Why Team Bonuses Hurt Performance
December 8, 2015
by Dan Richards
Electron Capital Partners' flagship Electron Global Fund returned 5.1% in the first quarter of 2021, outperforming its benchmark, the MSCI World Utilities Index by 5.2%. Q1 2021 hedge fund letters, conferences and more According to a copy of the fund's first-quarter letter to investors, the average net exposure during the quarter was 43.0%. At the Read More
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.
The elements of an effective team
My article today builds on two of my prior articles: The Skill Set for Exceptional Performance, which focused on establishing the right team culture, and Two Routes to Compelling Value, which outlined how different advisors defined clear roles for their teams.
The starting point for those earlier articles was an email from a successful advisor who is co-managing partner of an 11-person team. That email identified dealing with staff as by far the biggest challenge as they’ve grown. I also quoted one expert who observed that “what it takes to build an initial business, which is driven by the founders’ skills and energy, is very different than what it takes to run a bigger business, where you need to lever the skills of employees.”
To learn more, I hosted a series of lunches with top performing advisors to talk about what it took to build their teams. The advisors at those lunches identified seven discrete steps (summarized in the graphic below) to building and running the teams that are integral to their businesses
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.