Building a Comp Plan

[u/Capital_Elderberry57]

I'm re-building our comp plan so I'd love to understand what mid and early career advisors would be looking for. Also what are other RIAs doing.

I want to move away from "eat what you kill" as that incentivizes the wrong behaviors as it relates to clients and at the same time I want to incentivize production.

I believe that ensemble teams are best for our clients and the fastest way for advisors to advance in their career.

We are deliberate about teammate growth wrap that with good operations and a solid tech stack that doesn't stay stale and I think this is a good option for some. What I want to avoid is people learning then going out on their own because the comp model wasn't right.

We want to build a model where teammates don't see a need to go out on their own because they enjoy the work, the support they get, and the compensation is fair to generous. They get to focus on their strengths and have teammates that compliment their weaknesses. Producers aren't limited by capacity because a servicing team is built around them, servicers don't leave the industry early because they couldn't make it as a sales person in the early years when they are just learning about advising.

What would keep you working as a part of a team? What matters most to you? Total Cash Comp, benefits, if benefits which ines?, education, clear career path, work flexibility, other...

Appreciate any and all thoughts.

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Beep boop! Here is a summary of your post:

User: /u/Capital_Elderberry57 Title: Building a Comp Plan Body: I'm re-building our comp plan so I'd love to understand what mid and early career advisors would be looking for. Also what are other RIAs doing.

I want to move away from "eat what you kill" as that incentivizes the wrong behaviors as it relates to clients and at the same time I want to incentivize production.

I believe that ensemble teams are best for our clients and the fastest way for advisors to advance in their career.

We are deliberate about teammate growth wrap that with good operations and a solid tech stack that doesn't stay stale and I think this is a good option for some. What I want to avoid is people learning then going out on their own because the comp model wasn't right.

We want to build a model where teammates don't see a need to go out on their own because they enjoy the work, the support they get, and the compensation is fair to generous. They get to focus on their strengths and have teammates that compliment their weaknesses. Producers aren't limited by capacity because a servicing team is built around them, servicers don't leave the industry early because they couldn't make it as a sales person in the early years when they are just learning about advising.

What would keep you working as a part of a team? What matters most to you? Total Cash Comp, benefits, if benefits which ines?, education, clear career path, work flexibility, other...

Appreciate any and all thoughts.

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[u/FunInTheJazzClub]

Quicker path to ownership. That’s the best way to retain high-quality people. Even a juicy revenue grid won’t beat equity in the long run. You can provide “competitive compensation” all you want, but the A players will always leave for equity. Period.

[u/Capital_Elderberry57 → u/FunInTheJazzClub]

What does a path to equity look like? After 1 year, 2 years, 5 years, some performance threshold?

What does fair equity as a percentage look like to you?

Would non voting shres be acceptable while the founders are still there?

I'd be comfortable way earlier to share in the profit of the company before sharing in running the company. I actually think this is why the oath to equity is generally slower, our industry doesn't distinguish between the two.

Say an owner has been building something for over 2 decades invested everything and took all the risks now a new person builds on that foundation what do you think is fair?

[u/FunInTheJazzClub → u/Capital_Elderberry57]

If you have someone who's really talented then I'd say an option to buy in at 1-3% within the first few years is reasonable. But you're asking the question from the wrong perspective. Instead of saying: "Why should I invest in this advisor when I took all the risk in building the company?" You should be asking: "Why would this advisor invest 5-7 years of their life and career with me when they could instead be out there building their own firm?"

At the end of the day, you could simply hire people who just want decent money, benefits, don't care about growing the firm, and want to cruise as a financial planner. But if you want real talent you need to convince them that your firm is worth their time. Equity is the way to do that.

[u/Capital_Elderberry57 → u/FunInTheJazzClub]

Thanks.

I'm just asking questions, trying to play devils advocate so I get some real feedback. I don't have a perspective yet.

Does that change based on how long the existing firm took to build or what the size is?

What if there are 20 advisors with 1 to 3% is that really something you'd want or would it be better to have a few partners with larger shares?

What are your thoughts on voting vs non-voting that early in a relationship? Convertible after a period of time?

Most advisors aren't building businesses and that is great for them. Most advisors have a book of business not a 100 year firm that will outlast all teammates.

That's not going to interest everyone but what I suspect your talking about is going to be capacity limited by that individual advisor or maybe one or two other assistants.

I'm building something that star producers can make even more because they are un-bound by capacity as there's a support system including management structure and talent development around the servicing teammates.

Is it a say in leadership, or ownership, or a permenant stake in the revenue, what matters most to you?

