‘Needs-based’ Pay Pol­icy

Use Maslow’s hi­er­ar­chy of needs to help set your firm’s com­pen­sa­tion ap­proach and prompt growth.

Financial Planning - - CONTENTS - BY GLENN G. KAUTT

Find growth by us­ing Maslow’s hi­er­ar­chy of needs to help set your firm’s com­pen­sa­tion ap­proach.

“Show me the money!” is a line you prob­a­bly re­mem­ber from the movie “Jerry Mcguire.” The film fo­cused in a comedic way on a well-known fi­nan­cial ob­jec­tive: ex­cep­tional com­pen­sa­tion for su­pe­rior per­for­mance. For ad­vi­sors, there are many forms of com­pen­sa­tion. When you dis­cuss this topic with some­one in your firm, you should be clear on what type of com­pen­sa­tion you’re talk­ing about. The ways in which peo­ple are mo­ti­vated by dif­fer­ent forms of com­pen­sa­tion to sat­isfy phys­i­cal and emo­tional needs are de­scribed in de­tail in Abra­ham Maslow’s clas­sic 1954 book, “Mo­ti­va­tion and Per­son­al­ity.” The key to your suc­cess is un­der­stand­ing how each ad­vi­sor should be com­pen­sated and hav­ing a well-thought-out plan so you can elicit max­i­mum per­for­mance from em­ploy­ees at any emo­tional level of Maslow’s hi­er­ar­chy. The crit­i­cal ques­tion for busi­ness own­ers and man­agers: How do you de­velop those ad­vanced lev­els of ad­vi­sor com­pen­sa­tion? To de­velop a com­pletely com­pre­hen­sive com­pen­sa­tion sys­tem, a quick re­view of Maslow’s needs hi­er­ar­chy is nec­es­sary. Maslow de­scribed his first four lev­els as de­fi­ciency needs (shown in the ta­ble “Maslow’s Hi­er­ar­chy of Needs”), be­cause he be­lieved that ev­ery­one is ini­tially de­fi­cient in these ar­eas.

Sat­is­fy­ing Needs

Peo­ple are mo­ti­vated to sat­isfy their first level needs (L-1), then sat­isfy L-2 needs, and so on. I don’t write about or sug­gest things that re­quire work with­out a good pay­off, so I’ll tell you about what’s hap­pened at my firm, Sa­vant Cap­i­tal Man­age­ment, dur­ing the past 5½ years. We in­creased as­sets un­der man­age­ment an av­er­age of about 17% an­nu­ally to $6 bil­lion from just un­der $2.5 bil­lion. By com­par­i­son, the S&P 500 in­creased at 13.2% an­nu­ally dur­ing that same pe­riod. A ma­jor­ity of our AUM growth wasn’t from ac­qui­si­tions or mar­ket gains. Our to­tal port­fo­lio con­tains a sig­nif­i­cant amount of fixed-income se­cu­ri­ties and our port­fo­lio av­er­age an­nual growth was less than 10% dur­ing that pe­riod, so about 8% an­nu­ally had to come from else­where. The win­ning pay­ment­plan sys­tem for your firm must con­sider the emo­tional needs of ad­vi­sors across the wider spec­trum. Our best-in-busi­ness or­ganic growth was the re­sult of our ad­vi­sors bring­ing in an im­mense amount of busi­ness dur­ing this pe­riod. A large part of our ad­vi­sors’ mo­ti­va­tion for this ef­fort was our com­pre­hen­sive com­pen­sa­tion pro­gram. Want to know what you can do to en­hance your own pro­gram? Us­ing Maslow’s frame­work, start by creat­ing a ma­trix map­ping the ad­vi­sor’s lev­els against your current com­pen­sa­tion sys­tem. This will give you some ideas on how to best meet each ad­vi­sor’s needs. Here is Sa­vant Cap­i­tal Man­age­ment’s match to Maslow’s hi­er­ar­chy: 1. L1-L2: Salary, team and

