Every firm should have a well-documented, thorough compensation plan designed to make the most of your “people investment”. This plan should attract and retain good people; motivate them and boost their performance; and directly tie performance to delivery against the firm’s business plan and goals.
Salary and incentives are the biggest components of the compensation plan.
We believe that all employees in the firm should receive a combination of base salary and incentive pay. Think of base salary as fair compensation for an employee’s roles and responsibilities, while incentive pay should be geared towards meeting or exceeding stretch goals for the firm and/or individual.
We recommend that you define a base-salary range for each position based on the value of the position to your firm and the market value of the position. Make sure to revisit the salary range on a continuing basis and adjust as needed with market changes and move an employee within the range as his or her job size, responsibilities and skill sets change over time.
Variable or incentive compensation is a bit trickier.
The goal here is to leverage employees’ own motivation to improve behaviors and practices that drive the firm’s success. We recommend that incentive plans be tied to specific objectives and outcomes — showing employees how the incentive is a financial partnership between them and the firm.
In practice, incentive plans can have multiple components and will vary among firms. Examples of incentive programs include: business development, investment performance, firm profitability, client retention, team performance, and individual-performance incentives. Many firms use multiple incentive programs to help drive a range of behaviors. For example a business development incentive can be split: allocating the bulk of it to an individual incentive, for the advisor bringing in the business, but allocating a portion to a firm-wide incentive, in recognition of the value created by the investment and client service teams in building the firm’s reputation and brand.
How a firm combines fixed and variable compensation will depend on each employee’s role in the organization and the strategic priorities of the firm. In general, incentives will be more important for roles where the individual has a greater opportunity to deliver more value to the firm — as the firm can better drive motivation by making a higher bonus dependent upon delivering higher value. Roles that are more focused more on client service, operations, or administration should have a higher percentage of base compensation (fixed).
In the end, each firm must determine what their ideal mix of fixed and variable compensation is for each role. As long as all compensation to some degree is tied to objectives and performance against those objectives, then you’ll be maximizing the value of your people.