The Art of Set­ting Pay

You should base em­ploy­ees’ com­pen­sa­tion on their mar­ket price and in­ter­nal value — not on ir­rel­e­vant fac­tors like cost of liv­ing, Kelli Cruz says.

Financial Planning - - CONTENT - By Kelli Cruz

You should base em­ploy­ees’ com­pen­sa­tion on their mar­ket price and in­ter­nal value — not on ir­rel­e­vant fac­tors like cost of liv­ing.

LET’S FACE IT: END-OF-YEAR COM­PEN­sa­tion de­ci­sions are stress­ful. Even successful own­ers may lack the con­fi­dence needed for mean­ing­ful dis­cus­sions. Th­ese guide­lines can im­prove em­ployee pay meet­ings and ease the an­nual rit­ual.


Dust off your firm’s job de­scrip­tions and en­sure you have a clear un­der­stand­ing of what your em­ploy­ees are re­spon­si­ble for ac­com­plish­ing in their cur­rent roles. If you aren’t sure the job de­scrip­tions are cur­rent or you don’t have job de­scrip­tions, ask em­ploy­ees to de­scribe their key re­spon­si­bil­i­ties and the per­cent­age of time spent do­ing each one.

Job de­scrip­tions are a crit­i­cal tool to en­sure you and your em­ploy­ees are on the same page in dis­cussing end-of-year re­sults and their cor­re­spond­ing com­pen­sa­tion.

As a rule of thumb, base salary is paid for per­form­ing the du­ties in the job de­scrip­tion, and bonuses or in­cen­tives are awarded for ex­cep­tional per­for­mance above and be­yond the job de­scrip­tion re­spon­si­bil­i­ties.


Once you’ve re­viewed job de­scrip­tions, re­view the firm’s re­sults for the year, your or­ga­ni­za­tional chart and your em­ploy­ees. Who had the great­est im­pact on the firm and your clients over­all? What key ini­tia­tives were im­ple­mented that in­creased client re­ten­tion; brought in new clients and rev­enue; and in­creased pro­duc­tiv­ity, ad­vi­sor ca­pac­ity and over­all prof­itabil­ity? The in­di­vid­u­als or teams who are re­spon­si­ble should get the lion’s share of your com­pen­sa­tion dol­lars.

Per­for­mance-based com­pen­sa­tion com­mu­ni­cates that the firm’s pay phi­los­o­phy is based on mer­i­toc­racy. Each per­son’s per­for­mance is used to de­ter­mine his or her com­pen­sa­tion, po­ten­tial pro­mo­tions, own­er­ship and part­ner­ship op­por­tu­ni­ties, and other perks and ben­e­fits.

The bet­ter em­ploy­ees’ re­sults are, the bet­ter their re­ward. Firms that spread their salary dol­lars like peanut but­ter to en­sure ev­ery­one gets some in­crease (no mat­ter how small) are not go­ing to re­tain the best ta­lent.

Job de­scrip­tions are a crit­i­cal tool to en­sure you and your em­ploy­ees are on the same page in dis­cussing end-of-year re­sults and cor­re­spond­ing com­pen­sa­tion.


I am sur­prised by how many firms use costof-liv­ing ad­just­ments. This method makes no fi­nan­cial sense, but is of­ten used to pro­vide a mar­ginal em­ployee with a pay raise. This goes against a mer­i­toc­racy cul­ture.

The two main forces that should drive pay are mar­ket price — what the em­ployee is worth in the mar­ket — and the in­ter­nal value, mean­ing what the em­ployee is worth to your ac­tual firm. In­creases to base salary are about rec­og­niz­ing changes in mar­ket price or an in­crease in the in­ter­nal value of your em­ployee.

Base salaries only go up. Once an in­crease is granted, the higher salary will be paid over and over for as long as the em­ployee re­mains

with the com­pany. You should in­crease base salary only when the mar­ket and the per­for­mance of the em­ployee sup­port it.

De­fine a base-salary range for each job based on the value of the po­si­tion to your firm and the po­si­tion’s mar­ket value. Make sure to re­visit the salary range reg­u­larly and ad­just as needed with mar­ket changes.

Move an em­ployee within the range as their job, re­spon­si­bil­i­ties and skill sets change. In­creas­ing an em­ployee’s base salary be­cause she has done an ex­cel­lent job of meet­ing or ex­ceed­ing her ob­jec­tives is a bet­ter bang for your buck than au­to­mat­i­cally rais­ing your fixed costs by pay­ing COLA.


