These benefits are often a hidden but substantial cost in small busi- nesses and can distort profitability if not managed well.
Long-Term Wealth-Building Plans
These plans may be tied to long-term behavior and may include options, partnership or other stock ownership, or even phantom stock. Equity-type offerings should be reserved for individuals who behave like owners and whose contributions to the business result in enhanced value. Equity should never be given; it should always be sold. It’s important for participants in these programs to have some skin in the game.
Phantom stock and options, on the other hand, may be issued to key people as a form of noncash compensation. In both cases, the employees realize the benefit when the business is sold, or in some cases, when they retire. Typically, these forms of equity protect the current owners from income dilution and loss of ownership con- trol and do serve a role in some practices. However, most advisory firms should validate how important such synthetic equity is to the employee compared with real ownership. In many cases, for example, it’s not the idea of equity that’s so compelling but the ego fulfillment that comes from saying, “I’m a partner.”
The most common form of base pay—used in combination with incentive pay or in isolation—is a fixed salary, which is the simplest and most “firm-oriented” of the above options. The process of establishing base pay should take into consideration:
! The job description and responsibilities
! Market compensation benchmarks as a baseline
! Adjustments to market-rate compensation based on the indi- vidual’s experience, tenure, and designations, as well as on affordability to the firm
! Annual reviews and adjustments based on changing responsibili- ties or expectations
This process, of course, begs the question, What is market-rate compensation?
Benchmarking Compensation
One benchmark that owners of advisory practices often ask us to consider in our compensation studies is a job title’s market rate—
defined as what the individual could earn working elsewhere, given geography, experience, and expertise. Perhaps a better way to think of market rate is not in terms of what the employee could make elsewhere but in terms of what it would cost to hire someone else to perform the employee’s job. This is typically the best way to exam- ine market rate, by asking not “What is the candidate worth?” but rather “What is the job worth?” and “What is this candidate worth in this job?”
Compensation benchmarks for jobs in financial-advisory firms are hard to come by, particularly for relationship-manager and senior- adviser positions. The biannual FPA Compensation and Staffing Study provides benchmarks unique to this market for a wide variety of job functions. Figure 7.2 is an example of a detailed table for the paraplanner position from the 2003 study. Worksheet 6 in the appen- dix describes how to interpret these detailed tables, specifically, and presents some questions you should consider when evaluating any compensation benchmarks or salary survey data.
We often apply market-rate information to a firm attempting to align its compensation plan with its strategic plan. As a first step, to
provide a composite, we pull together data from a variety of sources.
We try to observe industry data, local market factors, and national industry factors in evaluating a position. Obviously, it’s important that the position be defined clearly so that our comparisons are rel- evant. The external benchmarks and internal affordability and job- worth analysis will be used to define a salary range for each position defined within the firm.
FIGURE 7.2
P A R A P L A N N E R
Primary Function K
A technical position responsible for the detail work in developing modular or comprehen- sive financial plans for clients in support of a relationship manager. Limited client contact except in meetings, data gathering, and follow-up.
Number of positions reported: 267
% who are owners: 0.4 Median % ownership: 25.0
< $250,000 $250,000– $500,000–
>$1,000,000 $500,000 $1,000,000
Positions reported, by firm revenue 10.5% 13.9% 24.3% 51.3%
Salary + Commission Ownership Salary Only Incentive Only Distribution Combination No Data Compensation method 43.1% 45.7% 0.0% 0.0% 6.0% 5.2%
Lower Upper Compensation information: Quartile Median Quartile Base compensation $32,500 $38,000 $45,759
% reporting bonus 48.9%
Bonus $1,309 $3,000 $5,043 Median bonus, % median salary 7.9%
% reporting commissions 4.9%
Commissions $5,000 $10,000 $21,000 % reporting ownership distribution 0.4%
Ownership distribution $670 $670 $670 Total compensation $35,000 $40,000 $50,000
Factors impacting compensation:
Variance as a % of median base compensation
Lower Upper Quartile Median Quartile Experience (in years) 3 5 8 Variance in salary by work experience 89% 105% 139%
Tenure (in years) 1 3 5.75 Variance in salary by tenure 105% 97% 123%
As a general rule, you do not want to start an individual’s com- pensation at the upper level of the range because you have nowhere to go once this salary is established, unless you want to violate your guidelines or promote the person to another position. To decide into which tier to place the person for base purposes, make a judgment based on experience and credentials, financial contribution to the firm, and responsibility. As the individual’s experience, credentials,
Source: © Moss Adams LLP
P A R A P L A N N E R (continued)
CFP CFP certificate holder 14.6%
Variance in salary if CFP certificant 111%
$250,000–
Population of local market <$250,000 $1,000,000 $1,000,000+ No Data
% of positions reported by population 18.4% 23.3% 54.3% 4.0%
Variance in salary by population 83% 95% 105%
Most common secondary functions No Secondary O N, Q Other
% reporting secondary function 49.8% 13.1% 6.4% 30.7%
Variance in salary by secondary function
As a % of median base compensation 100% 101% 89%
As a % of total compensation 100% 106% 94%
Full- vs. part-time: Full-Time Part-Time No Data
% of positions reported 83.5% 15.7% 0.7%
Lower Upper Quartile Median Quartile Annual salary for part-time $19,500 $25,000 $30,000
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.