay and noncash compensation in the form of benefits and perquisites, more advisory firms—particularly growing firms and those with an eye on their own retirement and succession—are examining the role of equity or other long-term wealth accumulation in the overall compensation scheme.

Equity participation may be real—in the form of options, partnership, or other stock ownership—or it may be in the form of phantom stock. Real equity should always be sold, rather than given away, and the criteria for becoming an owner should be well deliberated.

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