It is one of the oldest stories. A star performer feels unrecognized and underappreciated and withdraws his efforts and participation. His organization struggles and loses again and again to the star performers of rivals. Finally, our star returns to business and crushes the competition, fulfilling the organizational vision. It is the story as old as Homer’s story of Achilles: Organizational performance has had a lot to do with the performance of the stars.
In fact, in my experience, the top 20% of professionals in any firm are likely responsible for 80% of the growth opportunities, 90% of the implemented ideas and positive changes and 100% of the culture of excellence. The top team members may come from the advisory department, the operations department, executive management or investments, but they are invariably good at every aspect of their job, and they become the catalyst for getting others to perform better.
If you want your firm to be great, the key to excellence is to channel the energy of your top players, create a culture that mirrors their behavior and find a way to recruit and develop more exceptional team members. On the other hand, if you want to create stagnation, you can alternatively manage with the median performer in mind and let the average (often mediocre) performance become the cultural norm and expectation.
The pursuit of “average” performers and performance, however, still works for some firms, ironically because the firm’s founders themselves are usually stars. This strategy provides founders with control, prestige and command over compensation, which lets them foster peaceful cultures. It is easier for them to try to make everyone comfortable than to face the aggravation that often comes with the ambition of future stars. However, such firms will eventually have to turn power over to the next generation, and such “recreational teams” are not built to grow the new generation of star players. Those stars who do emerge won’t want to stay when more competitive organizations are calling out to them.
Many firms seek to appease everybody and pursue misguided initiatives.
For instance, they might be afraid to track people’s individual results, thinking it will damage teamwork. This is very naïve. I coached my daughter in soccer when she was 6. The league wanted to encourage camaraderie, so it didn’t track scores. Guess who did. The 6-year-old girls.
The firms shooting for average are also afraid to set goals for employees: They think that setting easily reachable targets for staff won’t have much business impact and that setting more ambitious goals will likely end in failure. So the firms do neither.
The thing is, top players still want to win, even if they aren’t compensated or encouraged. It certainly helps to offer them ownership. But here, too, firms make misguided decisions—by also offering ownership to those with longer tenure, even if they are otherwise falling short.
Finally, firms often delay promotions or leadership training for their best people. They worry that promoting Elizabeth, a top performer, would upset James, who was hired before her. They worry that sending Emily to leadership training would make Steve feel bad because he hasn’t passed his CFP exam yet.
Karl Marx famously wrote: “To each according to their needs, from each according to their abilities.” It sounds like many advisory firms are consciously or not following a similar philosophy. What Marx didn’t account for was that those with significant “abilities” often just go to another team. The firms they leave behind are stuck with those who have fewer abilities but more needs (that are now harder to meet). That’s why back in the communist days we were not allowed to travel to the West—no one came back. Even Lenin openly acknowledged that communism would only work if it were global so that no other teams could compete (which is also why I prefer shadow boxing).
The Top Players Generate Most of the Results
Before LeBron James joined the Miami Heat, the team was fifth in the Eastern Conference and lost in the first round of the playoffs in 2009. After he joined in 2010, the Heat went to the finals every year for the next four and won the title twice. The year after he left, they didn’t even qualify for the playoffs. Not until they recruited another star, Jimmy Butler, who took them back to the finals (where they happened to face LeBron James).
Business dynamics lend themselves to sports analogies because both endeavors are so results oriented and data hungry. In fact, the NBA has become a real data-driven enterprise, voraciously collecting performance statistics. In the last season, players like Steph Curry, Giannis Antetokounmpo and James are estimated to have contributed between 15 and 20 wins more in an 82-game season than what their teams would have otherwise done without them. In other words, they make the difference between getting into the top seed and missing the playoffs.
While I don’t have the amount of data the NBA might have for the advisory industry, I do have numbers for the firms I work with.
Take one of them (a well-known name I’ll call “Firm A.”) It has a billion in assets under management and 13 advisors. The top three of those advisors are responsible for 67% of the firm’s new business development and 56% of its revenue. Now take Firm B, another well-known, very large firm with multiple billions in overseen assets and 18 advisors. The top three of them generate 67% of the revenue and 57% of the new assets. Here is the key—the top three advisors in Firm A are founders and it’s still a peaceful place. The top three in Firm B are not founders, and they are increasingly restless about their compensation, recognition and role.
The only reason the statistics are not more dramatic is that both these businesses receive a significant number of referrals from a custodian channel and steer those to the advisors having more trouble growing.
The Top Players Are Good at Everything
Not only are the top performers great at their own jobs, but they also tend to be the best at a bunch of others. It’s a myth that some people are good at relationships and others at sales. In professional services, your best business developers tend to also be the best relationship managers and experts.
Why? For one thing, ambitious people expect more of themselves and strive to be very good at everything—in fact, they tend to be very uncomfortable when they are not good at something. They also tend to be highly conscientious, which keeps them focused and disciplined. They understand how to learn and what it takes to learn. (Consider that those who have learned one language tend to more easily learn a second, and a good musician will have less trouble switching instruments.)
Think again about LeBron James. He’s the top three for points, rebounds, steals, assists and blocks. The same is true for his co-star, Anthony Davis. Star players do everything well.
