The Com­pen­sa­tion Recipe

La­bor costs of­ten make up the largest ex­pense for firms. Fol­low these ap­proaches for an eq­ui­table and re­ward­ing struc­ture.

Financial Planning - - CONTENTS - BY KELLI CRUZ

La­bor costs of­ten make up the largest ex­pense for firms. Fol­low these ap­proaches for an eq­ui­table and re­ward­ing struc­ture.

I be­lieve that roles that have the most im­pact on end clients should have higher com­pen­sa­tion op­por­tu­ni­ties.

In my con­sult­ing prac­tice, I am fre­quently asked a vari­a­tion of this ques­tion: What are the in­gre­di­ents that go into cre­at­ing a com­pen­sa­tion plan? Sim­i­lar to when you’re pre­par­ing a new recipe for the first time — fol­low­ing the di­rec­tions to the let­ter, do­ing the steps in or­der and adding all of the in­gre­di­ents — fol­low­ing a reg­i­mented process can be im­por­tant to cre­at­ing a com­pen­sa­tion plan. Here is my se­cret recipe:

1. De­ter­mine the firm’s com­pen­sa­tion phi­los­o­phy.

Be­fore de­ter­min­ing salary ranges and cre­at­ing a com­pen­sa­tion struc­ture, first de­ter­mine your ap­proach to com­pen­sa­tion. Ask your­self this ques­tion; what mind­set drives my pay de­ci­sions? A firm can choose from three gen­eral com­pen­sa­tion philoso­phies: to lead, to match or to lag the mar­ket. Be­ing a mar­ket leader means you pay more for tal­ent than your com­peti­tors. Typ­i­cally, the goal is to gain an ad­van­tage by at­tract­ing top tal­ent away from oth­ers. If you de­cide to match the mar­ket, it means you pay roughly the same as your com­peti­tors, and if an em­ployer lags the mar­ket, it is pay­ing less than mar­ket rates. Gen­er­ally, an em­ployer rarely chooses to lag the mar­ket as a con­scious pay strat­egy. In­stead, this prac­tice is ei­ther dis­cov­ered af­ter con­duct­ing mar­ket re­search, or it may be the re­sult of a lim­ited com­pen­sa­tion bud­get. A firm’s at­ti­tude to­ward com­pen­sa­tion will drive its de­ci­sions through the rest of this process. An ef­fec­tive com­pen­sa­tion phi­los­o­phy should pass the fol­low­ing qual­ity test: Is the plan eq­ui­table? Is it de­fen­si­ble and per­ceived by em­ploy­ees as fair? Is the plan fis­cally sus­tain­able over time? Are the com­pen­sa­tion poli­cies legally com­pli­ant? Can the firm com­mu­ni­cate ef­fec­tively the phi­los­o­phy, pol­icy and over­all pro­grams to em­ploy­ees? Once the firm’s com­pen­sa­tion phi­los­o­phy has passed the qual­ity test, you should iden­tify ways to align com­pen­sa­tion with the firm’s broader goals. Some of those goals may in­clude re­in­forc­ing team­work, putting clients first, cre­at­ing full trans­parency, pro­vid­ing pru­dent fi­nan­cial ad­vice and de­vel­op­ing long-term re­la­tion­ships.

2. Rank po­si­tions in the firm.

Cre­at­ing a clear hi­er­ar­chy can help de­fine the value or worth of each job in com­par­i­son to other jobs in the firm. As a gen­eral rule, I be­lieve that roles that have the most im­pact on end clients should also have higher com­pen­sa­tion op­por­tu­ni­ties. For ex­am­ple, ad­vi­sory roles that in­clude di­rect in­ter­ac­tion with clients should of­fer the high­est com­pen­sa­tion. What about the sup­port staff roles? With roles such as client ser­vice ad­min­is­tra­tors, port­fo­lio an­a­lysts or op­er­a­tions man­agers, the best course of ac­tion is to

Your firm should pay fairly for ex­pe­ri­ence, knowl­edge and cre­den­tials, re­gard­less of an em­ployee’s gen­der, race or color.

fo­cus on how crit­i­cal their job func­tion is to ser­vic­ing and re­tain­ing your ex­ist­ing clients.

