• Some firms complement that first-year revenue component with some “residual” compensation. For example, a popular formula is 25% of year one, 15% of year two and 5% of year three. As former advisor and consultant Jeff Filimon explained to me, sometimes clients cannot transfer all their assets in the first year for various tax and liquidity reasons. In such cases, the second-year component captures that residual revenue when the assets move.

• If you are trying to send a signal that new business development is valuable, there is no reason you can’t amplify the signal and increase the incentive to as much as 50% of the first-year revenue. While I am not sure that double the bonus will get double the result, the higher number will certainly add an exclamation point to that statement, and perhaps that’s necessary. For a firm expecting a long-term relationship with the client, this can still be a reasonable approach.

• I am not a fan at all of incentives that continue for a long time. For example, a typical solicitor arrangement pays 20% of the revenue in perpetuity to the source of the referral (the solicitor). This may very well be the economic limit of such arrangements. You have to remember that the long-term cost of sale and service should be no higher than 40% (according to our benchmarking studies). Anything higher than 40% reduces the profitability of the relationship substantially. I have seen arrangements where the source of clients is paid 50% of the revenue, and the result is a relationship that can never be profitable.

In addition to the high cost, ongoing payments can create the wrong incentives. Paying in perpetuity allows someone after 10 years of successful business development to enjoy a great annuity from the income of past sales, and thus feel less motivation to seek new clients. Why develop new relationships if you can simply harvest the results from past success?

Ongoing payments can also create confusion about who owns the client, especially if the solicitor is another firm. If I am getting paid in perpetuity for the client I referred to you, can you actually ever sell that client?

Some Pesky Questions

While the bonuses described here are fairly straightforward, there are still some pesky devils in the details to be dealt with:

• Should we only pay for “new clients” or should we also pay for new assets from existing clients? What if an existing client adds $5 million in new assets to his or her account? Isn’t this more valuable than a new $1 million relationship? The answer is complicated. To me, business development bonuses are meant to reward business development—the addition of new clients. Growing existing relationships—client retention—is something firms already do well anyway, and in my mind, there is perhaps less reason to give additional rewards for it. But this demonstrates one of the “side effects” of bonuses: They prompt the question, “If you pay for this, why not pay for that?”

• What if more than one person contributed? Most firms allow the bonus to be split between two professionals. This in fact is highly desirable, and “team selling” is something firms try to encourage. But problems arise if one person disagrees about the split, and the arguments can get very ugly, damaging the team relationships. I know of one managing partner who got so tired of compensation disputes that he created a new rule—if anyone quarrels over who gets credit for a client, no one gets credit for that client.

Mixed Results