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Why team bonuses hurt performance

By Advisor Perspectives
Wealth Management

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Editors note: This story is excerpted from Advisor Perspectives.

Every advisor wants support staff to operate at peak efficiency. One way to do to that is to hire bright, capable team members with a strong work ethic and to provide financial incentives to encourage strong performance, allowing staff to earn bonuses and participate in practice profitability as a means of keeping them enthused. My article, How to Attract Top Talent, outlined some of the challenges that advisors face in attracting and retaining top talent.

Recent research questions the thinking on the kind of staff you should hire and how to motivate them. Indeed, it suggests that traditional bonuses based on overall profitability are counterproductive. In the New York Times article The Secret of Effective Motivation, Yale professor Amy Wrznesniewski and Swarthmore professor Barry Schwartz outlined research that contradicts traditional thinking.

Two things that drive motivation

Wrznesniewski and Schwartz identify two motives for behavior – internal and instrumental/external. In their study of 11,000 cadets entering West Point, internal motivations were things like being trained as a leader and serving the country. External motivations were things like the prospect of glory or the opportunity for a good job after military service was complete.

The authors of the study identified the motives of each cadet entering West Point and then tracked their success at the academy in how quickly they became promoted and whether they stayed on after their mandatory service was complete. How did the cadets do? Here’s an excerpt from the New York Times article. The first finding should be no surprise:

We found, unsurprisingly, that the stronger their internal reasons were to attend West Point, the more likely cadets were to graduate and become commissioned officers. Also unsurprisingly, cadets with internal motives did better in the military (as evidenced by early promotion recommendations) than did those without internal motives and were also more likely to stay in the military after their five years of mandatory service

Next comes the key finding:

… unless (and this is the surprising part) they also had strong instrumental motives.

Remarkably, cadets with strong internal and strong instrumental motives for attending West Point performed worse on every measure than did those with strong internal motives but weak instrumental ones. They were less likely to graduate, less outstanding as military officers and less committed to staying in the military.

… Our study suggests that efforts should be made to structure activities so that instrumental consequences do not become motives. Helping people focus on the meaning and impact of their work, rather than on, say, the financial returns it will bring, may be the best way to improve not only the quality of their work but also — counterintuitive though it may seem — their financial success.

Implications for your practice

This research has implications both for the staff you hire and for how you compensate them.

When it comes to hiring, screen first and foremost for internal motives – the desire to help people and to develop new skills. When it comes to getting the best people on your team, this research provides fresh evidence for the old axiom that skills can be taught but attitude cannot. The key factor in hiring members of your team should be that they are motivated by internal goals rather than external factors such as compensation.

With regard to compensation, this study doesn’t suggest that there is no role for variable compensation. Indeed, it always makes sense to align compensation with performance. But what is critical is how you structure the variable compensation for your team. If bonuses are based on practice profitability alone, you may not get the long term focus that you want. Consider instead tying variable compensation to factors like client retention and overall client satisfaction.

Many advisors are caught in the trap of paying their team in the same fashion that they did five or 10 years ago. But this research can be the catalyst for rethinking compensation for your team so that they, you and your clients will all be better off.

Dan Richards conducts programs to help advisors gain and retain clients and is an award winning faculty member in the MBA program at the University of Toronto. To see more of his written commentaries, go to www.danrichards.com.

Read the full story at Advisor Perspectives.

Photo: DancingOnThePedals.net

 

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