In Rebecca Pomering's former life as part of Moss Adams' once high-powered wealth management consulting team, she talked to a lot of financial advisors about how to pay their folks. When she changed hats to become chief executive of Moss Adams Wealth Advisors LLC, the Seattle-based company's wealth management division, she got to practice what she preached.

Pomering assumed her new job in July 2008, or just in time for the Great Recession. The downturn raised a fundamental question: Was the firm's compensation plan set up in a way that rewards the right behavior and shares the risks and rewards in an appropriate way?

Pomering didn't think so. She says the pay plan she inherited gave employees at the 35-person firm annual cost-of-living adjustments of 3% to 5%. "What happened in some cases was that pay had grown out of proportion with the value of the job," she says. "We've tried to better align compensation growth with performance."

As part of Moss Adams' new compensation plan, an employee's base pay increases only when his job gets bigger and he takes on more responsibility. Otherwise, there must be clear evidence that his role has become more valuable within the organization or within the market.

"It incents and rewards people who take on additional responsibility, but it doesn't reward in a fixed, guaranteed, year-after-year salary increase if their responsibility level hasn't increased," Pomering says.

In addition, the firm instituted an incentive plan that will reward employees with a bonus when they've performed well in their job, even if they haven't taken on more responsibility. The incentive could also kick in if the company has had a good year. But conditions must justify such a bonus, and it's not intended to be an annual entitlement.

The firm rolled out its new compensation plan in March 2009, she says, but so far hasn't had a chance to fully implement it because it didn't have profits last year to pay out as an incentive. This year it will.

"I think at the end of the year when it pays out, people will see how the performance of our business helped them make more money and how their ability to achieve individual goals let them make a bonus, and they'll see their salary can increase if they want to take on more responsibility," she says.

Pomering believes the RIA market in the post-meltdown world will never be the same, and that it's a good time for advisors to step back, look at their compensation plans and ask what they're trying to accomplish with their business.

What kind of behavior do they want to see from people and not want to see? What kind of results would boost the economics of the firm so it in turn could boost the compensation of its employees? Asking these types of questions "will allow us to naturally create the right kind of compensation plan," Pomering says.

Satisfaction
According to the 2010-2011 edition of the Financial Planning Association's salary survey released in September, financial advisors on the whole seem to be a satisfied lot. Turnover is low (particularly among higher-level employees), and the survey found that 85% of individuals at financial planning practices are either "satisfied," "very satisfied" or "extremely satisfied" with their jobs.

In that vein, 50.2% of respondents said their compensation is the primary reason for their job satisfaction, trailing only the work environment (62%) among nine different categories. The FPA report concludes that one way for advisory practice owners to boost employee satisfaction is by evaluating compensation and opportunities for advancement within an organization.

"It's a constant challenge for RIA firm owners to structure the right compensation plan that will give professionals a fair shake while driving profits for the owner," says John Furey, principal at Advisor Growth Strategies LLC, a consultancy in Phoenix.

At Financial Architects LLC in Woodstock, Ga., the firm's admin people get paid hourly and professionals get paid a percentage of revenue that may vary depending on the type of business, says the firm's president, David Hultstrom.
For example, he says, a planner may be paid 50% of planning fees and a customer relationship manager 20% of AUM revenue. Each year's net free cash flow-essentially everything that isn't spent on compensation according to the formulas and other expenses-is placed into a bonus pool and there is a predetermined split of the pool.

"My view is that if you get the incentive structure right, you don't have to manage people," Hultstrom says. He adds that Financial Architects' incentive structure aims to help grow the firm from 30 clients to 100 within about five years.

Don't Be Cheap
Scott Slater, the managing director of business consulting at Schwab Advisor Services, says he's getting three to four calls a week from relationship managers about advisor clients who need help with compensation issues. "It's coming up a lot more than it used to," he says.

For starters, advisory firms are trying to do a better job aligning pay with behavior. "They want to know if what they're doing will drive the results they want," Slater says.

Second, they want to know what other firms are doing. "They feel they're isolated and they want a better feel for what's competitive and appropriate," he adds.

Slater says one way to think about compensation is to divide it into a base salary, an incentive plan and equity ownership. A firm's principals should ask themselves what the base salary is actually paying for and how they can reinforce that. "If you want people to drive new business, [you should] maybe increase the proportion of compensation tied to an incentive-driven plan," he says.

