Revenue-Based Employee Bonuses at Advisory Firms: The Best Laid Plans . . .

I've received a fairly large number of responses to my December Investment Advisor column on revenue-based bonuses for employees of advisory firms. Most of the writers have asked about the specifics of how to implement such a bonus plan.

I’m always happy to help advisors improve their practices, but in this case, I’m a little bit concerned about introducing a new bonus plan into an advisory firm—even one as effective as revenue sharing—without making sure that the firms’ organizational structures can fully support highly motivated employees.

It is true that revenue-based bonuses work, and work very well.  But it’s also true that in order for these bonus structures to work as well as you want them to, you have to build an organization that supports revenue bonuses. Which means you have to first do the hard work to create an organizational structure that enables—and even, empowers—highly motivated employees to fully contribute to the success of their firms.

When I say the word, “organizational structure” most people believe that I am really saying is “create an org chart.”  Thanks to the proliferation of management gurus, virtually very advisory firm today has an org chart.  But an org chart is merely a map of the hierarchy of the firm: who reports to whom. That’s great if you’re running IBM, since there you couldn’t do business without one. But in a small business, such as an independent advisory firm, most org charts don’t have to be any more complicated than everyone really reports to the owner(s).