My controversial assertion is that the best advisors also make great managers and leaders. And the best professional managers would likely make great advisors if they were to go for it.
Balancing Stars and Culture
If you want your firm to be good, you need to steer your culture to the same level of ambition, drive and energy that your top players have. And that means recognizing your top performers and letting them lead the way.
By “star,” I don’t mean prima donna, and I don’t mean sacrificing team values. Quite the contrary, the top performers should be held to the same standards of teamwork and cohesion. They should be trained to surround themselves with good teammates whom they make better. Look around the NBA again—stars like Steph Curry and Giannis Antetokounmpo are among the best leaders and the kind of teammates everyone wants to have.
What needs to be sacrificed is not teamwork but mediocrity and the tolerance for it. Trying really hard is not enough—just ask the Trojans again. (Or Blockbuster Video.)
The Future Stars Deserve the Most Attention and Opportunity
You must reward your stars not just with money but with opportunity. To lead. To learn. To earn prestige.
These opportunities should not be distributed equally. That might be desirable in society but not in a business. A coach would never say: “It’s the last shot of the game so let’s give it to Timmy since he hasn’t played all game.” A good firm creates opportunity and puts it in the hands of its best players so that they can create even more opportunity. Eventually, that’s good for Timmy too.
Balancing Stars and Compensation
Paying the star is costly and difficult, but it is also necessary for organizational success. LeBron James earns close to $42 million a year in salary, about five times more than the average NBA player, who earns $8.2 million. Chris Hemsworth (Thor of The Avengers) makes about $76 million a year—about 1,461 times more than what the average Hollywood actor grosses (about $52,000). The pay disparities are staggering, but so are the results.
The key to compensating stars is to first abandon the notion that equality or near equality is desirable or fair. If Brandon has three times more positive economic effect on our firm than Philip has, it is neither fair nor productive to ask Brandon to accept the same compensation.
Firms paying salaries alone, however, often struggle to properly compensate their stars. Salaries are instinctively set in a narrower range that doesn’t differentiate nearly enough between the stars and those in the bottom of the distribution. For example, partner-level lead advisor salaries in the bottom 25% are $150,000, the median salary is $200,000 (33% higher) and salaries in the top 25% are $300,000 (twice as much as those in the bottom). On the other hand, those in the bottom quartile account for $650,000 in revenue, while those in the median tier account for $1.2 million (which is 95% higher) and those in the top quartile account for $1.8 million—nearly three times as much as those in the bottom, even though they are paid only twice as much. I would argue that those in the median and top quartiles should be paid much more.
Bonuses don’t help here as much as you would think. When they’re added in, those in the bottom 25% receive $176,000 in total compensation (salary plus bonus), while those in the median receive $250,000 in total (roughly 42% higher), and those in the top quartile receive $334,000—about 90% more. The bonuses merely help us revert to the mean rather than widen the distribution. This scheme is designed less to reward stars than to avoid upsetting people.
Then there’s variable compensation (when advisors are paid a percentage of revenue, such as 30%). Unfortunately, that approach ends up creating silos within a firm and that’s when you start hearing words like “my client” and “my revenue.” What’s more, the percentages turn into a recruiting race—if one firm pays 30%, the next pays 35% and then someone always offers 95% or 100%. Economists call this “the winner’s curse”—when competitive bidding leads to overpayment.
So the only solution seems to be equity, and it is certainly a very good one. Those employees who create the most value should benefit the most from what they have created. That was the original power of the independence movement. That’s how the original stars (the founders) earned their reward.
Unfortunately, equity has become very expensive, and much of it is in the hands of institutional investors, who have yet to come up with compensation plans that have scope and impact. Most firms otherwise have no good mechanisms for transferring ownership. The future stars get to purchase 2% to 3% of a firm, but the process stops there, and there is often no secondary market for those who want to buy more shares.
Balancing Stars and Management
Stars, we should point out, are not easy to manage. That’s been true since the days of Achilles. (He was a prima donna. So is Kevin Durant.) LeBron James seems to handpick his coaches. Quite a few players have been caught screaming at theirs. Still, without the stars, even legendary San Antonio Spurs coach Gregg Popovich can’t win many games.
That’s led to the league recruiting coaches who can better work with stars, and the same thing is likely going to happen to executive management in our industry. Some of the best executives I have worked with or observed—people like Stuart Silverman, Michael Nathanson, Dale Yahnke, James Poer, Bob Oros, Fielding Miller, Eric Kittner, George Stapleton and many others—know how to recruit, identify, collaborate and inspire their stars rather than control them, diminish them or appease them.
The former CEO of Moss Adams, Bob Bunting, told me that in the last year of his tenure he asked his 250 partners to give him the names of professionals from other firms who they wished were on “our team.” Then he made 100 phone calls to those star players asking them to join his firm. That’s the approach I believe wealth management firms should take.
Stars have a huge impact on the outcome. They don’t need to destroy the team. Quite the contrary. They will make the team better. You could say that being the CEO of a wealth management firm means identifying and developing your future stars. If you don’t have enough—go recruit them!