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The Hidden Reason Revenue Bonuses Don't Work in Advisory Firms

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We received two good comments to my January 23 blog (“Whey Do So Many Owners Resist Revenue Bonuses for Employees?”) that raise important issues regarding revenue-based bonuses for employees. Many owner-advisors resist revenue bonuses for a variety of reasons. In our experience, all of them are symptoms of problems that lead to poor performance in independent advisory firms. These comments illustrate a few of the most common of those problems. 

First, Robert Schneider asked about the impact of “down markets” on the revenue bonus scenario:

“Truly, in the last 5 years, most firms have seen consistent revenue gains. If a 2008-2009 hit came again and revenue bonuses were zero, would employees recognize that the firm had to pay to keep the lights on and no one (including the owner) took bonus?” 

Back in 2010, we conducted a study that compared our client firms that used revenue-based employee bonuses with those that didn’t during the turbulent three years ending December 31, 2009.

We think the results speak for themselves: Firms that offered revenue-based bonuses posted annual revenue growth of 14% (vs. 3% for the non-revenue bonus firms); and owners’ incomes grew 15% annually (vs. -3%). What’s more, during this period, the revenue-bonus-paying owners worked 60% fewer hours during their “working” weeks, and took twice the number of vacation days as did their non-revenue-bonus-paying peers. 

So the answer to Mr. Schnieder’s question is “yes.” Revenue bonuses create an understanding among employees of the impact of down markets on their firm (which is usually absent in most other firms). More important, they create incentives to find ways to generate new revenues and get their firm back on track. 

Then, Neal Nakagiri wrote:

“We will consider bonuses based on net income, not gross revenues. I have observed that a revenue-based bonuses often lets the employee/staffer generate more revenues, while at the same time ignoring the costs to generate those revenues.” 

Mr. Nakagiri is right, if he is running Apple Inc. or Exxon, that is.

In large corporations, many division heads, managers, supervisors, etc. do have control over costs, and consequently need to be incentivized to keep them down. However, in a small business, such as even the largest independent advisory firms, cost control is easily managed from the top.

If your employees really are driving up operating costs, you have a management problem, not a bonus problem. 

You probably have a motivation problem, too.

In our experience, the unintended consequence of profit-based bonuses in small businesses is that it creates a disconnect between the owner(s) and their employees. In a small business, the owner(s) is usually trying to reduce reported profits to minimize taxes. So they write off as much as legally permissible: cars, trips, hiring family members, etc. But with profit-based bonuses, each of those write-offs is coming out of employees’ pockets. Do you really want your employees resenting your business trips, new cars, your employee children, or your new large screen computer monitor? That isn’t good management, either. 

What’s more, Mr. Nakagiri’s comment raises an issue that is quite common among advisory firm owners: blaming their employees for problems that really are the results of poor management. As our experience shows, revenue bonuses create tremendous incentives for employees to help stimulate growth in the majority of firms that use them. But in some cases, management can take actions that derail this success. 

Sure, occasionally, we’ll come across a “problem” employee that, despite our best efforts, just doesn’t fit into a particular firm. But when we see all, or a substantial portion, of employees not getting with the program, or exhibiting “bad attitudes,” it’s time to look for problems elsewhere. 

In firms where revenue bonuses “don’t work,” we almost always find management problems. It could be that employees are being demotivated in some other way. Maybe they haven’t been adequately trained and/or supported to succeed in their jobs. Or management has created a “critical culture,” in which employees are severely reprimanded for making honest mistakes, for voicing their opinions or for taking initiative.

So if revenue bonuses aren’t working in your firm, take it as a wake-up call to take a hard look at the culture and top management of your firm: and to look for ways to better support your employees to succeed.

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