3. Es­tab­lish mar­ket ranges.

La­bor costs are usu­ally the largest ex­pense for or­ga­ni­za­tions, and iden­ti­fy­ing mar­ket rates for core po­si­tions is im­por­tant for a va­ri­ety of rea­sons. First and fore­most, it guides your de­ci­sion mak­ing on hir­ing, pro­mo­tions and your firm’s broader bud­get. Con­sult in­dus­try bench­mark­ing re­ports. Be sure to 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 re­port find­ings for the lat­est com­pen­sa­tion trends. About 90% of RIAS par­tic­i­pat­ing in the 2017 com­pen­sa­tion study by Fidelity Clear­ing & Cus­tody So­lu­tions re­ported giv­ing salary in­creases as well as bonuses last year. One-third said that raises ranged from 2% to 4%, while half re­ported in­creases of 4% to 10% or more. Un­der­stand­ing these trends can help you make the right investments with your com­pen­sa­tion dol­lars.

4. De­cide on in­di­vid­ual com­pen­sa­tion lev­els.

Us­ing sur­vey data, de­velop guide­lines to map out your com­pen­sa­tion struc­ture. For ex­am­ple, an in­ex­pe­ri­enced per­son who is start­ing a new role should prob­a­bly be po­si­tioned in the lower 25% of the salary range, whereas more sea­soned in­cum­bents may fall around the me­dian. Only the most se­nior-level ex­perts — those in­di­vid­u­als who truly ex­ceed ex­pec­ta­tions — should be in the 75th per­centile and above. Un­less a com­pet­i­tive la­bor mar­ket war­rants in­creas­ing the bases above the 75% range, other pay op­por­tu­ni­ties should only come in the form of in­cen­tive pay. In ref­er­enc­ing years of ex­pe­ri­ence of new hires or in­cum­bents, re­mem­ber to fo­cus only on ex­pe­ri­ence that re­lates to the em­ployee’s cur­rent role. For ex­am­ple, if you hire a ju­nior-level ad­vi­sor who pre­vi­ously worked sell­ing med­i­cal equip­ment, you would not count the years work­ing in the med­i­cal field as re­lated ex­pe­ri­ence. That said, there are some gray ar­eas. For ex­am­ple, let’s say you have can­di­date A who has some re­lated work ex­pe­ri­ence that makes them more at­trac­tive than can­di­date B without any work his­tory. Bring­ing in A would mean pay­ing that in­di­vid­ual within the me­dian. Bring­ing in can­di­date B would mean pay­ing that can­di­date in the bot­tom 25% to com­pen­sate for their lack of work ex­pe­ri­ence. It would be up to you to de­cide if work ex­pe­ri­ence is of more value than sav­ing on your bot­tom line.

5. Don’t for­get ge­o­graphic dif­fer­ences.

How can you fi­nal­ize your com­pen­sa­tion recipe? Most of the avail­able salary data con­sists of na­tional av­er­ages, but some ge­o­graph­i­cal lo­ca­tions, like San Fran­cisco, New York City and Chicago, will be above the na­tional av­er­age and oth­ers may fall below. Ad­just­ing for the cost of la­bor in your area is an im­por­tant step in de­ter­min­ing whether or not your cur­rent pay prac­tices are com­pet­i­tive. If your firm is lo­cated in an area that is at or below the na­tional av­er­age, con­sider whether there is an ad­di­tional pre­mium that you will need to pay to re­cruit and re­tain tal­ent for cer­tain po­si­tions. For some firms, that may be a 10% pre­mium or even higher. It’s im­por­tant to keep in mind that this pre­mium is ap­plied to not only the new hires to the firm, but also to in­cum­bents who have proved their per­for­mance over time.

Be­ware of In­ter­nal Eq­uity Is­sues

Bring­ing in newly hired em­ploy­ees dur­ing tal­ent short­ages (and thus, when la­bor prices may be at a higher rate) may lead to an­i­mos­ity among longer tenured em­ploy­ees. If your cur­rent com­pen­sa­tion prac­tices haven’t kept up with mar­ket pay rates, ad­just­ing pay for ex­ist­ing em­ploy­ees is an im­por­tant step to so­lid­i­fy­ing in­ter­nal pay eq­uity. Fi­nally, it also goes without say­ing that your firm should pay fairly for ex­pe­ri­ence, knowl­edge and cre­den­tials, re­gard­less of an em­ployee’s gen­der, race, color, re­li­gion or na­tional ori­gin. Re­search shows (and my own con­sult­ing ex­pe­ri­ence con­firms) that much of the gen­der wage gap oc­curs be­cause women tend to work in lower pay­ing jobs, whereas men tend to work in more se­nior, higher-pay­ing jobs. This is cer­tainly true in the fi­nan­cial in­dus­try, where women are still far less likely than men to make it to the high­est ranks of lead­er­ship. I highly rec­om­mend that firms of­fer de­vel­op­men­tal and ca­reer pro­gres­sion pro­grams to all em­ploy­ees and align com­pen­sa­tion ac­cord­ingly.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.