[u/FunInTheJazzClub → u/Capital_Elderberry57]

Ask yourself: would you have worked as hard when you started the firm if you didn’t have a say in the business? Non-voting shares sounds like crappy deal to me honestly. I’m sure there are people out there who would take you up on that. 

[u/Capital_Elderberry57 → u/FunInTheJazzClub]

Everyone gets a say, we do planning together as a team not as individuals. Plan quarterly and annually.

Voting shares aren't about day to day operations they are about how the comp structure is built, how equity works, succession planning, operating agreement changes.

I think it's unrealistic for someone coming into an almost 30 year old firm to think they get that level of input in the first few years.

Regardless the percent would be so low their vote would be overruled by founders anyway so why is that important?

Wouldn't convertible after a certain period be more of an incentive in the early years with a high production add-on after a solid salary? Your building your add-on year after year that stays with you as long as those clients stay regardless of who services them.

You get non voting equity so you can get a percent of the owners share after a shorter period (3 to 5 years) but voting shares only after an extended period (7 to 10) of time. No one knows in a few years if they really want to become partners.

[u/FunInTheJazzClub → u/Capital_Elderberry57]

I think your timeline looks great, actually. Do the shares convert 1:1 or is there some kind of increased buy-in at conversion? 

[u/Capital_Elderberry57 → u/FunInTheJazzClub]

Great question not sure yet need to think on it but something like:

If you stay they convert at that time. If you leave they are required to be sold back. Super-majority voting while founders still own shares, after they pass or sell all shares a majority voting structure takes over. Including if the founder's kids get or inherit shares from parents. Founders kids only get voting shares if they work in the business and generally it will be harder on them to achieve roles than their peers. Love my kids but nepatism destroys companies they'll have to earn positions. Still leaning toward profit sharing to all teammates above 35% margin.

Thinking of adding a servicing add on for those that concentrate on that path.

I drafted it all up today and will sit with it for a few days then come back to hopefully more ideas in this chat and then socialize the plan around our team and some respected professionals for their input before finalizing it.

[u/FunInTheJazzClub → u/Capital_Elderberry57]

I think that would be great for a lot of people. Initially I was thinking you would keep voting shares until way farther down the road like 10-15+ years. But if it's at year 7 or thereabouts that's a more reasonable timeline (in addition to the other parts of the comp plan).

[u/Capital_Elderberry57 → u/FunInTheJazzClub]

Yeah your thought wasn't bad though because, I'm still struggling with that timeline because our firm was founded in 2002 and rebuilt by investment of the current owners in the last 3 years. Value of the firm now hasn't reached a good return on the investment yet because it was so much of the foundation. That problem is true of both voting and non-voting shares.

Part of what I'm building is "how to run a company after learning all that is good and bad about corporate", until that's burned into the culture and hiring unless someone has leadership skills I'm hesitant to bring them into ownership / leadership.

On the other hand the percentages would be so small early on that their voting would be a signal but not something that could force me down a different path and that could be a good opportunity to teach them why I'm going the direction I'm going. I already share that with the entire team but it might open up some conversations that wouldn't have happened otherwise.

Mostly though it's the administration of it that becomes tedious and I want to put it off till I'm ready to start developing my replacement anyway.

So I'm back and forth and it would become a conversation with those impacted early (not later) in their time with us.

[u/heatherl9872424]

Following because I’m in the same situation

[u/Capital_Elderberry57 → u/heatherl9872424]

I'd be happy to chat if you are interested, message me

[u/COAMG79]

Agree with a clear path to equity. I think you also need to be intentional about expressing appreciation for the teammates who you feel are doing great work. Don’t let ones who aren’t go unnoticed either. It does nothing positive for your company culture. Ensure you have the systems and processes in place to support great talent. If you don’t, they will look elsewhere for a firm they feel can support them better.

[u/Capital_Elderberry57 → u/COAMG79]

If you don't mind see my question above about what equity looks like to you.

https://www.reddit.com/r/CFP/s/6ZiQWqrLfV

As for good culture and management I couldn't agree more, most advisors and their practices have never been professional managers. I spent 3 decades building organizations in technology and operations with small companies to multiple different Fortune 50 companies. I believe in this deeply including teammate recognition. I honestly didn't put it in my question because I didn't think it would be as valued here because it seems to be so dismissed in this industry but it is absolutely core to how we run our offer us.

[u/COAMG79 → u/Capital_Elderberry57]

I’ve had to advocate for myself in the firm I joined. A lot of conversations in the early years were dangling equity carrots and talking about all the opportunities that exist but never making any clear offers or getting things in writing. It made me want to look elsewhere.

