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.
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.
1. CONFIRM ROLES AND RESULTS
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.
2. IDENTIFY TOP PERFORMERS
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.
3. ELIMINATE COLAS
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.
4. CHECK COMPENSATION DATA
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.
5. FOCUS ON HARD-TO-FILL ROLES
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.
6. RATIONALIZE INCENTIVE PAY
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.