One of the overall themes Slater is finding is that principals in search of the proper compensation structure don't want to be chintzy with their employees.

"When we talk about the best-managed firms in terms of profitability, revenue growth and productivity, many of them say they've learned from experience that it pays to pay in the top quartile in compensation because one good hire can make a big difference in overall productivity," Slater says.

Multi-Tiered Plan
Some advisory firms have put a lot of thought into their pay practices. "In this business, our number one concern is client service," says Charlie Fitzgerald, a principal and human resources director at Moisand Fitzgerald Tamayo LLC in Maitland, Fla. "Our number two concern is making sure our staff is well taken care of."

The firm has 11 employees-three partners, four financial planning associates, three client service coordinators and one office manager. Its compensation plan has four components: base salary, an individual performance award, a team award and a new business incentive it recently rolled out that applies only to the firm's four financial planners.

Fitzgerald says his firm relies heavily on the Moss Adams salary study to peg staff salaries to where they should be on a national and regional level. "I don't want to be below market value with the folks we have because they're great folks who should be at or better than the market," he says.

The individual performance award, Fitzgerald says, is based on an annual review the partners do on their staff members. They evaluate each employee on a dozen different criteria such as productivity and creativity, as well as on his or her ability to be a team player and handle client relationships.

"We'll literally grade them on each category and we'll do a weighted average," Fitzgerald says. "We'll add our thoughts, and the three partners devise a performance score based on all of the categories."

For employees with one year of experience, that can mean an award of as much as 3% of their base salary. The award can reach 4% for two-year employees and up to 7% for employees with up to five years of experience.

"If they do just average, we won't pay a bonus," Fitzgerald says. "We're looking for above-average performance to earn a performance award. It's something we can control."

The team award is a firmwide bonus based on client retention. As long as the firm loses no clients (unless it's a death), everyone earns a certain percentage of his base salary as a bonus. And if the firm adds clients, everyone gets an extra bonus.

"Everybody has a little skin in the game when it comes to retaining and adding clients," Fitzgerald says. The formula used for bonus payouts isn't based on new account size, he adds, as much as it is on the amount of net fees generated from new accounts.

The firm rolled out a new incentive program earlier this year just for its four financial planners, encouraging them to drum up new business for the firm entirely on their own. "It gives them an opportunity to do a bit of rainmaking," he says, an important thing for them to learn in order to keep the business going after the three existing partners eventually leave.

Survey Says . . .
Advisors can increasingly look to best practices standards from industry salary surveys and analysis published by the likes of Moss Adams, Schwab and the FPA.

Kathleen Longo, a senior principal with Accredited Investors Inc. in Edina, Minn., says her firm uses industrywide salary surveys to set employee compensation. But rather than break out the data by base pay and incentive compensation the way some surveys do, her firm simply pays near the top end of the compensation total.

"We have top performers at our company, and we want to pay them as such," Longo says. The firm has 32 employees, including four principals, an investment management team, various admin and tech people, and a group of financial planners and wealth managers who make up roughly half the company's head count.

Longo says the firm's principals often consider building some type of incentive program, but each one they consider means wrestling with possible unintended consequences.

"If we compensate them for getting new business through the door, that's new revenue and that's good, but does that cause them to make decisions where you're bringing in the wrong types of clients for the firm?" she asks.

And putting the employee compensation focus on client retention might mean holding on to clients the firm wants to get rid of. "We've stayed away from all of that because we haven't been able to find the incentive piece that's the right way to incent," Longo says.

As for compensating the firm's admin and tech folks, Longo says her firm goes to sites such as About.com, Career Builder and Monster to help set the appropriate salary ranges.

You Are What--And How--You Pay
Rebecca Pomering at Moss Adams Wealth Advisors believes that an advisory firm's compensation plan reflects its history and philosophy, and the culture it's trying to create.

"Your compensation plan tells people this is what we value and what we'll pay you more to do," Pomering says. "I think a lot of people put compensation plans in place without thinking through what it will encourage people to do. I'd bet that if 80% of organizations really look at their compensation plans, they'll find it contradicts to some extent the behavior they want to see from people."