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Hosted by Financial Advisor Coach, Ray Sclafani, "Building The Billion Dollar Business" is the ultimate podcast for financial advisors seeking to elevate their practice. Each episode features deep dives into actionable advice and exclusive interviews with top professionals in the financial services industry. Tune in to unlock your potential and build a successful, enduring financial advisory practice.
Ray Sclafani (00:00.142)
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Welcome to building the billion dollar business, the podcast where we dive deep into the strategies, insights and stories behind the world's most successful financial advisors and introduce content and actionable ideas to fuel your growth. Together, we'll unlock the methods, tactics and mindset shifts that set the top 1 % apart from the rest. I'm Ray Sclafani, and I'll be your host. Right now, across the wealth management industry, firms are
deep in compensation planning mode. According to a recent corn fairy survey, nearly 70 % of firms begin reviewing or adjusting compensation in the last quarter of the year. And yet less than half have a documented compensation philosophy guiding those decisions. Think about that. More than half the industry is creating pay plans without a clear strategy. And when that happens, you get what you'd expect. Confusion.
inconsistency, and even a loss of trust. Harvard Business Review calls this the fairness gap, the growing divide between how leaders perceive compensation and how employees actually experience it. Their research shows that teams with clear pay philosophies report 22 % higher engagement and 27 % higher trust in leadership. So before you dive into your spreadsheets, before you finalize bonuses, salary increases, or even next year's budget,
Stop. You need a compensation philosophy. That's a clear written explanation of how your firm rewards performance, how it shares success and aligns pay with purpose. Because without a compensation philosophy, you're not running a process, you're managing reactions. Today, I want to walk you through why a compensation philosophy is essential to every advisory team. But more importantly, what goes into building one
Ray Sclafani (02:01.452)
and how to make it a living framework that strengthens your culture, your profitability, and ultimately your leadership credibility. Okay, so let's start with why it matters. I'll be brief in this segment because I want to get into the how and then making it come alive piece. I think those last two parts will be really effective. So let's start with why this is more than just an HR exercise. You see, a compensation philosophy is really the foundation of how your business connects performance, culture, and profitability.
It answers a few big questions every team quietly asks like how are pay decisions made around here? What behaviors are rewarded? And can I trust that this is a fair process? When you don't answer those questions with intention, it's easy for people to fill in the blanks emotionally. Again, research from Korn Ferry found that organizations lacking a clear compensation strategy experience a 35 % higher turnover rate.
and significantly lower employee engagement. Meanwhile, a Harvard study on pay transparency found that when employees understood why compensation decisions were made, check this out, even if they disagreed with the outcome, they trust in leadership that rose dramatically. So this isn't about the numbers, it's about credibility. Your compensation philosophy signals what your firm truly values. It's your operating system for recognition, reward,
and growth. Without it, year-end planning becomes a reactive process. With it, you create a framework for consistency, communication, and confidence. Okay, let's dig into sort of how you, how do you go about building one of these compensation philosophies? And if you've already built one, how do you sort of assess where you can make improvements in the one you've got? So there are core building blocks of a strong compensation philosophy. We've identified there are
eight building blocks that every financial advisory firm should define and document. Okay. Number one, pay positioning. Where do you want to sit relative to the market? At the market, above the market, or slightly below the market. Most advisory firms target in the 50th or 60th percentile of market compensation. But with this battle for talent, we're noticing that many firms are even taken up into the top quartile or the top decile. The key isn't the number.
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It's your intent to find the type of talent you're trying to attract and determine the competitive positioning that aligns with your brand and budget. Look at your existing employees. Are you at market or above market? And what is your retention strategy? You're going to find that if you're not being competitive in the marketplace today, your talent is at risk. Number two, pay mix. This is where you've got to decide
the balance between fixed versus variable. Now, this balance is between stability and stretch. It's what drives both retention and performance. For some, too much fixed pay creates complacency. For others, too much fixed pay isn't as motivating. On the variable side, for some, high variable comp can be anxious, create this instability. And for others, it's really motivating and rewarding when there's
you know, no upside and big variable. So you've got to find by role and by person, mix that together and determine what the right balance ought to be for your firm, for the roles and for the people. Number three, performance linkage. This is where most firms really fall short. You need clear, measurable links between performance and pay. What are the key results that you can measure in each role assigned?
