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Compensation as a Strategic Management Tool

Used optimally, compensation is a powerful tool for recruiting, motivating and rewarding your sales team. Used poorly, it can discourage employees and frustrate company strategy.

Fortunately for asset managers, the recent economic downturn provided a unique opportunity to moderate wholesalers' expectations and make important changes to compensation plans.

In August, kasina released a new benchmarking study: "Compensation as a Strategic Management Tool: Aligning Sales & National Accounts with Company Objectives" (

kasina surveyed and interviewed senior executives from mutual fund and insurance firms regarding compensation strategies and trends. Firms are increasingly using differentiated basis points to incent wholesalers to sell across multiple product lines and asset classes. More than half now use a bonus to recognize superior performance on a few clearly communicated criteria. And, 22% of firms use earnings caps to manage sales costs, more than double the 2007 figure.

Many asset managers have made changes to the structure and distribution of wholesalers' variable pay-for example, by reworking external wholesalers' compensation to increase bonuses and cut back on largely ineffectual deferred payments. After all, salespeople want to and deserve to be compensated for current productive activities, even if the results of those are apt to appear longer-term for the firm. Using bonuses to reward these productive activities aligns the efforts of the employee with the longer horizon objectives of the firm better than deferred payments do.

Looking at targets for 2010, wholesalers' base compensation is up slightly, while variable compensation has been reduced. Moreover, to recognize their strategic importance, firms have increased pay for Heads of National Accounts, as well as for Internal Wholesaling Managers and National Sales Managers, acknowledging the importance of having a strong internal team and a seasoned National Sales Manager able to recruit and retain talent. Similarly, Hybrid Wholesalers got a bump in recognition of their value as well.

Yet, despite these positive changes, all firms struggle to balance competing objectives. Firms should use sales compensation as a strategic management tool to accomplish four fundamental corporate goals:

* Acquire new long-term customers and assets

* Nurture loyal customers and retain assets

* Manage risk and expenses in all markets

* Recruit and retain talented sales personnel

While a number of asset managers have made potentially productive adjustments to their compensation plans, many compensation systems as a whole fail to align the sales strategy with these company objectives. In an ever more competitive marketplace, firms need to embrace sales compensation as a strategic management tool to attract and retain great sales people and focus on building profitable relationships by selling a full array of products.

The majority of firms today do not yet:

* Keep their best, most experienced performers motivated with appropriate rewards

* Use compensation components to stabilize pay in all markets

* Measure sales data and activity to determine best opportunities for the firm

* Incent focus on productive advisers and profitable products by using basis points that vary by product, segment, or focus firms

* Use proxies for net sales to manage sales costs

Firms must pay top producers competitively, even if it means eliminating some positions or expanding the responsibilities of others. Otherwise, star salespeople will leave for firms that acknowledge their experience and pay commensurately. Keeping the best people satisfied will ultimately help a firm remain competitive and adaptable to uncertain conditions in the future. To reward intelligently, firms should differentiate pay and bonuses for top performers, ensure adequate compensation in uncertain markets, and aggressively manage low performers out of the organization or into other roles.

Asset management firms often reward sales team members for bottom line gross sales. But, a number of wholesalers and wholesaling managers who maintain a solid approach and work ethic do not achieve sales success over short periods of time because of factors outside their control, such as market forces and product performance. So tying variable compensation exclusively to sales targets with basis point payments can be disheartening.

Instead, effective variable compensation rewards activities that are both important and largely controllable. To that end, firms should tie substantial portions of compensation to bonus pools based on role-specific factors and activities that will be beneficial in the future. For example, external wholesalers should be rewarded for cross-selling activities, client meetings, redemptions or net sales percentage, while rewarding internal wholesalers for phone calls, teamwork, and research and support provided to clients.

Firms that use net sales or a proxy as a factor to calculate a component of variable pay understand that saving a dollar of redemptions is cheaper, easier, and breeds more client loyalty than trying to replace dollars that walk out the door.

While paying on net sales is a clear way to align firm objectives with those of its sales team, many firms are not able to implement this. But firms have other ways to incent the behaviors that retain assets and nurture client loyalty.

Managers can tweak incentives so that wholesalers sell across the product line or focus on those products that are more profitable for the firm. And firms can focus wholesalers on key advisers who exhibit characteristics that will make them more profitable long-term clients of the firm.