Ask any consultant who works on compensation in the financial services industry and they’ll probably tell you that retaining Human Capital should be the #1 cause of sleepless nights for advisors. And the research bears this out. A 2019 Schwab survey found that 76% of RIA firms planned to hire from competitors over the next 12 months (nearly double the 42% of firms that recruited from other RIAs in 2018).
The gauntlet has been thrown down – your competition doesn’t just want your clients, they want your employees as well. And many of those firms have deep enough pockets to chip away at whatever loyalty you’ve been able to build over the years. Nobody is safe.
Not only is there a financial price – it costs twice as much to hire as it does to retain employees – there’s also a potential business continuity and succession price. Right this moment, a recruiter somewhere may be reaching out to make contact with one of your next generation leaders. Think about the IP, data, client and professional relationships at stake if one of those individuals took the bait and jumped ship.
Unfortunately, you can’t just go and delete your team’s LinkedIn accounts. And overpaying key individuals in the form of excessive salaries or bonuses is rarely the answer. So, what preventative actions CAN you take?
At ClientWise, we encourage the advisors we work with to view incentive compensation as an investment rather than a simple bottom line cost. Yes, Human Capital (e.g., salaries, benefits, incentives, training and payroll costs) comprises 70% of a typical advisory firm’s costs. That’s because your people and their intellectual capital are your enterprise’s core product and have a lasting impact on culture, profitability and sustainability.
Simply put, a well-designed compensation plan may be the most important work you can undertake to attract, retain and motivate the people who will drive the future growth of your business. And by adhering to the following five critical keys, you’re likelihood of success should be markedly increased:
- Your compensation plan must align with the firm’s strategic plan – strategy entails much more than just acquiring new clients and revenues through sales and marketing. It requires the creation of an infrastructure to support growth and the continued development of present and future leaders. You need to consider how to incentivize team members to further develop their skills (such as bonuses for achieving certain designations or leadership abilities). Alternatively, if maximizing your enterprise value takes precedence, you might consider profitability targets as a potential driver of team bonuses. The bottom line is that a well-designed compensation strategy will re-energize and re-focus your team so there is a high degree of confidence that their activities and behaviors are aligned to well-defined goals. And make sure that goals are formally documented and communicated, and that progress is tracked and measured.
- Solicit employee feedback about your compensation plan – feedback is an essential component of compensation plan effectiveness. More often than not, money isn’t the primary driver of team defections. Instead, factors such as the nature of the work, the nature of the workplace, and the nature of the relationship with the leaders of the firm are the culprits, not to mention a lack of a clear pathway to advancement or even partnership. A recent McKinsey research note (10/2020) states “Relationships with management are the top factor in employees’ job satisfaction, which in turn is the second most important determinant of employees’ overall well-being.” If you don’t know what’s important to your employees, then any financial incentives are like throwing dollars to the wind. Take time to learn about what motivates each individual, how they can become more meaningful contributors to the firm’s continued success, and whether they feel they’re compensated appropriately. By asking for feedback, you’ll learn more about what motivates your team, and most importantly, your employees will feel appreciated at having an opportunity to provide input. Having a voice and being heard can go a long way to greater satisfaction.
- Choose simple over complex to give your plan longevity – when it comes to compensation and incentive design, keeping it simple may be our single best piece of advice we can offer. There will be plenty of decisions to make along the way. Getting the compensation ranges and formulas right is only half the battle of designing an effective plan. You also need to think about the administrative support and processes required to facilitate your compensation plan before you start designing it. Identify who on your team will be tracking data, including the milestones and goals you lay out for your team to achieve. Also, consider the frequency of bonuses (monthly, quarterly, annually) and whether they’ll be tied to individual or team goals. But overcomplicating the process will only serve to shorten the lifespan and effectiveness of your plan. A simple design and administration will keep your plan evergreen and allow your entire team to rally around your vision and mission.
- Communicate…communicate…communicate – it doesn’t matter how well-designed your plan is if your team doesn’t understand it. Solid communication is essential if your want to properly equip them to achieve their individual and team targets. A good practice is to time the communication of a new or revised compensation plan to just after performance evaluations are conducted. If it’s a new plan, be sure to build in enough lead time to properly transition your team. Create a process for any new systems you are implementing, and clearly lay out goals, milestones and measures for employees so they feel informed and prepared. It may make sense to present your new plan to all employees at one time, or you might try to first lay the groundwork with your most senior staff. However you plan to deliver the news, be sure to explain the key changes and why these changes are being made. Your sincerity and transparency will ultimately drive their perception.
- Perform diagnostics along the way – set it and forget it isn’t going to work. Once you’ve designed and communicated your plan, it’s essential that you perform periodic diagnostics along the way. Certain measures will need to be documented and assessed to ensure your compensation plan is fair, relevant and well-aligned with the firm’s goals. Keep in mind that you may need to shift the plan periodically. For example, service model issues may necessitate a pause on acquisition until capacity concerns can be addressed, and you’ll want your plan to reflect that temporary change in focus – with bonuses predicated on client satisfaction and retention metrics rather than new accounts and assets. Additionally, as your firm grows and your employees become more valuable, your compensation plan will need to evolve and expand. Even though the structure of your plan may remain the same, certain changes (e.g., regulatory requirements) will inevitably be needed.
In the battle for talented candidates, the best in the business are seeing the impact and success of intentionally aligning their compensation investments with their business strategy. By incentivizing the right behaviors and rewarding your team’s execution, you’ll be future-proofing your firm’s continuity.
Coaching Questions from this article:
- What ways could you go about more closely tying compensation to the firm’s critical objectives and key results (OKRs)?
- Based on benchmarking, how does your compensation program stack up to your peers for both retention and new hires?
- How might you improve advisor performance (or execute more effectively the strategic plan of the firm) through better plan design and incentives?
- Are there more robust compensation structures that don’t require relinquishing equity you might consider implementing to retain future leaders?
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