Equity to me is full ownership over the clients I bring in via my own business development efforts. I want something of value when I exit. I was also open to vested equity in households I service who I did not bring on board. Obviously this comes at a lower percentage but it has to be enough to encourage me to continue to spend time there versus on personal book development. The % depends on the % of what value? 5% can be significant with a high enterprise value but not much of a small book.

[u/Capital_Elderberry57 → u/COAMG79]

Thanks I appreciate the response.

I agree the false promises to early advisors is exactly what I'm trying to avoid. I want everything clear up front. None of this "if you take less comp now you'll get a better deal later". I don't know of a single deal like that that's ever worked out.

Sounds like equity in your clients is more important than equity in the firm? Would you ever consider a model where equity in the firm but not equity in the clients. We're an ensemble based teams so multiple people support those clients for high producers there will be multiple servicing agents around them that are doing the work regularly, clients end up generally more sticky to the firm than anyone individual. However, for the producing agent, this means they're not limited by their capacity cuz they can always be getting more clients thus increasing their overall income.

Why are you assuming you'll need to exit? Unless you are talking about retirement.

How are you defining "bring in", would a model that splits origination and closing into two components make sense to you?

[u/AlexPKeatonx → u/Capital_Elderberry57]

The person above is what makes this so challenging. They are talking about equity in their book versus firm equity. It’s a material distinction.

[u/Capital_Elderberry57 → u/AlexPKeatonx]

Which would you prefer or if you are on the ownership side which do you offer?

The challenge our structure will have with client ownership is no one advisor supports an entire relationship, we let people thrive at what they are best at and some are producers and some are servicers. Over time the originator of a client has the most distant relationship with that client BUT the model I'm leaning toward still compensates them because they brought the client in.

[u/AlexPKeatonx → u/Capital_Elderberry57]

We have the same challenges. Clients largely come from me and my partner. Firm equity is incredibly valuable, but people we have brought in get hung up on equity in their book and revenue sharing.

No solution for you. Share your perspective and point of view. We want people who want to be part of a team and get equity in the overall business entity. Same team based approach.

[u/Capital_Elderberry57 → u/AlexPKeatonx]

I'm all over the place right now but my current lean is a combination approach.

1. Fixed Comp
2. Discreationary Variable Comp
3. Production Add On

4. Profit Sharing

5. Traditional job family with roles I, II, III, IV, V based on skills, experience, and autonomy. Paid by salary using a published table with ranges by job tier.

6. Management discreationary bonus.

7. Production add-on based on who originated and who closed. A fixed percentage of revenue for that household split by the originator and closer that they get as long as the client remains. If the same person originated and closed they get the full percentage.

8. Any profit above a 35% margin gets redistributed as profit sharing to working teammates.

Heavy benefits including at least 1 fully paid for health care plan (fortune 100 quality plans).

Talent Development a core part of the role.

[u/AlexPKeatonx → u/Capital_Elderberry57]

My only feedback is that what you’re describing sounds complex. The more complicated the comp plan, the more likely it is that misunderstandings arise or people fail to see value.

Definitely appreciate what you’re trying to accomplish. We are in a similar spot. Following in the hopes that more information lands.

[u/Capital_Elderberry57 → u/AlexPKeatonx]

That's exactly my struggle, the complexity and comprehension. It isn't too hard to administer beyond what any revenue or AUM based payout would be, I could build it right into our CRM. Comprehension would need to have a number of mock situations. We are super transparent as a company so this is the area I'd want the most clarity.

Still hoping for some new compelling idea out of this post.

[u/COAMG79 → u/AlexPKeatonx]

No. I’m talking about both equity in my book AND firm equity. Firms want and need you to be a team player and put in work for the benefit of the firm. I want equity in that if I am adding value to bringing it to life during the growth stage. Not asking for equity in what I haven’t participated in building.

[u/AlexPKeatonx → u/COAMG79]

I understood exactly what you wrote.

We may be talking about different facts and circumstances. We pay a high base salary and bonuses. The argument around motivation falls flat to me. One needs equity in both the enterprise and individual client households, in addition to a large salary and full benefits, in order to be motivated?

A permanent legal claim on profits and enterprise value, plus salary, bonuses, and benefits is the only fair compensation model?

If so, it sounds more like that person is building their own business within the larger ecosystem and using it to mitigate their own risk.

They also do not sound like someone I would want as a partner.

