One of the common mistakes financial advisors make when designing a pay structure is failing to consider how an economic downturn might hurt the firm (and lose it revenue). If you have a static plan (offering fixed salaries plus bonuses), the costs can quickly spiral out of control when you suddenly have less income to handle the expenses. There may be strong reasons to use some fixed component in the payouts anyway. But it is also good to structure plans so that compensation dovetails with a firm's profitability in some meaningful way by adding a variable component as well. That offers you the ability to curtail some compensation in years when the firm confronts flat revenues or even sees them decline.
Another mistake advisors make is to promise too high a payout for an employee's productivity only to find that it never materializes. It is far more difficult to negotiate down on compensation than up. Yet another misstep is to focus on new business production, (where you weight new business payouts more heavily than existing AUM-related compensation). This leaves your employees with little motivation to service existing clients. The opposite can be a problem as well, though, when compensation is based solely on servicing existing clients, which might deter the search for new ones.
The solution is to create a plan that delicately balances the firm's need for new business with the mandate to properly handle your current clients. At the same time, it must be an affordable program that motivates employees to stay productive and stick close to the firm's goals. It's a mistake to create a compensation structure without tying it in some meaningful way to the firm's strategic plans.
The biggest mistake of all is to assume that a compensation plan can and should be developed in a vacuum, without considering other related aspects of your business. For example, a firm might develop an employee compensation plan now, but leave its business continuity plan until later-even though each greatly depends on the other. Developing both together in a comprehensive effort would avoid the costly reworking of either one by itself later.
Consider also how it might hurt the firm to build a compensation plan that covers only some of the firm's employees/advisors. Perhaps your firm has decided to implement a new compensation plan for producing advisors and reps while leaving intact the current compensation arrangements for other types of employees. If the bonus plans and incentive programs are limited to only part of the team, those left out could feel alienated by the process.
Which brings us to one final point about the development of compensation plans: They should be a collaborative effort that includes input from all affected members of the firm. You are much more likely to have employees buy in if they have at least some say in how the plan is developed.
You may choose to take this journey by yourself or with the help of a third-party consultant. But whomever you work with, ensure that he or she has considerable experience in developing such plans. The devil is in the details.
David L. Lawrence, RFC, ChFE, AIF, is a practice efficiency consultant and is president of EfficientPractice.com, a practice consulting firm based in San Diego, Calif. (www.efficientpractice.com). The Efficient Practice offers an advisor network and a monthly newsletter.