The Benefits and Pitfalls of Incentive Pay in the Wealth Management Industry

The wealth management industry is no stranger to incentive pay.  Traditionally, the incentive compensation structure was simplistic, focused on advisors, and based solely on revenue.

Now, firms have a myriad of choices when designing an incentive pay structure for the whole financial team.  Let’s explore some of the benefits and pitfalls of incentive compensation.

 

PROS:

 1.  Increased revenue.

One of the biggest benefits of incentive pay is increased revenue.  According to a recent study by Charles Schwaub, firms that had implemented an incentive compensation plan reported a 52% increase in revenue over companies that did not.   

2.  Prioritizes company goals.

A well-designed incentive plan can help individuals focus on the same goals by attaching rewards to measurable benchmarks of those goals.  In addition to revenue growth, it can motivate financial teams to work more efficiently and improve client satisfaction.  

3.  Retains Talent.

Incentive pay tends to be a factor in retaining talent.  Reward compensation gives advisors and staff specific goals to work towards as well as an opportunity for personal financial growth.  Incentive pay feeds into the competitive spirit and goal-oriented aspects of human nature which is a recipe for talent satisfaction.

 

CONS:

 1.  Toxic work culture.

If an incentive compensation plan is haphazardly put together, it can be a recipe for toxic work culture. That same competitive spirit of human nature can have a dark side if the reward structure pits team members against each other.  If the reward benchmarks are seemingly unattainable, talent will either burn out trying to achieve them or give up altogether.  This usually results in staff jumping ship to another firm.  

 

2.  Unethical practices.

A firm can be at risk if team members are more concerned about a bonus than putting the best interests of their clients first.  It’s a breeding ground for unethical behavior like the housing crisis showed us in 2008.  

 

3.  Inequity.

A poorly designed incentive compensation plan can also foster inequity.  If the plan is vague without specific, measurable outcomes it can unfairly favor certain team members over others.  Compensation awarded by the discretion of a few people lends itself to personal bias.

 

On paper, the data definitely supports the value of implementing an incentive compensation plan.  However, every firm is different and will require an incentive strategy unique to each company. 

Wealth management leaders need to assess and deeply understand the unique motivations of their teams.  Depending on the team, competitive cash rewards can be an obstacle instead of a motivator and other non-traditional incentives may be more appropriate.  

Many of the pitfalls of incentive pay revolve around poor design and execution. When incorporating an incentive compensation plan, this is for sure.  Do it right.  Think it through, be specific, and make it fair.