It's stunting advisory firms, but here's how to find a better way.

    My team is in the midst of our 2007 compensation study-the biannual study in which Moss Adams surveys the advisor industry to learn about how-and how much-advisors are paying themselves and their staff. In an initial examination of the data, I continue to be surprised at how many organizations are paying advisors based on the revenue they personally generate-a compensation model driven by paying a percentage of an individual's "book"-paying them on their "personal production."

I know those words-"book of business" and "production"-offend many advisors, but even those advisors are paying their owners and advisors on this basis. It is time for a new way, and for brokerage-model compensation to exist only in transaction-oriented firms.

The eat-what-you-kill, production-based compensation model inevitably promotes personal development of business and thus implicitly undermines teamwork, integration and sharing of clients, ideas and knowledge. The logical extension of this compensation model is the phrase "my clients," shortly followed by "my practice." This means that for any firm that is trying to create an institutionalized and team-based model of client service, the production-based compensation model will achieve the exact opposite of what the firm is trying to achieve. Nonetheless, many firms continue to do exactly that, whether by virtue of inertia or simply by not seeing alternatives.

There are organizations-or individual positions-for whom the eat-what-you-kill model is a good fit with the organization's strategy, positioning and desired culture. But other organizations are attempting to build businesses that are in direct conflict with this method of compensation. Many advisors are trying to build businesses that are different from the brokerage firms from which they evolved or against which they compete. Yet their compensation plan-the number one driver of behavior and the number one communication tool the firm has-still actively supports the model they are trying to evolve away from. And it supports only that model. Though I have seen hundreds of advisors try, I have never seen a firm build something other than a personal sales culture with an eat-what-you-kill compensation model.

I have nothing against the brokerage model, and nothing against brokers. I think this compensation plan is the right one for some organizations, and the right one for some positions in other organizations. But it is not the right compensation model for advisors in a planning or wealth management firm that is trying to build a team-based culture and an institutional brand. It is not the right model for investment management firms that are trying to promote something other than individual books of business and individual-focused behavior.

There are some behaviors and outcomes that the eat-what-you-kill model promotes, which many organizations see as positive and want to encourage. Namely:

It promotes individual accountability.

It shifts the compensation risk from the firm to the individual.

It rewards superstars and punishes underachievers.

It allows for independence and for people to excel at their own pace.
But not all of the behaviors the eat-what-you-kill model promotes are positive or healthy for an organization. These are the symptoms that arise that point us directly to the firm's compensation plan as the root of their pain:

A focus on "my" clients: because that's what drives "my" compensation.

A focus on "my" brand: because my compensation is driven by my ability to generate new relationships, it is my personal reputation as opposed to an institutional, organizational brand that I have incentive to build.

A battle over the value of relationship management versus sales: because in most firms to make a lot of money you have to be the killer not the skinner, raising the issue of the relative value of keeping clients and nurturing relationships.

Hoarding: because the plan punishes delegation of relationships, it makes it hard to encourage the practice of handing off clients, involving junior staff in a meaningful way or assigning clients to the advisor best suited to their needs.

Individualized sales: because the plan requires that we put the client in one person's column or another's, involving other qualified people in the sales effort is discouraged because there is only so much to go around. If I involve you, I have to give something up. It forces advisors to evaluate,         "Even if my odds of landing the client are less, am I better off trying this on my own because then I don't have to 'split' with someone else." And on the flip side, why would I help someone else land a new client if it's not going to drive my personal compensation, and take me away from activities that can?

Individualized client acceptance: because it's hard for the firm to have the discipline to tell me what clients I can or cannot accept if that is going to impact my compensation.

Passive management: because if someone is underperforming, they will make so little money that they will eventually leave. We can let the compensation plan manage them instead of coaching them and actively managing their performance.

Large gaps between juniors and seniors: because it is very hard to get young people up and running in this model, and times have changed. The best people want more than just a first year's guaranteed minimum compensation, then to shift to "commission" when their "book" is big enough to support them. They want an ongoing team-based model this compensation plan will not allow.

Potential for low profitability: because advisor compensation is driven by the revenue in advisors' columns, not the profitability, or strategic fit, of those relationships, the organization may suffer from a profitability perspective, as well as diluting strategic focus if advisors take on clients that drive their compensation but don't fit with the firm's focus.

Are most of these outcomes of the eat-what-you-kill model obvious? Yes! Advisors are quick to pinpoint that it is their compensation plan that has led them astray from becoming the organization they want to be-one that promotes people, allocates client relationships appropriately, has an institutional brand and deep, sticky client relationships. Yet they are frozen in the face of changing this compensation plan to something less familiar and something that-they imagine-will be vague and nebulous instead of known and formulaic.

If you have an eat-what-you-kill compensation model, think about these questions:

For our firm, what are the pros and cons of our compensation model given where we are going (or want to go) as an organization?

Do the positive aspects of the eat-what-you-kill model outweigh the bad, or vice versa?

Would we really be willing to make a meaningful change from the compensation plan we have to something different? What would the implications be for our people and our organization?

What are all the behaviors we want to reward with our compensation plan? Is personal production the only one? If not, what are the others, and how do we value them relative to one another?

If business development or volume of client responsibility is important to your organization-and it is for most of us-I encourage you to include this as a factor in your incentive compensation plan, but not as the sole factor. This may not be a dramatic, immediate shift. I am not recommending an about-face from 100% commission, or production-based compensation to 100% salary. You can begin by incorporating additional components of incentive and additional components of salary if you don't already have them. Here are some components to consider:

Base salary to reward for people management, client service, firm management and leadership responsibilities.

Sales incentive to reward for business development-either a percentage of the revenue generated or a flat dollar amount (or percentage of salary) for meeting or exceeding individual sales goals.

Individual incentive-either a dollar amount, a percentage of salary or a percentage of firm profit, earned based on the achievement of individual goals that are not production-related, like being an effective delegator, having an impact on the development of people, contributing in a meaningful way to firm-wide initiatives and teamwork.

Also remember not to muddy the issue with ownership elements. Owners should be paid separately for their job and for their ownership. Personal production should not define your split of the firm's bottom line, ownership should. Individual sales, team sales, client load or client management success should be rewarded through incentive compensation and not confused with ownership returns.

Those firms with a broker-dealer affiliation run into some challenges getting away from eat-what-you-kill, since the regulations don't readily support a team-based compensation model. I am not a compliance consultant or a lawyer, but we have seen a number of broker-dealer affiliated organizations develop successful team-based cultures. Talk with your broker-dealer (and your lawyer and compliance team) to see what your options are and how they can support you in aligning your rewards system with your vision for your organization.

As with every decision about how you structure and run your practice, the decision about how to pay your advisors is a very organization-specific one and the right answer for every firm is not the same. My biases are obvious, and are driven by the number of problems we have been hired by advisors to fix that are driven by a misalignment between their compensation plan and their desired structure, culture and business results. What is important is that you are deliberate and strategic in the development of your compensation plan, and not careless in adopting a model that is familiar but may be misaligned with who you want to be as a business.

Rebecca Pomering is a principal in Moss Adams LLP and consults with financial advisory practices on matters related to strategy, compensation, organizational design and financial management. She is co-author with Mark Tibergien of Practice Made Perfect.