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How to get adviser remuneration right

Too many business owners base remuneration structures on assumptions, missing the chance to make them work better for all involved.

Remuneration, which encompasses salaries, bonuses and other variable pay such as incentives, is usually the largest expense item for advice firms.

Yet many directors spend relatively little time on the design and review of remuneration structures for employees, missing the chance to tailor them to meet their firm’s specific needs and requirements.

Indeed, there is a tendency to accept convention and to stick with the status quo.

For example, many employed advisers are set salaries based on a perception of market rates and paid bonuses once the level of adviser charges, commissions and fees exceed 3 to 3.5 times that base salary. The bonus is then usually tiered to increase in bands based on the total income the adviser generates for the firm.

So, what is wrong with this approach? Perhaps nothing at all if the level of overheads, the quality of business generated and the resources used by the adviser deliver the desired level of bottom line profit and client outcomes.

But many firms do not have the management information to know what the adviser’s costs of operation are, basing them instead on assumptions or guesstimates.

What is more, despite several papers from the FCA over the last few years, in reality, a lot of firms do not have sufficiently robust qualitative measures in place that focus on the impact on clients and the firm’s resources, as distinct from ones that focus on quantity – i.e. the level of production.

Last but not least, many firms’ remuneration structures are not granular enough to differentiate between the cost of acquisition of new clients and the servicing of existing clients. Arguably, new client acquisition needs to be recognised separately, as long as the way in which it is done and the service to the client is reflected in the payments made to the adviser.

If you have read this far, you may be saying: “I know what I am getting from my advisers and staff for the remuneration I pay them, and I know which advisers deliver better client outcomes and retention than others, and their levels of profitability”. If so, all well and good.

But if you are not sure, here is a checklist for you to consider as and when you next come to review these structures:

1. Culture

Remuneration should be aligned to a firm’s culture. Are you confident the structures in place encourage and foster the right behaviours?

2. Budgets and projections

Have the possible outcomes and likely/maximum payments been modelled and budgeted for?

3. Incentives

If an incentive is to be paid for production over a specific period, will it increase productivity as well as drive the right behaviours in terms of treating customers fairly?

4. Long term versus short term

Even if a remuneration package delivers initial increases in productivity, will it also deliver profitability in the longer term or will it distort productivity and quality because of shorter-term targets which are manipulated?

5. Quality not quantity

Can your firm demonstrate that the remuneration structures in place measure and reward quality, not just quantity?

6. Measurement

Is management information available to accurately measure outcomes on an ongoing basis and to enable trends to be identified and acted upon quickly and effectively?

7. Refresh

Nothing stands still, and this is especially true of remuneration schemes. They should be assessed annually to ensure they are not only delivering the desired financial outcomes but also the appropriate client outcomes, and that they are still motivating employees and advisers in the right ways.

8. Do not follow the crowd

Just because other firms remunerate their staff and advisers in a specific way, does not mean that structure will work the same way in your firm. They may in practice be overly generous or drive the wrong behaviours. It is important to be clear what you are seeking to achieve before implementing or revising remuneration structures.

9. Do not be different for the sake of it

The converse is also true: do not seek to be different unless there are sound reasons based on careful thought regarding the possible outcomes and modelling.

10. Avoid complexity

Some remuneration schemes have complex formulae and so are difficult to understand. Unless the remuneration structure you are seeking to put into place is easily understandable, it risks failing to motivate those participating in it and the desired outcomes will be lost.

Implementing and managing remuneration schemes is key to ensuring the structures are fair to the participants and the firm’s clients, and will help build and preserve value in the business. Spending time on this will deliver long-term rewards to all concerned.

This article was originally published on Money Marketing

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