Devise an incentive program

Everyone is mid-range on my company’s suggested salary scale and I cannot justify simply raising their pay levels, so it seems to me that some sort of bonus program, based on profitability, might be the answer. I am sure you have seen a lot of these programs in other advisors’ practices. What works best?

Coach says: Your question reminds me of one of my mentors long ago, who said: “Human nature is such that people will work just short of your expectations if they believe they are being fairly paid. However, they will work to exceed your expectations if they believe in you. They will work to exceed their own expectations if they believe in the cause.”

To me, that advice says that leadership, respect and a genuine desire to serve others are key motivators to performance. That said, with the exception of truly altruistic people, the rest probably comes down to money. Let’s begin with base salary, the most fundamental compensation component.

Most studies suggest that base salary is not a motivator. In fact, it can be a “de-motivator” if employees perceive they are paid unfairly for the work they are expected to perform. Unless the base salary is well above the typical range for the job and the employee is aware that they are extraordinarily well paid, base salary alone seldom drives people to overachieve.

That brings us to incentives or variable compensation, which can be motivating if well designed and focused on the right jobs. The operative words are “the right jobs” – meaning that some jobs are better suited to salary compensation, while others may appropriately be based on salary+incentives or incentives alone. Most advisors are aware of what working in a 100% incentive-based job is like.

My basic philosophy is this: pay salaries for jobs; pay incentives for results. That means people should earn fair salaries for carrying out routine (but important) activities in which the contribution to overall results is hard to measure; people doing less routine activities, in which results are easily measured, should have some portion of their compensation based on achieving appropriate targets.

To answer your question more specifically, the most common incentive-based approaches to compensation I encounter are:

– Commission or bonus based on sales. Partly due to industry tradition and partly because new business is what fuels practice growth and (hopefully) leads to valuable recurring revenue, strong sales performance tends to be well rewarded. Sales also can be measured accurately, so creating an incentive that is directly tied to sales results is easy.

You can offer extra compensation by increasing the percentage payout for sales above a certain level by way of a tiered bonus that increases as levels of sales are reached, or offer a yearend bonus based on results vs objectives.

– Annual bonus on revenue. If we stick with the notion that incentives should be based on results, it then is reasonable to reward team members as a group if the business meets certain targets overall. You wrote, for example, that you want a greater awareness regarding profitability, so I am not surprised you might consider creating a bonus program based on achieving a certain level of profitability.

The problem with that approach, however, is that profitability is entirely in your hands because you choose how much your firm spends on everything. If you decide to move to more expensive office space or to hire your brother-in-law, profitability may well decline – in the short term, at least – which, in turn, will affect bonus payout. Your team could be doing their very best to improve profitability, but they have no control over the outcome.

Consequently, many advisors have bonus programs based on achieving revenue targets rather than profit objectives. Just be sure the revenue target you set is sufficiently profitable to you as the business owner.

Another advantage to revenue-based bonus programs is transparency – everyone can see how much revenue comes in the door. With a profit-based program, you have to ask everyone to trust you regarding the amount of profit or show them how you spend the firm’s money (including your own compensation).

– Project bonuses. Other advisors have created incentives based on completion of a major project. For example, one advisor I work with wanted to motivate his team to complete the transition of his large practice from a commission-based model to a fee-based model within a year. He established milestones at 25%, 50%, 75% and 100% completion. When 25% of clients who qualified for the fee-based program were converted, the advisor’s team of three staff would share $2,500; at 50%, the shared bonus was another $5,000; at 75%, another $7,500; and at 100%, the team would split another $10,000. By the end of only eight months, all of the clients who agreed to the conversion (93%) had been converted, generating a final bonus payment of $9,300 split three ways. This advisor insists the total of more than $24,000 or $8,000 per staff member he paid out was worth every dollar for the accelerated rate of conversion, not to mention the team bonding and the spirit of co-operation that endures to this day.

– Non-cash bonuses. Not all incentives have to be in the form of cash. For many staff members, smaller tokens of appreciation, given on an ad hoc basis, can be quite rewarding. Examples I have seen work well include extra days off, flexible hours, use of the advisor’s time-share, transit passes and payment of continuing education or personal development course fees.

Other, not so obvious bonuses you could consider include:

– Recognition. This affects not only the recipient, but also those around the recipient.

– Culture. Open, honest communication nurtures a more contented and productive team.

– Work environment. Workspace and office esthetics contribute to employees’ comfort and pride.

– Career development. Regular feedback helps employees map out their career path.

– Leadership roles. Most people are stimulated by leadership roles and want to demonstrate their value.

The fundamental objective to keep in mind: appropriately reward the behaviour you want.

George Hartman is CEO of Market Logics Inc. in Toronto. Send questions and comments regarding this column to george@marketlogics.ca. George’s practice-management videos can be viewed at www.investmentexecutive.com.

CREATING A BONUS POOL

The incentive plan outlined below is used by two advisor/co-owners who wanted a revenue-based plan for their four staff members that recognizes individual employees’ contribution to results and allows for reasonable owner profits. Here’s how it works:

1. Calculate the business’s break-even point, including advisor compensation (e.g., $1.6 million).

2. Add target profit (e.g., 25%).

3. Minimum revenue for bonus to be paid: break-even plus target profit.

4. Basis for bonus pool: actual revenue minus minimum revenue.

5. Bonus pool: the percentage to be paid out (e.g., 20%).

6. Allocate among all staff, according to individual contribution.

Calculations

1. Break-even point: $1.6 million (including advisor compensation)

2. Target profit: 25% x break-even = $400,000

3. Minimum revenue for bonus:$1.6 million + $400,000 = $2 million

4. Basis for bonus pool: $2.5 million – $2 million = $500,000

5. Bonus pool: 20% x $500,000 = $100,000

6. Allocate: Advisor 1 ($40,000); Advisor 2 ($25,000); Staff 1 ($15,000); Staff 2 ($10,000); Staff 3 ($5,000); Staff 4 ($5,000)

Partners also share the $400,000 balance of the profit achieved as owners’ compensation. This arrangement has several advantages:

1. It permits individual contributions to be recognized, based on merit rather than salary level.

2. It recognizes the cost of having advisory work done, just as there is a cost for client service.

3. All staff members, including advisors, participate in the pool.

4. Owners are recognized for their contributions as advisors. For example, if one partner lands a large account, he or she gets a bigger share of the pool.

© 2017 Investment Executive. All rights reserved.