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Why Do So Many Owners Resist Revenue Bonuses for Employees?

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“How in the hell could a man enjoy being awakened at 6:30 a.m. by an alarm clock, leap out of bed, dress, force-feed, brush teeth and hair, and fight traffic to get to a place where essentially you made lots of money for somebody else and were asked to be grateful for the opportunity to do so?”—Charles Bukowski, “Factotum” 

We get a lot of pushback on our use of revenue-based bonuses. Don’t get me wrong: they do work to solve the problem that Bukowski so graphically described in his 1975 novel. We know this from our experience with our own advisor clients, and from feedback that we get from other advisors as well.

Still, there seem to be many owners-advisors out there who are adamantly against sharing their revenues with their employees. While the emotional level of their responses makes us wonder if their real motivation isn’t rooted in plain old greed, they also tend to offer the same objections, which usually lack a basis in either logic or experience. 

I recently had a “spirited” discussion with one such advisor, who acquired one of our client firms. At our suggestion, our client had used revenue-based bonuses for years: the employee motivation this created has enabled the firm to grow consistently at double-digit rates, with a much higher level of client service. But the senior partner had decided to retire in the next couple of years, and the junior partner didn’t want the responsibility of running the firm. So we had begun looking for a suitable merger partner. 

One firm we have been taking with appeared to be good fit, based on corporate culture, approach to client service, services offered and client niche. With one exception: the revenue-based bonuses. Now don’t get me wrong: this firm’s owner isn’t a bad guy. In fact, he consistently pays his employees substantially higher salaries than most other advisory firms. (Actually, too high salaries, in our view.) 

Still, the idea of annual bonuses tied to the firm’s revenue just seemed to rub him the wrong way.  He couldn’t really articulate his objections, until the other day when he told me he’d been researching HR publications on compensation structures, and learned that “money doesn’t motivate.” Therefore, he concluded, the concept of revenue-based bonuses is flawed.

Setting aside the obvious inconsistency of paying higher-than-market salaries while believing that money doesn’t motivate, we find that there is considerable confusion among owner-advisors about the motivational properties of compensation. Ironically, what our merger partner found in his research is exactly right: typically, money doesn’t motivate employees. More money might attract them to take a job, but it rarely causes employees to perform better once they are in their jobs. 

Our experience—and research—tells us that’s because the prospect of additional raises is too far into the future, and too uncertain, to motivate most employees. In fact, when we’re confronted by advisory employees demanding “more money,” we automatically look for other causes for their unhappiness; we almost always find one.

What our merger partner (and many other owner-advisors) fails to understand is the logic behind revenue-based bonuses. They aren’t about the money. Instead, they are a tangible way to tie firm employees to the success of their firm. If the firm does better, they get rewarded.

Essentially, revenue-based bonuses are a relatively inexpensive and non-equity sharing strategy for getting a firm’s employees to think—and act—like owners. Without exception, the owner-advisors that we’ve seen implement revenue-based bonuses are amazed at the changes in employees’ attitudes and work ethic. 

I often wonder why more owner-advisors just don’t see the many advantages in creating a more employee-centered culture. After all, their success largely depends on their employees. I suppose it’s because they just don’t see the problem that Charles Budowski described, so they don’t see the wisdom in creating a firm that offers a good answer.