Follow the Money (Part 5)

What’s the balance?

Source: Gratisography

How do you balance employee interests and owner interests? Customer concerns and management issues? The goals of all stakeholders—owners, employees, clients, and communities—should be considered.

They key word for all these parties is equity. Equity as in people inside and outside the firm feel they are being treated fairly. And equity in the sense that employees have a proprietary feeling about the business—a sense of ownership, that what they do and how they do it makes a difference to everyone’s bottom line.

The ideal compensation plan is contextual: it’s tailored to the type of business and the stage of growth that the company is in. And it’s meaningful—the incentives are large enough to have a material impact on someone’s behavior. Goals have to be specific, achievable, and tied to the firm’s performance. And some of the incentives should be deferred. If employees leave, they should have a real sense that they are leaving something behind.

One of the unseemlier sights in the financial industry is the annual “bonus shuffle” that happens every spring. After annual bonus checks are cut—usually sometime around March—many top performers go job-hunting, searching for another big score. Because too much of their pay is tied to short-term performance, they don’t have much reason to stick around. And the nature of accounting is that while the financial payoffs can be seen up-front, many of the underlying risks aren’t visible for years. Employees should feel the same concerns as owners—concern for the bottom line, concern for the business’s long-term viability, and concern for other team members.

Photo: Dave Meier. Source: Picography

Finally, a good plan needs to be simple. People shouldn’t need a spreadsheet to figure out what they’re being paid. If a plan is too complex, workers just forget about it and fall back on what they know—and managers lose the ability to structure the business and change the culture.

A good incentive system is like a good relationship: it has short-term, medium-term, and long-term objectives. Each of these contributes to a firm’s success—something everyone wants. But if folks fail to plan effectively—balancing all these objectives—they’re effectively planning to fail.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:21:54+00:00 July 11th, 2016|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

Leave A Comment