The Perils of Rewarding the Wrong Behavior

Dear Coach Alan,

I am the owner of a small but profitable professional services company.  My top performer, Joe, keeps asking me for more money.  Several years ago, I put Joe on a profit-sharing program.  His annual bonus is a percentage of the profit earned for the year. Now he keeps questioning expenses and other deductions from revenue, including his own bonus. It has gotten to the point that profit-sharing has turned into a nightmare.  How do I get Joe to stop challenging me and the company income statement?

 Steve P.

Steve, you may have created this dilemma by basing Joe’s bonus on profits.  Because money is so important to him, he is questioning anything that reduces profits that, in his mind, is not a legitimate expense. I agree with you that this needs to stop.

You might begin by asking what your goal is in compensating Joe. Is your purpose to make him feel like an owner?  This is the usual reason why profit-sharing is presented to employees:  they then share in the success of the company. They also share less in down years.  Not all employees trust the honesty of profit reporting. Small businesses often write off marketing costs, entertainment expenses, and membership fees that are used to generate business.  Expenses also include overhead that might be challenged by less-trusting employees.  For example, an employee may question why the boss plays golf with customers when he or she should be adding to revenue. Also, most employees are risk averse. They prefer to have certainty to their compensation. As one my colleague states, “Profits are about risk, and pay is about work: don’t confuse them.”

If the purpose of compensation is to reward Joe for his productivity or billable time, then profit-sharing may not be the preferred method of compensation.  You may want to consider a bonus program based on the revenues Joe produces. This is easy to track for you and Joe.  Because Joe has more control over his productivity, he will have fewer challenges over the method of determining his bonus, whether it is billable time or margin.

Summarizing your dilemma, you need to decide on how to compensate Joe.  From what I can determine, he seems to want more income and control, not ownership.  Therein lies the clue on how to choose the best compensation program for Joe.

If you accept the assumption that Joe wants to maximize his income, you should consider having a candid conversation with him about his compensation plan.  You may want to point out how the goals of an owner are different from those of an employee. Unless he is willing to risk part of his compensation, the two of you need to agree that a change is in order.  The tension you create by contrasting a compensation plan based on profits with one based on Joe’s productivity should be sufficient to demonstrate the need for change.

Your next challenge is to design a mutually beneficial compensation plan.  You may decide to hire a compensation consultant to help design this plan, or you may do it yourself, taking into account Joe’s needs and your desire to motivate him.  By bringing Joe into the plan’s creation, you will likely get less hassle from him about fairness and how you choose to spend company money.  Anything you can do to reduce the tension between you and Joe and raise the tension between Joe’s desire to make more money and his generating more revenue for the company will yield positive results.  You can even include customer satisfaction in the plan.

I have always viewed compensation as a reward for performance.  It is important that the reward be related to the goals of the company and the behaviors that are consistent with its values.  In Joe’s case, the misalignment of rewards and behavior is creating tension that needs to be eliminated.  As Joe’s coach, your job is to make him aware of this and create a compensation plan that is relevant and within his control.