This article examines how compensation errors, both overpayments, and underpayments impact your firm’s bottom line. It’s easy to see how overpaying your financial advisors can hurt your bottom line, but making the connection between underpaying your advisors and diminished profits might not be as clear. Let’s take a look at how both are factors and how compensation automation can help boost profits.
Overpayments Impact to Your Bottom Line
Sales compensation costs are the single largest marketing expenditure for U.S. companies, accounting for, on average, 10% of sales revenues. Looking into our industry, advisor compensation amounts to over 40% of revenue, according to research from Kehrer Bielan Research & Consulting. Firms need to offer competitive compensation plans while ensuring that the business isn’t overpaying their advisors. Yet, according to Gartner, 3-5% of all sales compensation expenditures are overpayments.
Most firms use complex formulas to compensate financial advisors, and commissions are commonly shared or split among advisor teams. Using manual processes to calculate and manage elaborate compensation plans opens the door to errors, in particular overpayments – often, they go unnoticed. Even if the advisor were aware, it’s unfortunately not likely that they’d bring this to the attention of management. This compensation payment leakage results in paying more for the transaction, which in turn pushes up the cost of selling, and ultimately takes a chunk out of your firm’s bottom line.
Another Cause of Reduced Profits: Underpaying Advisors
In addition to compensation overpayments contributing to diminished profits, underpayments can also impact your firm’s bottom line. In contrast to overpayments, underpaying advisors rarely go unnoticed. Inaccurate compensation payments will foster an environment of frustration and distrust. And if advisors can’t trust the numbers, your firm faces an increased risk of advisor attrition.
As with any role in any industry, it costs more to replace your employees than to retain them. Expenses include recruiting, onboarding, and training. Even when these milestones have been reached, it still takes time for a financial advisor to ramp up their production and achieve the same level of productivity, especially if they’re replacing a tenured advisor. According to a study from Kehrer Bielan Research & Consulting, losing a tenured advisor typically costs a firm at least $2 million in revenue.
How Compensation Automation Can Help Boost Profits
Inaccurate compensation payments are typically due to manual processes in an incentive compensation program, in particular spreadsheets. According to a joint report published by Robert Half and the Financial Executives Research Foundation, “of the U.S. executives surveyed, only 63% said their companies continue to use Excel as their primary budgeting and planning tool.” Research shows that nearly 88% of spreadsheets contain errors, which certainly illustrates the limitations of using spreadsheets, whether it’s inserting a decimal in the wrong place, an error in a formula, or a simple copy and paste error.
An automated and centralized compensation solution ensures accuracy and facilitates transparency in the payment processes.
- Automating compensation management significantly reduces the potential for human error. Not only will automation help increase payment accuracy, but it allows for the back-office to spot and correct any mistakes that might occur.
- A centralized compensation solution will bring transparency to the compensation process. Your advisors can view their sales production in real-time at any time, allowing advisors to see current sales figures and view pending trades. This visibility eliminates surprises and reduces the number of compensation disputes due to underpayments.
If you want to boost profits, compensation automation is a vital tool that can produce results.
