For most managers, the end-of-the-year employee compensation and performance review is one of the most dreaded events of the year. The average manager doesn’t have a disciplined approach for handling these critical discussions and decisions.
The end of the year is the perfect time to revisit your firm’s human capital strategy and make sure that you have programs that develop and retain your talent. The following tips will help you evaluate your current system and give you some ideas about how to improve the experience for you and your employees.
1. Create a clear framework.
Make sure that you have a compensation philosophy that is agreed upon by the management and partner team — and that you are consistent in communicating and implementing it across your team.
Your philosophy should ensure that compensation levels have several critical attributes:
- They are affordable and equitable.
- They reward employees for individual performance and overall contributions to the firm.
- They tie an individual’s compensation to the value of his or her role to the firm.
- They promote and encourage the values of your firm.
- They reinforce the consistent delivery of the client experience.
Remember, the purpose of a good compensation philosophy is to attract, retain and motivate great people.
2. Check the competition.
Benchmark your current compensation program to determine if you are paying competitively, then establish a salary range and total cash compensation (salary plus incentives) for each position in your firm.
When analyzing industry data, remember you are paying employees for the jobs they perform, which is the market rate — not reimbursing them for their cost of living. Many firms have gotten into the habit of giving annual cost of living increases; I strongly recommend against this practice. Increasing your employees’ base salary because they have exceeded their objectives provides a better bang for your buck than automatically raising your fixed costs by increasing salaries and not tying them to tangible results.
Assessing the competitiveness of your firm’s total cash compensation requires looking at the overall context in which it is set — including how salary and incentives are balanced with each other and with other components of compensation and benefits, as well as the market demand or rate for each position. Each firm must decide what skill set is needed to support the firm’s goals, and then set its cash compensation to be able to compete in those areas. The talent that is in highest demand will command the most competitive cash compensation.
Currently, the fastest growth in cash compensation is among technical specialists who have expertise in tax, estate planning and research. Note that these people bring specific skills and expertise, and create leverage for the advisor team — supporting advisors with plan preparation, technical analysis, research or other related functions — but they typically have less client contact and do not act as the primary relationship manager for clients.
3. Tie incentives to measurable outcomes.
One of the main reasons firms use incentive compensation is to increase staff motivation and to increase behaviors and attitudes that correlate with the firm’s success. Creating stretch goals for employees to accomplish is a key part of the compensation mix, especially for incentive pay. These goals need to be easy to track, documented and used to motivate performance.
4. Spell out roles & goals.
For employees, clear job descriptions help them understand what their role is and what each job requires in terms of experience and skill base. Goals, on the other hand, tell employees what is expected above and beyond their basic job tasks; goals link to targeted objectives and reveal to employees how their achievements contribute to the firm’s overall performance.
All staff members should have both; without them, it can be a challenge to motivate employees to attain the right results.
Firmwide goals and objectives are just as important as individual goals, by the way. They provide context, helping employees understand how their tasks help the firm.
A few to spell out: How many new clients is the firm aiming to win? What level of profitability is desired? What kind of experience does the firm hope to deliver — and what does that look like from the client’s point of view?
It may seem cumbersome and daunting to develop job descriptions, and goals and objectives for the different positions in your firm, but the end result will reward these efforts.
5. Discuss performance throughout the year.
Meet quarterly or monthly with employees — not just at review time — and ask them to assess their performance, focusing on accomplishments and areas for improvement. Get input from staff on areas for development, as well, and review their progress. This will help to correct any issues that come up and ensure your employees stay engaged.
Remember that two-way open communication is essential to an effective working relationship.
Also, create a simple system for recording and documenting your employees’ performance over the course of the year. Take notes at these feedback meetings, rather than relying on your memory, to simplify writing annual reviews.
6. No system? Don’t panic.
If you haven’t created a formal performance review process for this year but need to review your team, shift the responsibility for the assessment over to your employees. Ask them to identify the following: their top three to five accomplishments and contributions to the success of the firm; one or two things that could have gone better during the year; and two or three areas that the employee wants to develop and improve in the new calendar year.
Then engage in a conversation about career goals, and a specific path in your firm. Find out what career goals and plans your employees have, and discover whether those are in alignment with the company’s plans — then talk about the skills and experience they’ll need to develop.
This conversation will position you as a career mentor and coach — a much more positive relationship to have with your key talent. FP
Kelli Cruz is a Financial Planning columnist and the founder of Cruz Consulting Group in San Francisco.
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