The Pitfalls of Profit Share

This is part 3 of my Remuneration series. Parts 1 and 2 can be found here and here.

In last week’s blog, I warned against the unintended consequences of the variable remuneration incentive schemes I see designed by well-meaning business owners.

This week I’m taking a closer look at another variation used by incentive-minded owners.

💰What about profit share?

If individual variable remuneration incentives are not so great in a financial planning firm, the owners thinking often moves on to sharing the genuine profits of the firm with the whole team.

It sounds like a great idea and a no-brainer, but I don’t think it is.

Firstly, ask yourself the following question: Will your team be more motivated by a share of the profits?

Owners and salespeople assure me they will. I beg to differ.

Most people just want to come in and do a good job and be recognised and fairly remunerated for that. Pay people what they’re worth. Job done.

If you have a good year maybe you offer some ad hoc discretionary bonuses at Christmas time (who can’t use a little extra cash at Christmas?). However, recognise that if you do it two years in a row it might become expected, so you need to communicate when and why you do it (or not) each year.

Secondly, an unintended consequence I’ve seen from profit share schemes is that owners can get pushback from the team when they want to hire more staff.

In the minds of the team, more staff means more costs, which means less profit to be shared now amongst more people.

This is particularly true when you don’t give the team access to the same information that you have (think full financial performance). Most owners don’t give the team access to all of that information and so there’s a design flaw in the scheme from the start.

You complain that your team are all short-sighted when in reality, you designed a scheme they can’t ever fully understand.

And finally, sometimes the business doesn’t make great profits for a few years on the trot (as it invests in growth) and so the staff see the profit share plan as a waste of time at best or a scam to diddle them out of more pay now at worst. Now your incentive scheme has created negative outcomes even though you did it with the best of intentions.

My advice?

Just stay away from incentives unless you can find a clear-cut case for it to align with culture, values and desired behaviours.

In a Financial Planning firm, the desired behaviours are:

• Do the best thing for every client
• Learn and grow as a person (skills, knowledge)
• Make a positive contribution to the team and the business

You hire people who possess those traits. You don’t incentivise people to behave like that. It doesn’t work.

As you can see, even adviser roles in Financial Planning firms don’t meet all of those criteria.

📋Implementation

If you look back at my last few blogs on remuneration, there’s a lot to consider. And rightly so, it’s one of the most important decisions to get right in a growing business.

Having (hopefully) designed a remuneration strategy that’s right for your business, the next big question is, how do you go about implementing a new approach to remuneration? Particularly one that better aligns with your culture and values?

Clear communication

Transparency in how compensation is determined and communicated is essential. Make sure that everyone on the team understands how their performance and contribution to the business affects their pay.

Regular reviews

Your remuneration strategy should be regularly reviewed and adjusted to remain competitive and aligned with the company’s evolving goals and market conditions​. That might mean regular adjustments or tweaks.

A significant portion of employees often feel they are paid unfairly, which can be mitigated through these strategic approaches to your remuneration strategy that I’ve outlined this month in my blogs and also with clear communication.

Younger up-and-coming advisers/staff are often hungry for more money – but that doesn’t always mean you should give it to them. Opportunities for growth and career progression are also important in my opinion. These are the best way for an up-and-comer to keep earning more over a long and fulfilling career.

💭What do I believe on this issue?

Here are a few final thoughts on remuneration just so you know where I stand:

1. Self-employed advisers are, as the name implies, focused on themselves. That doesn’t make them bad people. If you hired them on that basis they are simply acting in line with the incentives you offered. If that doesn’t work for you then change the incentives (or remove them entirely).
2. If you have a team of self-employed advisers, what are you building and what will you have to sell in the future? It just doesn’t work in my opinion.
3. Hire the best people you can find, pay them well and treat them like adults. If you give everyone the brief, “do your absolute best for the client every time” you empower people to think and act in accordance with the values they probably hold (if they work in your firm) and you certainly hold. It’s really simple.
4. If issues of un-commerciality arise you can address them, not by asking people to shortchange the customer, but by getting your pricing right, or bringing in technology, or skills training to lower your cost of delivery. They are the decisions you own as the leader of the business.
5. Be clear and transparent in your communication about everything, including remuneration. Share all of the business’s financials and as much information as you can, and ask yourself, why can’t I just share everything? Your team can only come to the same conclusions as you if they have access to the same information as you.
6. The way businesses are run and structured is changing. With the speed of change due to Artificial Intelligence (AI), old-school business structures won’t be as effective at keeping up. You need your whole team engaged and contributing. Getting your remuneration strategy right is one important piece of that puzzle.

If you build a business that people aspire to work for because of its culture of fairness and transparency, you’ll be building a successful business with longevity.

Again, I’ll leave the last word to Verne Harnish.

“When it comes to remuneration, get it right and out of sight.”

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