So yesterday I gave a brief description of the “Compensation Grid”. Today, I’m going to give an example of what a real grid might look like. Across the top, we have the gross commission generated by an individual transaction. Down the left hand side, we have the gross annual commissions generated by the broker.
For the broker who is generating about $350,000 in gross commissions, if he/she sold $5,000 worth of a DSC mutual fund which generates a gross commission of $250 for that transaction then that $250 would hit the grid in the 43% payout level. Therefore, the broker would get a net commission of $107.50 (43%) and the firm would keep $142.50.
|$0 – $100||$100 – $200||$200 – $300||$400 – $500||$500+|
|$0 – $100K/year||10%||20%||20%||20%||20%|
|$100K – $200k/year||25%||25%||25%||25%||47%|
|$300k – $400k/year||35%||39%||43%||44%||49%|
|$500k – $1M/year||42%||44%||46%||48%||53%|
|$1M – $2M/year||44%||46%||48%||50%||55%|
You can see how “behaviour” can be modified based on how the grid is structured. In this particular case, high producers are rewarded (advisor retention) and low producers are given little incentive to remain where they are (that could mean motivation to sell more, or they quit due to lack of income). Further, incentive is given to placing trades that generate higher commissions as well (either by looking for more money to get the client to invest, putting them into a higher allocation to equities which generally generate higher commissions than fixed income products, or charging higher commissions on stock trades).
Another by-product of some grids is that by the end of the year, if you are near the next production level (i.e. you have generated annual gross commissions of $375,000 for the year), then by finding a way to generate another $25,000 in commissions in the final month moves you up a grid level. The new payout may apply retroactively to all your commissions for the year. For example, let’s assume that our broker has $399,999 in gross commissions for the year. If they ended the year at that level (and assuming all tickets were at the $500+ level) then they would have earned $195,999.51 in net commissions. If they made only one more dollar of commissions (gross) then they jump up a grid level and their net commission jumps to $204,000. So that $1 dollar in extra gross commissions was worth about $8,000 (net) to the advisor.