and contributions increase, he or she would be moved higher within the range each year.
If practical, renew the survey and evaluate your pay range each year, although every other year may be adequate in a normal mar- ket. Your pay ranges will likely need to be adjusted for inflation or cost of living (COLA) each year, if affordable. COLA amounts during the past few years have ranged from 3 percent to 4 percent in most markets. Changes in inflation or cost of living will be ref lected in changes to the range; changes in performance expec- tations will be reflected by a change in the individual’s position within the range. So it’s possible for an individual who does not move up a tier to still receive an increase in base pay, depending on changes in inf lation.
For an incentive plan to be effective, employees at every level need to be able to fill in the blank: “If I/we do more of __________, I will make more money.” If not everyone on the staff can answer that question, the incentive plan is overcomplicated, ineffective, or nonexistent.
If an incentive plan is in place but is ineffective, one of the follow- ing is typically at fault:
! The plan is not well matched to the firm’s style.
! The plan is sending conflicting messages.
! The plan is not understood by participants.
! There is too much or too little at risk.
! The performance measures or measurement systems are dys- functional.
There are a number of steps to consider in designing an incen- tive plan:
! What will be the role of incentive compensation in your over- all plan?
! What is the desired balance between risk and reward, variable and base pay?
! Who will be eligible and at what level?
! What kind of behavior are you trying to encourage?
! How will you evaluate and measure that behavior and perfor- mance?
! Are you inclined toward team-based, individual-based rewards, or both?
Before getting down to the mechanics of the plan, make sure you understand the drivers and philosophy underlying it.
The Role of Incentive Compensation in the Overall Plan
Typically, the role incentive compensation plays in a total compensation plan will vary by firm and usually by position within a firm. 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) ver- sus client service (lower percentage variable). Who is accountable to the client?
! Solving problems (higher percentage variable pay) versus analyz- ing problems (lower percentage variable). What is the level and nature of the work being performed?
! Revenue generation (higher percentage variable pay) versus facil- itation 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 incen- tive 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 addi- tional measures. Although personal productivity is still measured and rewarded for professional positions in most firms, some addi- tional 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 con- flicting, 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 phi- losophy. 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.
Make sure that the participants in the plan will have ongoing access to performance results and feedback on how they’re doing. If you reach the end of the measurement period and the results are a surprise to the participants, then the plan was not well administered during that period. Make sure managers are trained in giving feed- back and conducting meaningful performance appraisals.
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 perqui- sites, 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.
Long-term wealth-building plans should be tied to long-term behavior and should be reserved for those individuals who behave like owners and whose contributions to the business result in enhanced value. This ensures that you have the right people in the ownership pool and that additional owners will enhance the existing owners’ value rather than dilute it.
Equity participation may be real—in the form of options, part- nership, or other stock ownership—or it may be in the form of phan- tom stock. Real equity should always be sold, rather than given away, and the criteria for becoming an owner should be well deliberated.
Consider these questions:
! What are the thresholds to become a partner?
! What are the qualities—financial and nonfinancial—the firm is looking for in a partner?
! When can the firm afford to add a partner without diluting the income of current partners?
! What kind of partners will create value in the organization, as opposed to diluting it?
! What is the value of ownership?
! How much ownership will be shared?
! Are the other partners willing to share control?
! Are there structures in place to compensate and evaluate part- ners consistently?
Figure 7.3 (at right, and continuing) summarizes several equity compensation plans.