Ask yourself, what are those metrics that will drive incentive or bonus pay? Will it be assets under management, net new assets under management, client retention scores, client satisfaction scores, team collaboration, culture? Well, define those metrics, measure them, communicate them before the beginning of the year. That's what makes bonus season predictable and credible. Number four.
differentiation and fairness. Now, not all roles or contributions are equal and that's okay. A good compensation philosophy explains how differentiation occurs. People don't expect everyone to earn the same, but they do expect fairness, logic, and consistency. Number five, profit sharing, equity participation, even long-term incentives. Decide whether you're going to share profits, ownership, or both. If so,
Ray Sclafani (06:48.558)
How does profit sharing tie team success directly to firm success? It can also help bridge generational transitions and foster an ownership mindset in the next generation of leaders when executed flawlessly. Number six, budget discipline. Establish a total compensation target as a percentage of firm revenue. Across top performing advisory firms, we're seeing benchmark data range somewhere between 55 and even 60%.
That's your guardrail. Define your own guardrail. It keeps you profitable while still rewarding growth. You want to stress test that profitability in down cycles. You want to look at what happens in that up cycle. You want to look at steady state and benchmark through budget discipline, what your budget, your compensation target is as a percentage of revenue. Number seven, transparency and communication. Cornferry refers to this as structured
transparency. What it means is that everyone doesn't have to see everyone else's pay. It means that your process is transparent and straightforward. People know the rules of the game, even if they don't know each player's scorecard. And number eight, review and adaptability. Your business is going to change. That's one thing we know about financial services. There's constant change in the industry. So what I love about financial advisors and the entrepreneurship that's vibrant in our industry,
is you're really good at anticipating change. You're looking ahead around the bend. You're knowing what potholes to avoid. Well, as you're thinking about adaptability, we've got a lot of things happening in the marketplace. We're talking a lot about AI these days. We're talking about how the operational efficiency is going to improve in some way, or form. We're starting the stress test that operating expenses, there's a little bit of margin compression for some, for some there's fee expansion. So
As you think about the business and you think about all of what I've shared so far, you've got to think about how your philosophy is going to evolve and adapt, especially in the war for talent. Revisit your compensation philosophy on an annual basis and ask whether it's still aligned with your strategy, the culture that you want to build and the economic realities of running the business today. You see, when you treat your compensation philosophy as a living document, it grows with your firm. Okay.
Ray Sclafani (09:13.792)
Let's get into this last segment of our episode today, which is how to make it come alive inside your firm. If you're realizing that maybe you don't have a strong compensation philosophy when you've learned something here today, that's awesome. This is a good time to do some editing and updating. If you want to start from scratch, we've given you a good roadmap. If you want to take what you have and evolve it and improve it in some way, I want to provide in all those instances, a practical roadmap to get going even more quickly.
time is running short. let's get to it. Step one, audit your current structure. know audit is not a great word for our industry. People freak out when they hear the word audit, but I want you to list every role, the base salary, the bonus formula and ask yourself, do these reflect our values and our goals or are they remnants of old habits? Number two, define your guiding principles. Every firm's values should drive its compensation philosophy. For example, it could be a few things here.
Do you value growth and business development? Do you emphasize client retention, client satisfaction and experience? Do you reward for leadership, for innovation, for team development? Are you specifically rewarding for profitability? Write those principles first and use them as your compass. Number three, draft your philosophy statement. Keep it simple, two or three sentences. Let me give you an example of one that I've seen recently from a high performing firm.
