The Road to Happiness

What’s more, you’ve also sent the message that employees’ jobs are fixed, finite tasks, strictly limited to their exact descriptions, with no need or requirement to look outside of their duties for ways to help the firm or its clients. You have eliminated any motivation for exercising initiative, or taking on additional responsibility.

Finally, the worst thing about merit bonuses is that they put a price tag on each task or goal. Since the task in question has been “added to” an employee’s regular duties, their natural reaction (believe me, they all do this) is to calculate whether it’s “worth it” and how much effort they can “afford” for it to be cost effective. In the above example, the employee will mentally estimate how long it will take to implement the new software program, and divide the $5,000 “bonus” by that number of hours. If it’s going to take, say, 200 hours, that works out to be $25 per hour. If the employee believes their time is more valuable than $25 per hour then the employee will decrease their effort to bring the hourly wage more into an acceptable range, or decide their time is not worth the extra $5,000 you are paying and simply not do the work. Is that really how you want your key projects undertaken?

As you can imagine, merit bonuses do very little to meet any of the four elements of employee happiness and usually have a negative effect. Instead of feeling control, employees are given a fixed task for a fixed amount; the only control they can exert is to limit their working time to increase the hourly pay (or take control and simply not do the task). Instead of feeling part of a team, they have been further isolated in a lone task, with compensation completely separated from the other employees and the firm. Instead of making progress, they are stuck with one project. Instead of feeling they are part of something bigger, their job is actually made smaller. That’s why merit bonuses do little to motivate people.

As for profit-sharing, their deficiencies are glaringly obvious: Profits in a small, closely held business are entirely controlled by the owners. Many firms are understandably run to show as little profit as possible. Even when they aren’t, “profits” are often eaten up by investments in new technology, marketing strategies, new offices, or other capital improvements. Don’t get me wrong, there’s nothing wrong with these strategies, and often much is right from a tax perspective. But, as they see it, it’s patently unfair to expect your employees to equally shoulder the burden of growing your firm.

On the happiness scale, we’ve already covered the sense of control (employees have zero control over profits and bonuses on profits). When firm revenues go up, but profits—and bonuses—go down, that doesn’t translate into much of a sense of progress either. And it doesn’t make one feel like a team player when one’s rewards are taken away without one’s consent. Do you really want your employees feeling cheated every time you go to a conference?

This leaves us with revenue-based bonuses, which I have talked in detail about before but will reiterate here as it relates to “happiness.” Nothing connects employees to their firms better: When bonuses are tied to revenues, everyone is playing on the same team. Employees feel a sense of control because they will find ways to help increase revenues; revenues of a company cannot be manipulated (unlike profits) and revenues are not subjective (like a merit-bonus task or goal.) Most employees can’t bring in new business, but they can make clients happy; and since most advisory firms grow through referrals, that’s usually the best way to attract new clients. Employees feel that they are contributing to—and sharing in—their firm’s growth. They are now part of the team, working to grow their firm, and they are indeed part of something much bigger than themselves. (Now ask them to implement a new rebalancing program. I guarantee they will do it, without question or additional pay.)

Revenue-based bonuses hit all the happiness goals. A great indication that this is true is that once a revenue-based program is in place, money ceases to be an issue. Unhappy employees invariably believe that if they were just paid more, all their problems would go away. Yet, higher salaries almost never solve their problems. However, even employees who were constantly complaining that they were underpaid suddenly are satisfied with revenue-based bonuses. Not because they get more money—that often takes a while—but because they suddenly feel they are part of the firm, part of something bigger than themselves (connected).

I’ve had firms actually decrease salaries in order to make a revenue-based program work; interestingly, not a peep from the employees, who were thrilled with the change. When it comes to creating happy employees, few strategies are more effective than revenue-based bonuses, and when it comes to creating a great independent advisory firm, I can’t think of a better strategy than happy employees. There is just no substitute for employees who are totally motivated to work together toward building a successful firm.

Click here to read the rest of the July 2011 issue of Investment Advisor.