6 Key Drivers to Designing Effective Compensation Programs for Future Leaders

As your firm strives to attract and retain top-tier talent in an ever more competitive environment, designing compensation programs tailored to future financial leaders becomes increasingly crucial to the continued growth and sustainability of your business. These programs need to attract and retain top talent and align individual incentives with firm goals and values.

There is an approach leaders of top RIAs are accelerating when considering growing firm revenue and attracting new clients. That is, to further advance the bifurcation of “the advisor” role. One part of the advisor role as a business developer and one part of the role as an advisor. Simply stated, break them apart. There will be those firm leaders who are exceptional at both advising and rainmaking. We call these unicorns. The evidence is clear. The majority of RIA firms just are not growing. Yet, the majority of RIA firms are good at advising. The retention numbers prove that. However, a wave of “money in motion” is headed to a town near you. Most advisors are underprepared to catch the wave! Recently, I attended the Barron’s Advisor Teams Summit and heard from advisor after advisor how valuable it is for them to attract talent to consider this approach. I’ll write more about that in another blog post.

In the meantime, please consider the following six key drivers when building or revising your firm’s compensation programs for tomorrow’s leaders and owners:

1. Develop Those Who Can Grow Firm Revenue and New Clients: As competition for clients heats up, the ability to drive revenue and attract new clients becomes paramount. Therefore, compensation programs should prioritize developing those who demonstrate the potential to grow these essential aspects of the business. This could involve simply incentivizing team members to expand the firm’s client base and increase assets under management. Alternatively, you could get more creative with incentivizing other key results (e.g., establishing relationships with the next generation of existing clients or completing new financial and estate plans). By investing in the growth and development of revenue-generators, you’ll better position your firm for longer-term success and sustainability.

2. Create Career Paths so Team Members are Future-Focused: Career progression and advancement opportunities are powerful motivators for ambitious professionals. By offering clear and achievable career paths within the firm, you help encourage your team members to remain future-focused and committed to their professional development. Compensation programs should be structured to reward those individuals who proactively seek growth opportunities—whether through additional training, certifications, or leadership roles within the organization. By nurturing a culture of continuous learning and advancement, you’ll cultivate a more talented and engaged workforce poised for success in the future. By scheduling specific professional development program meetings with your future leaders and team members, you’ll better position your firm for longer-term success and sustainability.

3. Motivate with Performance-Based Incentive Compensation: Performance-based incentive compensation is a cornerstone of any effective compensation program. By tying compensation directly to performance metrics (such as revenue generation, client retention, and productivity), you can more effectively motivate the team to achieve their goals and exceed expectations. Performance-based incentives reward top performers and provide a clear pathway for advisors to track their progress and strive for continuous improvement. This results-driven approach fosters a culture of accountability, excellence, and results-oriented behavior within the firm.

4. Pay Attention to the Little Things and Communicate, Communicate, Communicate: I recently facilitated a roundtable discussion on compensation with several leaders of large $1+ billion RIA firms. It was amazing to hear how much thought and effort they put into the smaller details of their compensation plans. From flexible scheduling to free lunches at the office, paid pet insurance, and firm-matching charitable contributions, going ‘above and beyond’ is a clear part of these firms’ cultures. They ALL share a passion for clearly communicating exactly what’s expected of their employees, what they need to do to reach the next level, and then regularly reviewing progress/performance.

5. Retain Key Contributors to Reduce Turnover: High turnover can disrupt business continuity and hinder firm growth. To mitigate this risk, compensation programs should prioritize the retention of key contributors within the organization. This will involve offering competitive base salaries, performance bonuses, and long-term incentives such as cash-based, cliff-vest long-term incentive plans, synthetic equity, profits interest programs, profit-sharing, or equity ownership. Essentially, advisors tell us they are using all the instruments available. Additionally, you can enhance retention efforts by providing opportunities for career advancement, professional development, and a work-life “blend.” (I’ll write more about this “work-life balance” in another blog article. My take is there should never be a “balance” between work and life. It sounds so “equal.” Work may be a part of life, and life is so much more. I do hope you agree!) By investing in the well-being and satisfaction of your team members, you’ll likely experience reduced turnover, strengthen team cohesion, and maintain a more stable and productive workforce.

6. Develop Future Equity Buyers to Grow Share Value and Generate Liquidity: As you look to the future, identifying and developing equity buyers becomes essential for sustaining long-term growth and creating shareholder value. Your compensation program should incorporate mechanisms to accomplish that important organizational goal. This could involve offering equity participation plans, succession planning initiatives, and mentorship opportunities for rising stars within the firm. By cultivating a pool of future equity owners, you’ll be able to ensure continuity of leadership better, facilitate smoother ownership transitions, and create liquidity options for current owners looking to ‘de-risk’ their investments. Also, you’ll create greater optionality in your firm’s future should you choose to merge, acquire, or be acquired because you have firm leaders fully engaged with an “owner’s mindset.”

Designing an effective compensation program for your firm’s future leaders and owners requires careful consideration of key drivers such as revenue growth, career development, performance incentives, retention strategies, and equity ownership. By aligning your program with these key drivers, you’ll be better poised to attract, retain, and empower a talented workforce capable of driving continued success and constant innovation.

Coaching Questions From This Article:

1. Based on industry benchmarking, how does your current compensation program stack up against your peers regarding both retention and new hires?
2. Think about your firm’s current compensation structure. How well does each individual’s compensation align with your strategic vision and growth goals? 
3. What tangible steps could you take to improve your compensation plan’s design and/or incentives to help drive better advisor performance?
4. What ways could you go about more closely tying compensation to the firm’s critical objectives and key results (OKRs)?