Last week, you responded to a question from the head of sales of an investment firm asking your opinion about the best way to design a compensation structure or program for the various sales teams that this person was responsible for. I run a client service team and it is really difficult to attract and retain good client service people because I can't compensate my team in the same way as you suggested for salespeople. Have any thoughts?
What's the best way to compensate a client services team?
While I addressed some of these issues in an earlier column in June, I really didn't have the opportunity to address all the key points inherent in your question. The simple answer to your question is: Yes, you can set up a compensation structure for your client service team that has many of the same key attributes as the one I suggested in last week's column to the head of sales.
A dedicated, experienced and responsive client service professional is a highly valued and integral member of a successful investment management firm. Once an asset owner becomes a client, the relationship between the asset owner and the investment firm takes on a new meaning, a new dimension and certainly a changed dynamic. Having dedicated resources to retain clients, enhance the relationship and help grow the account through additional allocations over time is critically important to the profitability and long-term viability of any investment firm. The process of acquiring a new client can be costly in terms of hard dollars expended, time required and through the use of many of the firm's various teams i.e. sales, portfolio management, research and senior management. Investment performance in and of itself is important to a client but clearly not an end unto itself. There have been many examples over time where effective client service was responsible for client retention when the investment manager resided in the fourth quartile of many universe comparison services.
I would structure the compensation program for client service with four discrete components.
• First, the base compensation — as with the sales team — should be reflective of the individual's experience in the space. Depending on the size of the firm, and the number and types of clients (here I am assuming an institutional investor focus), I would segment the teams into specific channels of asset owners, such as public pension funds, corporate pension funds, endowments, foundations and family offices. One could clearly combine endowments and foundations, but the other asset owners are very specialized.
• The second component would be a perpetual trailer or a trailer for as long as the asset owner remains a client of 1% of the total fee on the account. This incentive, while not material, will impact behavior which is what compensation is all about.
• Third, I would establish an incentive of 5% of the total fee for the first three years, 3% for the next two years and then back to the 1% for as long as the asset owner stays a client for all “new business” that comes in from an existing client.
• The fourth component would be a discretionary piece that you can allocate on a very specific basis for “exceptional performance” by the client servicer. While subjective and very qualitative, you as the head want to have that flexibility and ability to reward outstanding performers.
While there are no guarantees in life, I am confident that you would be able to attract and retain an exceptional client service team with this approach.