Practice Management

Talking Points: How firms decide their compensation

Representatives from three advisory firms sat down during a recent webcast to discuss how their compensation plans have been developed, and how they are evolving.

The following is excerpted from the Owner Compensation & Equity, which was sponsored by Pershing Advisor Solutions and moderated by Kelli Cruz, Director of Research & Consulting at IN Adviser Solutions. To register to listen to the full webcast, click here.

Zach Abraham, the director of human resources and COO of McKinley Carter Wealth Services; Marita Sullivan, the chief executive officer and principal of JMG Financial Group; and Greg Friedman, president of Private Ocean, spoke to Ms. Cruz about the changes their firms have made in their compensation structures.

Paying owners as employees

Zach Abraham: At the present time, we actually are doing a base salary for owners and also a distribution of profits. But we are evolving this quarter; we are actually rolling out a short-term incentive plan.

So, they will actually have three different buckets of compensation—base salary, distribution and short-term incentive plan with long-term incentive built in on top which will have a fourth—probably in 2013. And so, that’s how we are structured today; and the reason why we have gone from a base salary is because we thought that was very important, philosophically, that we look at the owners as employees.

They all have roles to play within the organization and so we felt it was important to not just pay them out of the profits that the firm owned. They are getting paid just like any other employee would be getting paid, although at a higher level than most of them obviously.

That’s kind our philosophical take on why we are paying base compensation, plus we feel it’s important to create stability within the firm. Sometimes, if you understand that base salary is a part of what you are earning, there is some stability there, not only from an employee’s perspective, but from a firm’s perspective and an owner’s perspective as well.

Moving away from silos

Marita Sullivan: Most of us are CPAs and when the firm first started, we were silos, as I think most small firms start. We were “you eat what you kill”—(meaning) you got a percentage of your revenue and that was it. And there really was no benefit to be an owner.

As we evolved and changed in 1996, we gave up our brokers licenses and became fee-only. And then, when we decided to restructure and expand ownership, in 2005, what we did is we turned around and said if we really want to have a firm, we have to quit being silos and we have to break our compensation up.

So, what we did is we went just from a basic percentage of your revenue to a base salary, which still is a percentage of your revenue credit, but it’s substantially lower than it was before. We have an incentive bonus, that’s a percentage of the base salary. We have a company bonus that’s payable to all employees and it’s a formula company bonus and everybody in the firm gets it. And then we have the owners’ distribution. The profits will [then] be distributed according to your ownership.

We needed to do that in order to have value in the firm. That was the difficult part because you are taking [advisers] and you are going to go from a pretty much certain salary that is based on what their book of business is, to a situation where only a part of it is going to be based on that–and if the firm is not profitable or successful you are going to earn less. So, it was a culture shock, but I think everybody is very pleased that we did it.

No need to incentivize…yet

Greg Friedman: We do a base-plus distribution. We don’t do an incentive as of yet, because founders generally don’t need to be incentivized. That’s at least my experience, but as we have expanded ownership, the incentive piece is definitely on the drawing board.

And then the other thing I would add from our perspective, everybody definitely gets the base salary for the position, which as the study pointed out is good practice. We look at across-the-comp studies, and there have been about three or four every year. What we do is we essentially average those out and put ourselves in the seventy-fifth percentile, and we generally just do that as a base salary, and then after that, it’s just owner distributions.

We definitely have a lifestyle element to our company so people don’t work 70 hours a week here. Generally when you look at people that are making base salaries in particular at the very highest levels, they are usually working for companies where the reason they are making that kind of money is 60 or 70 hours a week is sort of the expectation. And that definitely is not the case here. So, that’s kind of how we landed on seventy-fifth percentile.