Our firm rewards performance, collaboration and growth in ways that align with profitability and our long-term vision of client satisfaction and growth. aim for fairness, transparency and sustainability in all compensation decisions. We always put clients first every step of the way. You see that's clear, balanced and actionable. Number four, you want to model your scenarios. Run the math. What happens if the firm grows 20 % next year?
What if it contracts 10 %? Make sure your compensation pool scales sustainably in both directions. Number five, begin to communicate the philosophy before you communicate the numbers. This part's really critical. You want to roll out your philosophy first so your team understands the context behind pay decisions, then share the numbers. One of the things I've recommended strongly over the years
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is you want to co-create some of those measurements in partnership with the team members. They know their role assigned perhaps better than you do as a leader. Start defining some key results in partnership with those team members and tie those key results relative to the role and the responsibilities directly to the profitability and growth of the firm. Number six, train your leaders. Most pay conversations often end up fairly emotional. So equip your leaders with the right language. It's not
Hey, that's just what the budget is. But more importantly, something like this is how our philosophy has guided our decision to structure the compensation. Number seven, again, review it annually each year, especially this time of year, evaluate how your philosophy held up. Did it drive performance? Did it support retention? Did it align with profitability? Now adjust as needed and keep it relevant. Here's the truth. Compensation can often be emotional.
It's tied to recognition, security, and a sense of belonging. And so when your team members don't understand your compensation philosophy, well, they'll write their own version. And that version always, almost always erodes trust. But when you take the time to build and share your philosophy, something shifts. You turn compensation from a transaction into more of a relationship building exercise, from a quarterly or annual stress point into an ongoing system of clarity.
from reaction to leadership. Harvard's data proved this out. know, organizations, they say, with defined compensation philosophies outperform peers in engagement, retention, and productivity. I've seen firsthand how that's true in our industry, that clarity drives trust and trust drives performance. Your philosophy isn't just about pay. It's about who you are as a firm. What do you value and how do you lead? So here's my challenge.
Before you finalize bonuses, raises, or even next year's budget, take a pause, take one page out, document your compensation philosophy, do the work. If you're unable to articulate it clearly, well, that's where you begin. Because without a philosophy, compensation is just math. But when you have a documented compensation philosophy, it's about culture and its leadership in action. Start small, write it out, share it, and live it.
Ray Sclafani (14:05.73)
Compensation without philosophy breeds confusion, but compensation with purpose drives performance. If there's one thing I've learned about compensation strategy after coaching hundreds of advisory firms, it's compensation clarity isn't about what people earn. It's about what they learn in the process. When you articulate a clear philosophy, you're teaching your team how the business works, how value is created, how success is shared and
how sustainability is protected. That's what builds a real partnership with team members. And as you close out the year and begin planning for the next, remember the best leaders, they don't just set compensation, they shape understanding. If today's conversation challenged you to rethink about how you approach compensation, bring it up with your team. Use it as a spark to encourage better dialogue and more transparency and stronger leadership.
With each episode, there are a few coaching questions to share with your team to reflect on internally. So today I'm just going to share three quick questions. First, looking ahead over the next 12 to 18 months, how do you want your compensation philosophy to reinforce the culture, the behaviors, the performance you most want to scale? Number two, how might your compensation structure evolve as you grow? What principles should stay constant and what should remain flexible?
And lastly, as leaders, how can you utilize your compensation philosophy to instill financial literacy and ownership mindset and long-term alignment throughout the entire team? Hey, so thanks for joining me today on building the billion dollar business. If you found this valuable, this episode was helpful, share it with your partners, your next generation leaders. And if you haven't yet subscribed, do that now. And we welcome your five-star review.
Feel free to reach out to the ClientWise team to learn more about how we can help you with your business planning. Well, thanks for tuning in and that's a wrap. Until next time, this is Ray Sclafani. Keep building, growing and striving for greatness. Together, we'll redefine what's possible in the world of wealth management. Be sure to check back for our latest episode and article.