Over the past decade or so, as advisory firm owners have moved up the learning curve from managing employees, they gradually have come to embrace the advice of management consultants to create “incentives” for employees to excel at their jobs. Those incentives range from profit sharing, to performance targets, to predetermined amounts paid for completing specific targets. While, I too, recommend that my clients create incentives for their employees, over the years I’ve come to realize that most firm owners incentivize the wrong things. 

Financial incentives are tricky things: people tend to do exactly what they are paid extra to do—and if you’re not very careful about how you structure their incentives, you many find them doing things that are not in the best interests of your firm. Here are some examples of incentives that I’ve seen not work out so well. My goal in expressing these common examples is to help you think deeper about the incentive structures you may be planning to implement in 2017.

I once fixed the compensation plan of an owner advisor who had decided to increase the efficiency of his client service department by adding an electronic signature capability. To get his client service people behind the project, he told them that if they got the service up and running by the end of the next three months, he’d give them each a $1,000 bonus.

The “bonus” worked: the firm got the electronic signature service up and running before the end of the quarter.

Then the problems started. Not only did the client service associates expect additional projects that they could get paid “extra” for, they started carefully monitoring their jobs, claiming that various tasks and duties were outside the scope of their normal responsibilities and so they should get paid extra for doing them. What’s more, employees in other departments started to complain that they weren’t getting any special projects that would pay them extra, and also complained that some parts of their jobs should fall into the “extra pay” category, as well.

The moral of this example is that to succeed, small businesses need all of their employees to do whatever they can to make the business successful—including increasing efficiency. By paying them extra for certain tasks, firm owners lead employees to believe they should get paid more for doing new projects. That belief can decrease their motivation to find ways on their own to improve the firm while increasing their dissatisfaction with their current pay levels. (As a side note, growing up in western Kansas, I remember my father saying: “Camper, I am not paying you an allowance to do chores. You are a member of this family. We all work together to make life better for everyone.”)

I recently fixed another compensation structure of a large firm (43 employees) that had a bonus plan for its advisors based on reaching specific goals for how much client revenue they generated individually.

I am a big fan of revenue bonuses. But never, and I mean never, have I seen one work that is based on an individual contribution, as opposed to a team contribution. Revenue-based incentive programs for employees must be based on team goals, not individual goals.

Just ask Wells Fargo about how their individual revenue bonus worked out.

Back to the advisory firm in question. If the advisors reached their “goal,” they would get an additional 12% of their salary. Sounds good, right? Advisors would make more if their clients paid the firm more.

That’s what the firm owners thought, too. Then they started to see the flaws in their plan. First, the advisors started to compete for new clients—especially the larger clients. And they tended to accept all the clients who came their way—even if another advisor at the firm would have been more suited to meet a particular client need. In fact, they continued taking on new clients even when they were overworked—choosing to provide reduced client service rather than lose revenue toward their “goal.”

Eventually, the owners saw a dramatic dropoff in an advisor’s work efforts once they had hit their revenue “goal” for the year.

The takeaway here is that incentives based on individual competition do not motivate employees to work together, nor toward the good of the firm. We fixed this structure by reverting it to a team revenue-sharing program. 

Finally, there is my favorite consulting projects to fix, the annual bonuses paid on a firm’s profitability. While this works in publicly traded companies with stock options, I’ve found that there are two problems with this “incentive” in private companies. First, most employees have no control over profitability: those decisions of cost vs. benefit are almost always made by firm owners/leadership.

Consequently, all that employees see are the ways the firm spends its money, with the suspicion that it’s all coming out of their pockets. That understandably creates resentment rather than a sense of teamwork and job motivation.

If you are thinking about creating an incentive plan or redesigning your current one for the coming year, remember that incentive plans can do a lot more harm than good if done wrong. If done right, they are amazing growth triggers for a firm.

The bottom line is that there will be an incentive to act created by every financial bonus. The best “incentive plans” motivate all employees and owners to work together toward the greater success of a firm on a trigger to which they all have the ability to contribute.

That incentive is growing top-line revenue, working as a team.