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by Ross Levin, CFP®

Ross Levin, CFP®, is the founding principal of Accredited Investors Inc. in Edina, Minnesota. His book Implementing the Wealth Management Index, published by Bloomberg Press, is now available. (

Our daughters are now in college, but when they were growing up we incented (bribed) them to read by giving them a bonus for books read during the summer. This worked incredibly well for an incredibly short time.

In our company, we had a philosophy based on compensation studies that we would hire motivated people and pay them well. We used to have a bonus structure, but found that when employees were thinking about their compensation they never really included the bonus in their calculations. Several years ago, we did away with this and paid salaries that were at a level other firms were paying after distributing bonuses. This raised our fixed costs, but our theory was that we couldn’t motivate our employees, we could only demotivate them.

Several years later, I read Daniel Pink’s book Drive, which seemed to underscore the same point. His theory is that people need to be paid fairly, but beyond that, they need autonomy and meaning.

Then a couple of things happened that caused us to rethink compensation. One was that when the firm was doing well, we suffered owner’s guilt. When we had a good year, we wanted to reward our employees. We thought this was a great concept, but our employees felt like it was random and arbitrary. While they didn’t mind the extra cash, they had no idea why they got it.

The second thing was that we fell victim to articles and consultants. Almost everyone we talked with was suggesting that a firm like ours (more than $1 billion of assets and 35 employees) needed a variable compensation program. Although most of the people advising on the subject never owned a wealth management company, we still found ourselves deciding that we should do something in this area.

The struggle then became how to create a variable compensation program that would fit into the culture of the firm—a culture that emphasized growing our business through improving the client experience rather than simply growing assets. This meant that traditional mechanisms for incentive compensation, such as asset or revenue growth, could result in us rewarding certain actions at the expense of others. What a conundrum.

Structuring an Incentive Compensation Program

Eventually, we settled on an approach about which I am ambivalent. While I like that we incorporate a number of different tangible areas, I still struggle with the entire concept of incentive compensation. I want employees to refer prospective clients because it is the right thing to do. I want employees to go the extra mile because that is the basis of the organization, not because they hit a metric. And most importantly, in any type of incentive compensation program, certain behaviors are going to be rewarded and subtly emphasized.

If we don’t work extremely hard on maintaining culture, we may not encourage people to do the things that are so important to a practice, but cannot adequately be measured. How much you love your life partner is not easily quantifiable; nor is how much care you give to a client. For example, you may be able to measure contacts, but you can’t measure the quality of the interaction. Surveys are a start, but they can’t be comprehensive.

With all of these caveats, I want to share with you how we structured our incentive compensation program.

First, we wanted to identify the things we felt were important for our practice to continue to be successful. We need happy clients, happy staff, strong financials, and sustainability. The challenge was coming up with ways to create measurables around those areas.

Second, we wanted the incentive compensation program to fund itself and to be a stretch from what we were doing. We wanted base compensation to remain at a level that most firms use for base and variable compensation, while providing upside for those who can significantly move the company’s inherent boundaries. Essentially, incentive compensation had to be paid for by new growth created, rather than just the traditional growth we had experienced.

Third, we wanted the program to help employees think like company owners. This means we wanted the net effects to last beyond the incentive period.

Fourth, we wanted to allow for those who didn’t want to do what is necessary to qualify for incentive compensation, but who were still good employees, to feel valued within the organization.

Using a Balanced Scorecard

For the plan to be self-funding and accelerate growth, it doesn’t kick in unless we reach a minimum dollar amount of growth in earnings before interest, taxes, depreciation and amortization. This number is beyond our traditional growth rate. After we hit this target, we fund the plan. The employees receive their payout based on a combination of firm targets, personal targets, and personal evaluations.

We break the targets into four areas using a balanced scorecard:

  1. Employee metrics: 30 percent
  2. Client metrics: 30 percent
  3. Operational metrics: 20 percent
  4. Financial metrics: 20 percent

As you can see, 60 percent of the weightings involve culture. How happy is our staff, and how happy are our clients?

We measure employees using two criteria:

  1. Staff retention. If our staff stays, we assume they find meaning in their work and are paid fairly.
  2. Duration to fill posts. If our staff is in the community saying good things about the firm to other planners, then when positions become open, we should be able to more quickly fill them.

We measure client metrics in two ways:

  1. Net existing client asset contributions. If clients are choosing to give us more of their pocketbook, it is an indication they are happy with what we are doing.
  2. Net new clients. If we are growing our client base, then we are getting referrals from existing clients and, more important, keeping our current clients. This is a client number, not a dollar number.

We measure our operational efficiencies in two ways:

  1. Labor as a percentage of revenue. We want to make sure we are not simply adding people as a way to keep clients happy.
  2. Non-labor as a percentage of revenue. We also want to be sure that we are not overusing consultants and that we are paying attention to operational costs.

Our financial metrics are:

  1. Percent annual increase in assets under management. This comes from investment performance and new and existing client contributions.
  2. Profitability as a percentage of revenue. This creates a range for our net margins.

Every month we share with the staff a dashboard that shows how we are doing in each of these areas. Each area has a range, and the incentive compensation is tied to the percentage of success in each area multiplied by its weighting multiplied by the employee’s performance rating. We do our salary reviews and pay out incentive compensation at the end of May.

If the balanced scorecard is set up correctly, the future goals of the business should tie in nicely. Firm initiatives should fall under one of the eight areas. This is the strength and the weakness. We have to be careful that as we pay attention to the scorecard’s areas; we don’t lose sight of important things that may not be captured through this.

Any firm that wants to adopt this approach needs to be sure it is authentic to who they are and where they are going. We believe that by having more of the scorecard weighed toward staff and client metrics, we will have growth that is consistent with our firm culture. And, if it turns out that these metrics are not the right ones, we will change them in subsequent years. It took a lot of work to develop our incentive compensation program, and it is far from perfect. We wanted to reward a variety of behaviors and activities.

Many staff members were excited about this approach. Some were concerned. Our rollout of the program involved lots of individual meetings and feedback. When you tackle something like this, be prepared for a ton of upfront staff communication time.

I still believe that autonomy and meaning create the happiest employees, yet creating a structure to regularly share in firm successes can help the organization cohere. 

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