Human beings respond to incentives, and as a result, compensation is one of the most influential drivers of employee motivation and is often used by employers as a way to guide their team’s behaviors. For example, some employers design their compensation structures to reward employees for experience gained and/or length of service provided to the company, or by adjusting an employee’s pay to compensate for certain benefits (e.g., paying extra to cover health insurance costs when the company has no group insurance plan, or by reducing pay to compensate for retirement plan contributions the company makes on behalf of the employee). Very frequently, though, employers overlook the fact that it is not actually the money itself that influences their employees but, rather, it is what the money offers to or makes possible for the employee that matters most. And it’s those emotional connections to money that ultimately must be tapped effectively in order for compensation incentives to actually create the desired business outcomes.
In this guest post, Angie Herbers – Chief Executive and Senior Consultant at Herbers & Company, an independent management and growth consultancy for financial advisory firms – identifies the common mistakes that many financial advisory firms make in developing their compensation models, and also discusses four key drivers behind the money that actually motivate employees. And that by understanding the different types of compensation that address the needs of specific motivational drivers, advisory firms can design better compensation models that will not only save time, but will also enhance the firm’s culture!
There are four common mistakes that advisory firms tend to make when creating their compensation structures. The first is designing an incentive structure without a clear focus – or with a focus on too many objectives – as many firm owners try to tie too many metrics to compensation (e.g., revenue, and profit, and client service) rather than on prioritizing one main objective with a clear focus (and a better chance of meeting that objective) for all. A second mistake is using compensation as a way to adjust for benefits; either increasing pay to make up for benefits the company does not offer (e.g., higher pay for no health insurance… but then what happens if the firm adds health insurance later?) or reducing pay to compensate for benefits the company does offer (e.g., reduced pay in exchange for employer contributions to an employee’s retirement plan… that the employer was probably going to make anyway for their own benefit!?). A third mistake that firm owners make is offering partnership rights as a form of compensation (i.e., not paying partners a salary for their active role in the business, and letting net partnership distributions be the primary or sole compensation), as the income a partner receives for ownership and what an employee receives for work in the business reflect two very different functions. And the last common mistake is neglecting to update the compensation structure over time, which should be reviewed and updated often to respond to the behaviors that the firm wants to influence (as the needs and demands of the business itself do tend to evolve over time as well).
When it comes to the actual drivers that make employees want to earn compensation, there are four basic feelings that serve as central motivators, and certain types of compensation offered can generally serve to satisfy these feelings for employees: 1) control (regular base salaries that employees can rely on receiving for the role they play in the company), 2) advancement (incentive-based pay that gives employees a sense that what they do is helping them advance through the ranks), 3) assurance (benefits offered to convey that employers care about their employees and are taking measures to provide care for them), and 4) achievement (compensation tied to a career-track plan). And for employees to develop trust in their employers, they need to have at least some of these feelings satisfied by the compensation they receive for the work that they do.
Ultimately, the key point is that if employers take the time to analyze their teams’ compensation needs, and decide which of the four motivational drivers are most important to their employees (and it may be the case that all four are important to a firm), firm owners can better understand which compensation structures would be most beneficial to implement, and why. And when effective compensation structures are in place that satisfy employees’ motivational needs, the result often produces more streamlined employee management… not to mention inevitably enhancing the firm’s culture and overall morale, as well!
