One of my favorite inside jokes about a firm I used to work for is that they would tell us that "we pay you FIVE ways!" And it was (and I think, still is) true that there were multiple components of the total compensation.
There was the regular payout of around 40%, plus four other various forms of incentive compensation with characteristics. Some short-term, some long-term....some in cash, some in reward trips....some tax-deferred, some paid out now....some based on individual performance, some firm based.
Many or most of that firm's employee advisors seem to be very happy with this "abundance" of ways to get paid---and why not?! If a 40% payout is fair, then the other four ways you get paid MUST be all gravy, right?
Well, sort of. As in trying to find the truth about incentives in most businesses, you can learn a lot by following the money. It is a pretty short path in this case. The only question I need to ask about this "five ways" is: where does the money come from to pay these five ways? The answer: FROM THE REVENUE YOUR BUSINESS GENERATES IN THE FIRST PLACE!
Would you rather get five coins that add up to 50 cents or a one dollar bill? There IS some well-researched psychic benefit about getting several small positive payouts , but the objective answer should be that we would all take the dollar bill.
It appears to me that large firms either implicitly or explicitly use this weakness in human logic to pay us less. In these firms' defense, there are a multitude of examples in other industries that are similarly complex. My contention is that the more moving parts there are in your comp plan, the worse....and the fewer elements, the better.
Consider all the other scenarios in our lives where complexity subtracts value from the world and elegance and simplicity add value.
- The pre iPhone cell phone world. There were tons of models and options out there before Apple simplified things and took a giant market share with the release of the iPhone. Service plans were also simplified. Unlimited talk/text/data plans or basic dollar-per-minute plans now dominate the market.
- The airline industry. Southwest Airlines took the guesswork out of air travel. No bag fees, no seating assignments and cheaper fares have paid off big time over the last 10+ years.
- Cable/Satellite TV. If you only watched one channel, you used to have to pay for all the other channels they offered. Now with services like Netflix, Hulu and Sling you can be more selective. And now you can even watch HBO, one of the early cable channels, through an internet subscription.
- Car sales. Not many people enjoy spending six hours in a car dealership. CarMax simplified car pricing by putting the final price right on the car, and taking the "let me go talk to my manager" song and dance out of the equation.
I'm sure there are plenty of other examples out there, but basically, the companies that are transparent and show the end consumer what they are really paying end up winning. In a lot of cases, it's not necessarily the lowest-cost provider. In a lot of cases consumers might pay more to know what exactly they are paying.
In dealing with clients or in firms dealing with us, if we can be the one that educates and gives transparency, you can build a lot of trust. It's hard to fail if you build that trust.
I know a lot of us independent advisors love our higher payouts. That is a really nice benefit of being independent....but it's very important to note that another benefit is that we are more likely to actually UNDERSTAND how we get paid, and therefore don't have to spend as much time and energy deciphering how our firm is trying to nick our bottom line.
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