In just the past few weeks alone, I’ve come across no fewer than a half-dozen situations where highly successful advisors suddenly find themselves hamstrung by compensation decisions they made years or even decades earlier. As rapid practice growth (both organic and via acquisition) continues to accelerate, it’s a challenge that I expect will likely touch more and more firm principals in the foreseeable future.
Rather than stepping back and taking a long-term view as they’re building their practice, far too many advisors make short-term compensation decisions to bring on the next person or acquire a new practice without thinking about how replicating those same arrangements for future employees or acquisitions might affect their business down the road. It’s an understandable byproduct of the drive to “close the deal,” but it can have significant negative future ramifications.
Sweet deals can hinder future growth
While these challenges evolve in a myriad of ways, often it’s the simple case of an advisor over-extending compensation to secure their very first employee. I’ve seen incredibly successful producers who start out in a wirehouse environment with no clients and a shared sales assistant. In order to secure the assistant’s undivided attention they pay out a generous percentage of their gross production. It’s an arrangement that seems to make sense early on, but years down the road when the advisor is generating hundreds of millions in production, the sales assistant views that original agreed upon percentage as a non-negotiable entitlement.
Employees rarely, if ever, think like owners in so far as realizing that as the needs of the business evolve, so too must their compensation structure so reinvestment in additional people and resources can occur.
Misaligned compensation can incent the wrong behaviors
Acquisition deals can also be fraught with a multitude of compensation challenges. We see many a deal where the advisor from an acquired practice is compensated with a base salary and an escalating pay-out structure on new business. Not only are the payouts typically far too high for an employee (when you calculate payroll expenses and benefits) but more importantly they are often misaligned with goals.
While client retention and share of wallet growth might be where you want the lion’s share of the advisor’s efforts focused, the compensation structure provides little to no incentive to service existing clients rather than focus on rainmaking.
Simply put, bad things tend to happen when you pay employees like owners but they don’t think, act and behave like owners. You need to unwind those compensation structures and rewind them to align with your firm’s long-term strategic goals. How do you reset? Have an open and honest conversation about the financials of your business. Co-create a larger vision of the future that shows the role that everyone on the team plays in the financial outcomes and demonstrates why it’s in everyone’s best interest to realign their compensation to better achieve those goals.
Coaching Questions from this article:
- Think about your firm’s current compensation structure. How well does each individual’s compensation align with your strategic vision?
- Look at current compensation as relates to your vision for where the firm will be in 5 or 10 years. Can you envision instances where certain team members will become “over-compensated” or cases of potential misalignment between compensation and goals?
- What steps might you take to restructure compensation to address potential future issues and challenges?