Es­tab­lish­ing mar­ket rates for core po­si­tions is im­por­tant for a va­ri­ety of rea­sons. First and fore­most, it guides de­ci­sion-mak­ing for pay, in­clud­ing hir­ing, pro­mo­tions, in­ter­nal eq­uity salary ad­just­ments and bud­get plan­ning. Be­cause la­bor costs are the largest ex­pense for an or­ga­ni­za­tion, a solid un­der­stand­ing of the ex­ter­nal value of each po­si­tion al­lows you to de­velop an ap­proach for set­ting over­all com­pen­sa­tion phi­los­o­phy.

Com­pen­sa­tion bench­mark­ing pro­vides the in­for­ma­tion needed to de­fine the costs as­so­ci­ated with salaries, bonuses and in­cen­tives. So, by match­ing your job de­scrip­tions with com­pen­sa­tion data, you can get a clear com­par­i­son of your staffing ex­pense and the mar­ket for sim­i­lar roles in the ad­vi­sory in­dus­try. Here is some ad­vice to fol­low:

Start with the in­dus­try bench­mark re­ports. Al­ways com­pare job de­scrip­tions — never ti­tles alone — when de­cid­ing whether a sur­vey job is a good match to your roles. Ti­tles vary widely from firm to firm in terms of scope, size and re­spon­si­bil­ity.

Read through the re­ports on the lat­est com­pen­sa­tion trends. For ex­am­ple, one re­cent study found that, in the past two years, the largest growth in com­pen­sa­tion has been in the ad­vi­sory ranks.

Sup­port ad­vi­sors had an av­er­age in­crease of 13% in com­pen­sa­tion, ser­vice ad­vi­sors had a 14% in­crease and lead ad­vi­sors had a 23% in­crease.


Make sure you are al­lo­cat­ing com­pen­sa­tion for hard-to-fill po­si­tions and those that have the high­est turnover. The role that seems to be the hard­est to fill is an ex­pe­ri­enced or lead ad­vi­sor. Firms are tak­ing a more strate­gic ap­proach to fill­ing the lead ad­vi­sor role by bring­ing in ju­nior ta­lent and train­ing or “grow­ing their own” ver­sus try­ing to re­cruit in the open mar­ket. Most firms I work with are skep­ti­cal that viable can­di­dates are avail­able, and are con­cerned about mak­ing sure there is a good cul­ture fit.

Turnover seems to be high­est in the op­er­a­tions and staff func­tions. Most of my clients are find­ing it in­creas­ingly dif­fi­cult to find can­di­dates for their en­try-level op­er­a­tions and sup­port roles, such as client ser­vice ad­min­is­tra­tor or ad­min­is­tra­tion as­sis­tant. Th­ese roles also tend to have the high­est turnover.

Keep in mind that, if you are op­er­at­ing in a com­pet­i­tive ge­o­graph­i­cal re­gion like the San Fran­cisco Bay Area, Chicago or New York City, pay­ing at the low end of the salary range guar­an­tees turnover.


Ac­cord­ing to the 2017 FA In­sights Peo­ple and Pay study, 43% of firms pay rev­enue­gen­er­at­ing roles dis­cre­tionary bonuses and 56% pay sup­port roles such bonuses.

Dis­cre­tionary bonuses, which are gen­er­ally paid with­out re­gard for any mea­sur­able cri­te­ria, are less ef­fec­tive in mo­ti­vat­ing be­hav­ior. Such bonuses do not cre­ate a clear link be­tween pay and per­for­mance, and can foster an en­ti­tle­ment men­tal­ity in em­ploy­ees. The wide­spread use of dis­cre­tionary bonuses is trou­bling. If you find your­self pay­ing bonuses this way, con­sider mov­ing to per­for­mance-based in­cen­tive pay in 2018.

Ra­tio­nal­ize the bonus, us­ing cri­te­ria like client re­ten­tion; new clients; com­ple­tion of mar­ket­ing, tech­nol­ogy, com­pli­ance, client ser­vice-re­lated projects; ac­quir­ing new skills; and at­tain­ing cre­den­tials, li­censes or cer­ti­fi­ca­tions. Once you ex­plain the ba­sis of the mone­tary award to em­ploy­ees, you will set clearer ex­pec­ta­tions for what it will take to earn ad­di­tional com­pen­sa­tion.

Be wary of dis­cre­tionary bonuses. They do not cre­ate a clear link be­tween pay and per­for­mance, and can foster an en­ti­tle­ment men­tal­ity in em­ploy­ees.

Kelli Cruz is a Fi­nan­cial Plan­ning colum­nist and the founder of Cruz Con­sult­ing Group in San Fran­cisco. Fol­low her on Twit­ter at @Kel­li­cruzsf.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.