meeting with clients, and receiving much greater compensation, with the goal of making $100,000 within eighteen months. To avoid these detrimental disconnects, the career path, expectations, and resulting compensation need to be clearly outlined and communicated.
The structure of the compensation—the how—can also be the source of a potential disconnect between employer and employee.
One firm, for example, asked us to review its phantom-stock plan to make sure it related well to its strategy. In the course of our interviews with the staff, we found that most felt they were being paid at below- market rates and were more concerned about making mortgage and car payments than having a big payoff tied to their retirement or the sale of the business. As firms get more sophisticated, they’re often tempted to make their compensation plans more complex simply for the sake of sophistication. These plans are often devised without input from staff on their real needs or preferences regarding the nature and form of their compensation. Ask your staff what they need and what they want. This is always a good starting point and can be closely related to the considerations of affordability to the business, behavior reinforcement, and alignment with the business strategy.
mission-based pay is essentially variable base pay. Like fixed base pay, commission-based pay is the amount an individual gets paid for doing his or her job. The more an individual’s performance is tied to revenue generation, the more contingent on short-term variables that person’s pay should be. The more an individual’s role is related to processes or administration, the more fixed his or her compensation should be. But there are variations on these themes, depending on the type of culture and organization you’re trying to create.
Bonuses and Incentives
A bonus or incentive is an amount over and above base pay that should be awarded when the business or individual achieves certain milestones or exceeds expectations. Too many advisory firms pay a bonus, rather than an incentive. A bonus is usually a surprise; it is not typically tied to any measurable expectation and tends to be discretionary. An incentive, on the other hand, links performance and behavior to the pay. It’s important when setting up incentive programs to measure and reward the right types of performance and not merely achievement of the ordinary or expected.
In compensating a professional adviser, it’s typical to have some amount of compensation “at risk”—incentive pay based on the per- formance of either the firm or the individual (or both). The theory is that incentive pay motivates a certain kind of behavior (determined
FIGURE 7.1 Compensation Components
Base Pay Short-Term
Incentives Perquisites Long-Term
Wealth Building Employee
Benefits Base Pay Short-Term
Incentives
Long-Term Wealth Building Perquisites Employee
Benefits
Source: © Moss Adams LLP
by how you structure the incentive plan) and that incentive pay allows you to strike the desired balance of risk between the profes- sionals and the organization.
Most firms that do not have incentive pay omit it either by neglect or because they do not know what to measure. In some cases, the reluctance seems to stem more from the desire not to judge or distin- guish one individual’s performance or contribution from another’s at the risk of saying one is “better than” and the other is “worse than.”
Some firms are reluctant to say that one person’s skill set is more or less valued than another’s, or that someone’s performance is better or worse, or that someone’s contribution is bigger or smaller. This kind of equanimity is not necessarily a bad idea; in fact, it’s core to the culture at some firms. It will, however, affect the compensation program design significantly.
The factors that would potentially drive an incentive program are those things that matter to the organization, including but not limited to:
! Individual job performance
! Firm performance
! Tenure
! Saturation of a target market
! Attainment of certifications or education
! Business-development responsibility
! Special contributions Benefit Plans
Benefit plans are put in place by employers to support cash compen- sation. They may include health insurance, disability and life insur- ance, and 401(k) plans. These sweeteners in compensation are often necessary to compete for talent, though small businesses must be careful about trying to offer plans competitive with larger organiza- tions that can afford to offer more.
Perquisites
Perquisites are also noncash benefits—for example, a club member- ship or a car paid for by the business—that are usually conferred on someone because of status. Senior staff people may get free parking.
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.”