One of the most common questions we are asked is “How much should I pay my new employee?” As is often the case with simple questions, the answer is complex and driven by a number of factors. However, we think there is a base commonality; you should incent your employees to drive the behavior that you desire. We have dubbed this approach the Purposeful Pay Packet — a different use of the popular acronym PPP!
What do I mean by this? The core reason you pay someone is to remunerate them for their services. The qualifier is that you pay them in a way that incentivizes them to work hard and focus on the right things for the good of the firm.
Here are the basic compensation components:
Base Salary: The component that is fixed and not dependent on what is happening to the firm or how the employee is performing.
Firm Incentive: The component that is driven by how the firm is doing. Typical factors are Key Performance Indicators (KPI) like assets under management, firm revenue or firm net profit.
Personal Incentive: The component that is driven by how the individual is performing. Typical metrics are personal revenue production and finishing strategic projects.
I’m not going to outline specific salary amounts in this post. There are two good studies, each produced every two years, which give this information. InvestmentNews creates the “InvestmentNews Adviser Compensation & Staffing Study” and FA Insight creates the “FA Insight Study of Advisory Firms: People and Pay.”
Salary and compensation amounts vary greatly depending on geographical location, and availability of good resources. The size of the firm also matters. In a small firm, each individual wears more hats. Therefore, surprisingly, they may be paid better than in a larger firm as they have more firm knowledge and are harder to replace.
Role in the firm
So what behavior do you want to drive? This depends on two things: the business goals of your firm and the role of the employee in your firm.
The biggest difference in how firms incent their staff is by role in the firm. Different roles have different firm goals. For instance, a key goal of most advisors is to bring new clients into the firm, or to ensure that existing clients do not leave. However, for office staff it is more about efficiency of operations and creating a great client experience.
So let’s push into what percentages of salary in each component can encourage behavior in a firm’s personnel. Surprisingly, this information is not often discussed. In the table below, the ranges are intentionally broad, as advisor firms have differing approaches to salaries. The ranges are meant to indicate best practices when the firm is trying to incent their staff’s behavior.
The following descriptions are also broad, and we have only focused on those few positions where there is the most debate around how to remunerate. We have used the InvestmentNews definitions (from their “2020 Advisor Compensation & Staffing Study”) of the roles, which are stated in the footnotes.
Office Staff/Administrator: The majority of the compensation is base salary. A much smaller amount is often used as an annual bonus.
Client Service Administrator: Again the majority of the compensation is base salary. A smaller percentage comes from either the firm’s performance or an individual’s performance.
Service Advisor: Service advisors are typically learning how to become an advisor and also managing smaller clients of their own. Their desired behavior is exceptional client service. The longer they are in the job, the greater the move to a personal incentive, as a service advisor may always stay in that role. Normally this percentage is in the form of revenue share from the clients that the advisor is servicing — the advisor gets a percentage of that revenue, and the advisor firm shares the rest of the percentage.
Lead Advisor: The lead advisor manages the largest clients and beats the bushes for new clients. Their desired behavior is growing the firm. At this stage, some advisors have very little base salary because they are being incented to bring in new clients. Revenue share can also be used, sometimes a higher percentage given for new clients being brought into the firm, and a lower share for managing existing clients.
For this discussion, it is worth identifying two types of an advisor firm: the Enterprise firm and the LifeStyle business. The Enterprise firm is growth firm that can last beyond the founders. The LifeStyle business is a firm that creates a good life for the founder and good service for the clients. As compensation packages are aligned to firm goals, you can see that in the Enterprise firm, the salaries are more focused on sales and in the latter to client experience. This can be thought of as an overlay to the chart above.
To wrap up this post, let’s highlight some key tenets around compensation.
Expectations. Clarity about how salaries are paid and what the firm’s philosophy to compensation is key. Being able to explain the strategy of how salaries are set ensures that the employee is aware of how they can act to maximize their compensation.
Performance reviews. Yearly, or more frequently, performance reviews help firm up expectations. It allows you to give feedback to your employee, which then feeds directly into salary changes.
No surprises. As well as formal performance reviews, it is a best practice to give ad-hoc feedback as well. It ensures that the current behavior can be immediately affirmed or corrected. There is little room for debate! The goal should be that by the time the performance review occurs, there are no surprises. This is true also of salary changes or bonus awards. Expectations should be set by both the employer and employee. Therefore when it is time to finalize salary changes, there are no disappointments – instead hopefully the occasional pleasant surprise.
Consistency. Remember that salaries are always important to employees. Treat the topic with respect and have a salary review every year at the same time, normally just after the formal performance review, so that one runs into the other.
I have avoided a key aspect of compensation in this post: ownership of the firm. The biggest and perennial compensation from an advisor firm is to the firm owners. I will cover that in next week’s post. Until then, I hope this has got you thinking about how you are compensating and incenting your firm’s employees.
1 Client Service Administrator: Support employee responsible for paperwork, client reports, maintaining contact with clients to provide or obtain updated information and trouble-shooting problems
2 Service Advisor: Responsible for managing client relationships, either working with a more experienced advisor or on their own. Typically Service Advisors are NOT expected to develop new client relationships.
3 Lead Advisor: Primary managers of the client relationship. Typically Lead Advisors are expected to develop new client relationships.
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