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.