in­di­vid­ual bonuses 2. L1-L2: Ben­e­fits such as 401(k) and match­ing; in­sur­ance; paid time off; telecom­mut­ing; flex hours 3. L1-L4: Eq­uity in the firm and an­nual div­i­dends 4. L3-L5: Job match­ing, men­tor­ing, coach­ing, reg­u­lar eval­u­a­tions. 5. L3-L5: In­creases in scope of job re­spon­si­bil­ity and author­ity 6. L4-L5: Recog­ni­tion and re­ward for in­no­va­tion and be­ing a change agent 7. L3-L5: Com­mu­nity in­volve­ment sup­port and recog­ni­tion 8. L3-L5: In­dus­try in­volve­ment sup­port and recog­ni­tion 9. L3-L5: Pro­fes­sional train­ing in­side and out­side the firm 10. L3-L5: Mar­ket­ing growth sup­port – “I care about your fu­ture” 11. L3-L6: Pro­fes­sional rep­u­ta­tion growth sup­port 12. L3-L6: Sup­port­ing pro­fes­sional ed­u­ca­tion out­side the firm. No­tice a sub­stan­tial part of Sa­vant’s com­pen­sa­tion plan pro­vides emo­tional mo­ti­va­tion in lev­els L3 to L6, ar­eas not typ­i­cally con­sid­ered by HR de­part­ments. Your win­ning sys­tem must con­sider the emo­tional needs of ad­vi­sors across this wider spec­trum, and for­mal­ize com­pen­sa­tion that en­com­passes ev­ery level de­scribed by Maslow. In Maslow’s own ter­mi­nol­ogy, get big in your hi­er­ar­chy or go home. Be­fore you change any­thing about your strat­egy, how­ever, take a step back and con­sider what you want to ac­com­plish in the ar­eas of com­pen­sa­tion and mo­ti­va­tion.

Higher Lev­els of Mo­ti­va­tion

You prob­a­bly want to pay at or above the in­dus­try av­er­age salary or bonus, but can you com­mit to be­ing re­spon­sive to your ad­vi­sors’ needs to reach higher lev­els of mo­ti­va­tion?

Ex­pand­ing your sys­tem to in­clude cut­ting-edge mo­ti­va­tional re­wards will help en­sure your firm isn’t left be­hind.

If your an­swer is “No,” then you might want to care­fully con­sider your over­ar­ch­ing busi­ness goals. Just don’t be sur­prised if good peo­ple leave your firm be­cause you don’t change. If the an­swer is, “I’m not sure” or “Yes,” that’s a sign you are ready to eval­u­ate and im­prove your com­pen­sa­tion pro­gram. You might think a di­ver­si­fied com­pen­sa­tion sys­tem that meets ev­ery need of ev­ery ad­vi­sor is in­cred­i­bly com­plex and highly ex­pen­sive. De­vel­op­ing and im­ple­ment­ing for­mal­ized in­cen­tives may in­crease your ex­penses some­what, but it can have a sig­nif­i­cant pos­i­tive im­pact on your com­pany’s top and bot­tom lines. From an im­ple­men­ta­tion stand­point, it’s rel­a­tively easy to in­stall if you’re al­ready do­ing some or much of what I have ex­plained but just haven’t made it part of a for­mal pro­gram. If that’s the case, I rec­om­mend you for­mal­ize what you al­ready do, and make sure each ad­vi­sor knows all about it. If you’re still de­vel­op­ing your or­ga­ni­za­tion, con­sider adding these ad­di­tional mo­ti­va­tions for­mally to your com­pen­sa­tion pro­gram as you grow. By the time we had 15 em­ploy­ees and four ad­vi­sors, we were able to use nine of the 12 cat­e­gories men­tioned ear­lier to mo­ti­vate them. Now, with about 10 times as many peo­ple, we use all 12 mo­ti­va­tional cat­e­gories. You should also de­velop and add to yours as time goes on. The world’s cur­rency sys­tems are ex­pand­ing con­cep­tu­ally and tech­ni­cally – think cryp­tocur­ren­cies. Whether or not you agree with their pur­pose, as an ad­vi­sor, you shouldn’t ig­nore them or the trends they rep­re­sent. In the same way, you shouldn’t ig­nore trends in ad­vi­sor com­pen­sa­tion. Ex­pand­ing your com­pen­sa­tion sys­tem to in­clude cut­ting-edge mo­ti­va­tional re­wards for ad­vi­sors will help as­sure your or­ga­ni­za­tion is not left be­hind. Do­ing so will pro­pel you into the 21st cen­tury as tech­nol­ogy, so­ci­ety and client ex­pec­ta­tions are chang­ing – and the mo­ti­va­tional ex­pec­ta­tions of your ad­vi­sors are also chang­ing. Get big or go home.

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