I am the head of sales for a fairly large investment management firm and have been asked to suggest a new compensation program for my team, including myself. I know there are different structures out there and want ours to be competitive so that I can attract and retain good salespeople. Do you have some suggestions on this issue?
What's the best way to compensate sales staff?
Actually, I have many, but given space limitations I will suggest only one.
I think you should offer a competitive base salary established from industry standards that would take into account the person's experience in sales, in the industry in general and in investment management products in particular.
Obviously, if your firm is selling into the institutional marketplace, relevant experience in this channel is a huge plus and should be reflected in the base. The same principle would hold if your salespeople were selling into the retail or high-net-worth market and their specific experience was in that channel.
The second component should be an incentive compensation program based on the “success” of the salesperson in bringing in new business.
It “used to be” that salespeople received a percentage of the fee paid by the client for a finite, but relatively long, period of time. My experience was that salespeople would get 20% of the total fee revenue from a client that they were credited with bringing in for, say, three years, then 10% for the next three years and 5% for the next four years, and then it would end. I had a friend who received 20% of the fee revenue for as long as the asset owner was a client of the firm. He did very well in the '80s when his firm's style was in favor and the proverbial cover was being knocked off the ball. The point is that salespeople really want to “eat what they kill.” They want to know that there is a direct and commensurate link between their effort in bringing in new business and the rewards they can expect from their success.
I think the third component should be a discretionary amount that you, as head of sales, can bestow on members of your team for some of the more qualitative aspects of sales, e.g. teamwork, hard work and performing tasks that are important but might not be in the normal job description.
The formulaic incentive compensation structure actually went away for a period at some firms and was done away with completely at others, and a subjective compensation structure was put in its place. The thought being, I assume, that the head of sales — or that person's boss — should determine somewhat arbitrarily what the total compensation for salespeople should be. I think this is a big mistake and doesn't really represent an alignment of interests between the sales staff and one of senior management's goals — that is, increasing assets under management.
One key concern is how you structure your sales team. Are they divided by geography (which, by the way, I think makes no sense at all)? Are they divided by channel (which, I think, makes all the sense in the world)? For instance, I would have a public fund team; a corporate pension fund team; an endowment, foundation and family office team; and a dedicated consultant relations team. Each channel has its own idiosyncrasies, and in-depth knowledge of what those in the channel need and want is critical. For example, as there are consultants involved in most searches, you need to set up a structure that “rewards” the consultant relations team and, say, the public fund team in such a way that they want to work together and don't view collaborating as a dilution of their earning power.
Now with regard to your compensation, I would have a base pay that reflected your experience, then I would have an override — i.e. a percentage of all fee revenue associated with business brought in by your various teams. I would also want to have a discretionary piece determined by your boss that reflects all the work with other groups within your firm; portfolio management, operations, trading, legal, compliance, and the list goes on.