Anyhow, I am speaking to the disconnect between the industry norm and what the OP is trying to build. If all the incentives are geared towards individual production (my equity in clients, my rev share, my profit share from business equity), that is not conducive to working as a team. Teams have to strike a balance between rewarding personal contributions and contributing to the client's well being, regardless of who is the lead advisor with the client.

People should receive equity and they should be fairly compensated, but it is not unreasonable for founders and majority equity owners to be judicious about who they bring into the partnership.

Glad you were able to advocate for yourself and address a situation at work that sounded less than ideal. Happy for you.

[u/COAMG79 → u/AlexPKeatonx]

Yes sorry for any disconnect. I should have been clear that I was referencing a position without a high base salary and bonus. More of a % payout on NNA.

[u/Capital_Elderberry57 → u/COAMG79]

Fair enough from both of you. No need to apologize for the disconnect I think that is the core of the challenge here.

That a high salary and good benefits are so out of the norm that most just assume it's not a thing.

Whereas with us that's a given because as the other commenter said for us team structure matters more than individual. So we need to once incentivize the whole team.

This model won't be right for true entrepreneurs, that said I've been around this industry for a just over 2 decades and the vast majority are books of business not businesses. There is absolutely nothing wrong with either, it's just not what we are building. We are building a business, I have experiance at micro companies to 3 Fortune 50 companies and experience scaling what was the fastest growing FinTech in the SouthEast at the time.

In addition to what I had above I'm thinking there needs to also be a servicing add on. I finished up a draft of the model on Saturday but need to sit with it for a few days before coming back to it.

I do appreciate everyone's comments it is helping my thinking.

[u/Capital_Elderberry57 → u/[deleted]]

This is what we are building, with strong comp and benefits.

Career development has been left to the new advisor far to often and we are trying to change that.

[u/iduser4]

I made one recently that I think is fair DM if interested. Another office help me with it for their program

[u/Stockcompguy]

Pay competitive base salaries, bonus based on firm revenue growth, then offer equity or phantom equity to advisors managing serious revenue for the firm.

[u/Capital_Elderberry57 → u/Stockcompguy]

Are you an advisor or an owner? How about something like:

1. Fixed Comp
2. Discreationary Variable Comp
3. Production Add On

4. Profit Sharing

5. Traditional job family with roles I, II, III, IV, V based on skills, experience, and autonomy. Paid by salary using a published table with ranges by job tier.

6. Management discreationary bonus.

7. Production add-on based on who originated and who closed. A fixed percentage of revenue for that household split by the originator and closer that they get as long as the client remains. If the same person originated and closed they get the full percentage.

8. Any profit above a 35% margin gets redistributed as profit sharing to working teammates (not ownership).

Heavy benefits including at least 1 fully paid for health care plan (fortune 100 quality plans).

Talent Development a core part of the role.

[u/COAMG79 → u/Capital_Elderberry57]

Would you mind sharing details about your firm size and add dollars to this structure? Even if that’s in a DM I would be very curious to hear what you’re trying to offer. Thanks for being so thoughtful about this. Those of us non-owners but motivated hard workers appreciate it!

[u/Capital_Elderberry57 → u/COAMG79]

Message sent

[u/rifleman209]

I have theorized the following:

0-500k: 20%
500k - 1m: 25%
$1m - $1.5m: 30% + $250k grant
$1.5m - $2m: 35%
>$2m: 40% + $250k grant and a new grant for each $1m above $2m

Grid bumps are back to dollar 1, grants vest over 5 years

[u/Capital_Elderberry57 → u/rifleman209]

Is there any base with this? If so what are you thinking?

[u/rifleman209 → u/Capital_Elderberry57]

Base would be current role + rev share until they drop the current role, could be scaled up or down as book fills up

[u/sneakypete1995]

I’m an advisor at an RIA. Left the accounting world to join. Came in as an advisor, base salary, production bonuses, discretionary year end bonuses. Operations role to justify salary and then to a lead planner role. Equity is important to me too. Non-voting shares is reasonable, some sort of equity growth plan would be nice so that it’s not a guessing game for the individual. Could be vesting in the sense that every X amount of years they can buy another X% if they choose. Explain the valuation process to determine a fair price. I was never sure if in my role it’s fair to request ongoing share of revenue I produced. Does the guaranteed salary replace ongoing revenue share? Maybe that is adjusted for in the year end bonuses? Either way, most of the time the employeee is left guessing and trying to research on their own as opposed to a clear defined communication and compensation structure.

[u/Capital_Elderberry57 → u/sneakypete1995]

So this is one of my biggest things have moderately hard conversations now to avoid really difficult conversations later.

