This is particularly a problem at the top of the organizational structure. The word “partner” used in many advisory firms tends to signify a certain level of equality with other “partners”—people with similar responsibilities and thus comparable salaries. But their performance is often drastically different.
Imagine that one partner, Philip, manages $1 million in revenue and generates $20,000 to $25,000 in new business each year while another partner, Brandon, manages $1.5 million in revenue and brings $100,000 or more in new revenue each year. Clearly, the two are not even in the same performance category, yet in the compensation system of most RIA firms their base compensation would not be 50% different.
Philip’s salary may be lower than Brandon’s, but it will rarely be “lower enough” to suggest how much Brandon’s performance exceeds Philip’s. Maybe Philip is at $200,000 and Brandon is at $250,000—yet Brandon is possibly adding twice as much to the firm’s profits as Philip is. There may be a bonus system where Brandon will earn more than Philip, but many firms do not have bonuses for partners and even if they do, the potential to earn income is less than the clearly significant difference in contribution.
It appears that the solution may be to create a very significant difference in salaries. But if we pay Brandon $400,000 and Philip $250,000, have we perhaps not gone too far? Can two people be in the same position if their salaries are so different? What’s more, are we not creating silos and damaging the integrity of teamwork?
This is why we need other forms of recognition and reward for achievement. A firm has to celebrate its heroes, not just pay them. Otherwise it may turn its heroes into mercenaries.
Differences In Ownership
Ultimately, if there is such a big difference in performance between two owners, perhaps the best way to recognize it is by creating differences in ownership. If Brandon is so much more productive than Philip, he should be a larger shareholder or owner. Otherwise, the value created in the firm may not be properly allocated in the long term.
This is a logical conclusion, but a very difficult practical matter. Equity is meant to be more permanent and reward those that invested and took risk. If we change equity because of the results from last year, are we not undermining that notion? Will we not undermine the value of equity if we start awarding it based on performance? Some law firms do that, but it is well known that law firms have little, if any, equity value. If we make the top performers bigger owners, are we not creating a concentration of ownership in the hands of a few “superstars”?
Again, the answer is to find balance. If a firm has a way of recognizing and praising its top performers, if there is a sense of “status” tied to performance and if there is a good system for paying for that performance, there will be less pressure on equity to reflect it. Ultimately, though, the top performers should own more. That will only be fair.
How Different is Different Enough?
Employees, in fact, are not children and do not want to be treated as such. They are very capable of managing their own careers, and in fact many of them want to have more control.
What they need is not equal treatment. They need an equal start and access to opportunities. They need clarity in the rules and goals, and then they will be able to take care of their own results. “Flat” is a relative term—the Appalachian Mountains are “flat” next to the Himalayas. “Flatter” may be good, but “too flat” may drive away those that want to climb a peak.
A strong firm culture will have a well-thought-out way of recognizing and celebrating the top achievers. Once that is in place, a firm may build additional levels of differential by awarding promotions and pay. Recognizing the best will ultimately help everyone.
Philip Palaveev is the CEO of the Ensemble Practice LLC. Philip is an industry consultant, author of the book The Ensemble Practice and the lead faculty member for The Ensemble Institute. More information about the institute can be found by e-mailing [email protected].