One of the most common issues that advisory firm owners contact me about is changing the behavior of some or all of their employees: to make them more productive, more cooperative with their coworkers, more punctual, more helpful to clients, and generally feel better about their jobs and the company that employs them.
More often than not, their “solution” of choice is to change their compensation structure to better encourage these behaviors. While this brings into question the wisdom of hiring a business consultant solely to implement a pre-determined strategy, that’s a subject for another blog. (I’d say 80% of my value to my clients is helping them determine what they need to do, and 20% is helping them do it.)
This is a story about why using compensation to change employee behavior is generally a bad idea that often results in consequences that are both unintended and counterproductive. (Read: makes things worse.)
(Related: 3 Things to Avoid in Salary Surveys)
Here’s the scoop on comp: It’s true that people generally do what they get paid to do. The problem is that it’s often difficult to make it clear what you are paying them to do. Salespeople are the classic example of incentive pay. Most sales folks get paid a percentage of what they sell or the business they bring in. Simple, right? Well, not so fast. As economist Steven Levitt pointed out in “Freakonomics,” for many salespeople, it’s far more lucrative to sell at a low price and reap the rewards of greatly increased sales volume.
In the advisory business, that would translate into rainmakers bringing in more clients who are less affluent, and reaping the benefits of much higher volume. And, if sales incentives can create the wrong incentives, imagine the difficulty with advisors or clerical people, where their “results” are much harder to measure. Yes, you can increase an advisor’s comp per client. But do you really want to motivate them to work with more clients than they realistically can service at a high level? And how in the world do you quantify your clerical staff’s performance?
What’s more, increasing pay to do their jobs creates a bad precedent. As every parent knows — or learns — paying children to do their chores creates the expectation that they will get paid for every chore they do. With employees, the problem is even worse. Faced with problem employees who seem less than motivated to do their jobs or cooperate with their coworkers, many business owners seem to believe that raising their salaries is the solution. Aside from the incredibly bad precedent of rewarding poor performance, this is at best a temporary solution.
Increased comp can elevate an employee’s performance — for a while. But usually sooner rather than later, the rush wears off, and they return to their past behavior: leaving the owner with the bad choice of raising their salary again. As for “incentive pay,” what’s the measure for working harder, a positive attitude, fitting into firm culture, emotional intelligence, willingness to change, being happier, or listening to and adapting to new ideas?
A far better solution is to address poor performance and bad behavior head on by talking to the employee about what their problems and determining what motivates them. (Different things motivate different people: praise, recognition, inclusion in decision making, advancement, etc. Good leaders look for them and use them to motivate.)
The big “Ah Ha!” here is that employers can’t change employee behavior — only the employees can — but good employers can influence and support changes in that behavior. As I said, opening lines of communication is a good start. Employers also need to make sure that each employee has been given the tools they need to succeed at their job; adequate education, training and support, along with the tools they need. And, that their compensation is competitive with what other folks in the industry make for doing similar jobs.
Finally, if you just have to “incentivize” your employees for better performance, I strongly recommend revenue-based bonuses across the board. They create an incentive for everyone in the business to work towards its growth and success. And it sends the message that “we are a team; all in this together.”
— Read Win the Talent War by Aligning Values With Growth Objectives on ThinkAdvisor.