Compensation designed to incentivize employees is a powerful tool, but is underused in the financial industry, according to David DeVoe, founder and CEO of DeVoe & Company, a financial services consulting company based in San Francisco.
Even for those financial firms that have what DeVoe described as “incentive compensation,” they do not use it well, he said during the second day of the DeVoe G2 Forum in a discussion about “Solving the Compensation Riddle.”
“Most RIA compensation plans are flawed,” DeVoe said. Compensation plans should be designed to connect employees to the company, at the same time that the plans drive results and fulfill the mission of the firm, he said.
“Compensation shows which roles are the most important for a given job,” he added, and yet nearly half of financial firms do not have a methodiclly structured compensation plan for incentive pay such as bonuses.
To develop a good incentive compensation plan, firm owners need to define the five or six responsibilities for each job that are the most important and determine how successful completion of the responsibilities will be compensated. The plan should have clarity and should be clearly communicate that to the employee, he said. The responsibilities included in a job will be different depending on whether a company is trying to grow its client base or increase its services.
The responsibilities should be made as concrete as possible and they should be measurable, but they also need to include the more qualitative goals of re-enforcing the mission, values and vision of the firm, he explained.
“You do not want to have one big driver that determines the amount of incentive compensation: you want bonuses to depend on a number of factors,” DeVoe said.
One way of tying the employee’s success to the company’s success is to get feedback from employees on the compensation plan and on the operations of the firm, and then make sure those suggestions are considered seriously and acted on when appropriate, DeVoe said.
In setting up pay and incentive compensation, firm owners need to decide where they want the firm to rank for compensation when compared to their competition.
“As the firm owner, you want to pay as much as you can in bonuses because it means the employee is doing a great job,” DeVoe said.
Job performance reviews that determine bonuses should be held periodically. Firm owners should use the reviews as an opportunity to coach employees on areas where they might be struggling or even encourage collaboration between employees who have different strengths, he added.
Typical advisor incentive plans are based on the amount of new client revenues brought in, the total revenue managed, how well the advisors support the team and the firm, success in client retention and the number of client referrals obtained.
Although those are legitimate measurement tools, firm owners have to be aware that there are are potential drawbacks to some of the goals if the consequences are not thought through, DeVoe noted. For instance, an advisor who has an exceptional ability to develop new clients should be allowed to continue in that activity. He should not become so busy serving those new clients that he no longer has time to use his real talent of bringing in new business, DeVoe said.