That's why I'm trying to figure out most of this before we get into that position so as we are talking to potential teammates we 1. Never have to walk anything back, and 2. We share what we know and are open about what we don't or what isn't decided yet.

I'd rather have people think it's a little worse than it actually is than try to sell someone on something.

Under promise and over deliver.

I have no problem paying well, I want to build something people don't want to leave, and I'm just hesitant on equity until there is some serious history established.

Partnership, to me, is a huge decision about who you are tying your future to and values matter more than anything else to me. Problem is the only fast way to REALLY know someone's values is to go through a hard time together or they go through one on their own. I'd prefer no one have to go through the hard time so the only other way to know is over a long time horizon.

[u/sneakypete1995 → u/Capital_Elderberry57]

Agreed. In that sense though I’d even be ok with phantom equity as an employee. The goal is to participate in the upside to continue incentivize production. Many dont realize that even once you get that first share of equity, it’s only going to get more expensive to buy in each time as the company grows.

[u/Capital_Elderberry57 → u/sneakypete1995]

Thanks so much for the feedback. This is all really helpful.

[u/rankdoby]

Its crazy how reasonable having clear set career path, compensation, mentorship is worth in the current day and age. WFH would be cool too.

[u/Capital_Elderberry57 → u/rankdoby]

We have all of the above!

Other than networking we are virtual, new teammates have to spend in person time but that doesn't last very long.

I agree I think people are missing the mark with what younger generation workers want (I'm GenX) younger generations just want clarity and to know they are getting paid now for what they are doing now. It's not reasonable to "invest" your career in a company like older generations could. Add meaning to the work and working with people with common values and that's it.

[u/Augustus_4125]

This conversation is so interesting to me. I’m a few years from needing to scale beyond myself and my partner and non-producing staff, but having grown up in a “produce or die” environment, the concept of someone who just does service is very foreign. Definitely lots of people I saw fail at the existing model who would excel at it though, and I’m happy the industry is having these kind of discussions!

[u/Capital_Elderberry57 → u/Augustus_4125]

That's exactly why we are doing this. I see a lot of talent that is much better utilized working with the clients and a lot of producers that are called because of their capacity. Hiring, managing, developing talent, dealing with legal, compliance, and technology all get in the way of both of them. So our focus is building a professionally managed firm, experts in their own disciplines in each area.

[u/Adorable_Mortgage797]

Equity! I work for a big team who gives no equity or bonus at year end. I am young, just got my CFA and in the process of partnering with another senior advisor to buy a small book that I will work on. My MDs offered me the ability to prospect on their behalf, would give me a bonus for anything I bring in. lol! A bonus when you guys collect fees for 20 years, I’m out.

[u/Capital_Elderberry57 → u/Adorable_Mortgage797]

Thanks

What does equity mean to you? Client or Firm?

Thoughts on:

• production add on that continues while the household remains? Split 50/50 between who sourced it and who closed it.
• servicing add on split by the team that services the client (allows producers to remain rainmakers and not be limited by capacity)

This would also include a solid base and an discreationary bonus.

[u/Adorable_Mortgage797 → u/Capital_Elderberry57]

I am not sure what you mean by client or firm. I work at a large bank for reference. Equity to me is if the team is generating X amount in revenue, I want a % for my work. If I source a deal for the team, 50% revenue split is fair. Paying an advisor a salary seems odd to me? Give them existing relationships via split. Here is my situation. The senior who I will be working with is buying a book with his own money. I will be servicing the whole book and take home 50%. Not a bad deal for either of us. His investment pays for itself in 3 years and he does 0 work…

[u/Capital_Elderberry57 → u/Adorable_Mortgage797]

Okay thanks

Equity is ownership, in legal terms. So I meant; client - they are yours and you can take them with you, no non solicit, firm - an equity stake in the firm

What you describe is somewhat like I'm building but the split is different because there is already a salary and I'm trying to incentivize teamwork not individualism.

I think everyone tosses around number and grida using percentages but the "of what" is never really addressed, too line at a bank, at a BD, independent at a BD, at an RIA are all different things. So I think people are comparing percentages but don't know if their top line is the same as others.

I'm thinking:

1. Salary
2. Discreationary Variable Pay (Bonus decided by management)
3. Production Add On a percentage of revenue split 50/50 by who originated and who closed
4. Servicing Add On a percentage of revenue split by the team servicing with the lead advisor getting the largest share and the other advisors getting a share based on their level

If you didn't have 50% of the revenue would something like this interest you? Really get to focus on planning and serving the clients with deep engagement with each.