Episode 60: Be careful with bonuses

A few reasons to be cautious. Full transcript below.

Welcome to the Business Numbers Podcast. I’m your host, Ben McAdam. I’m a profits coach, virtual CFO, and entrepreneur, and I’ve created this podcast to help you grow your business profits and understand your business numbers without judgment and without burying you in a whole bunch of jargon that you don’t need. Just actionable tips and case studies to help you grow your business. For show notes, go to the website, businessnumberspodcast.com.

In this episode, I want to talk about an issue that seems to come up a lot. And it’s the idea of how to incentivize your team, what’s the right amount of bonuses that I should offer them, all those kind of questions. It seems to come up a lot with clients, and it also seems to come up in a lot of business communities I’m a part of. 

So in this episode, I’ve got a few points that I want to leave you with. The main overarching thing is to be cautious about offering bonuses.

There’s many reasons why you might want to be cautious that I’ll talk about, but there’s generally an assumption that you have to spend money on your team to make them happy and incentivize them, whether that’s giving them raises, or bonuses, or profit shares, or revenue shares, or equity. There’s this natural thought that if you want people to do amazing work for you, then that’s what it takes.

But this doesn’t work on some people. Not everyone is motivated by money for a start. Some people are motivated by other things; like the fact that they’re getting to contribute, the fact that they get to work in a supportive team environment, the fact that they have flexibility to take a day off when their kids are sick, or that they can work hours around taking their kids to school or when their baby has a nap, or that they can take more time off during the year.

Money and time are the two big factors, and I think too much we focus on money, whereas other people enjoy the time flexibility, negotiating the time.

Or it could just be the fact that you’ve created a pleasant workplace that they enjoy coming to, whether they come into the workplace in person, or whether it’s virtual, or having support, or it could be career advancement potential and a clear path and clear progress towards that. All of those things are motivating factors. 

For example, for an ambitious person they don’t want more money. They want the opportunity to be able to earn more money. So they want training. They want advancement. They want skills; they can spend a couple of years in your business and then they can go onto an even higher title or an even bigger business and then continue growing there. The really ambitious A players don’t necessarily prioritize being paid a lot and it’s okay if they move on. You’ll find more, you found them, and a bit more confidence in your hiring can be helpful.

A few other points I want to make, a couple of little detailed, random points.

Equity’s very problematic. Giving people any kind of equity is a bit of a problem, because equity is like being married and you don’t marry your employees because you might want to fire them. You cannot fire the person that you’re married to, without it being very difficult and complicated, and it’s the same thing with equity. Yes, you could give them equity with a certain vesting period, which means that they can’t use, or benefit from, or sell, or exchange the equity for a year, two years, three years, five years. You could have a vesting period that limits what they can do with it, but you would also need to be very careful about what happens if they get fired, or what happens if you don’t want to work with them anymore. Or what happens if they want to quit, what happens to that equity? There’s so many questions there. And really why do you want to give them equity? It’s either because you want to give them a say, you want to give them a sense of ownership so that they commit a bit more… but you don’t need to give equity to get good people to commit.

A sense of control, or profit distributions, or money in the case of an eventual sale, all of those things you can give them without actually having to give them equity in your business. And all the issues with tax filings and approvals that you have to get from them, and potentially them having a director’s liability or something with the bank, or having to put up their own collateral, or being at risk if you run the company poorly and it gets liquidated or sued. There’s so many things that are bad for you and for them with equity that you can actually give the benefits that you have in mind for equity in other ways- like a profit share, or profit related bonuses, or paying attention to their opinion in the leadership meetings or the one-on-one meetings that you have with them. You can give them all those things without having to give them equity. There’s so many problems with equity.

So something to keep in mind: if you feel like you want to give an equity share to anybody, NO, no, don’t do it! Okay, so equity is problematic. 

And I did mention that a profit share or a profit based bonus system is an alternative to equity. Profit share is actually problematic, too. Because many business owners have some personal expenses that they put through the business in order to get a bit of a tax deduction. How does that affect the profit share that this person has? Do you have to then run the books a little bit differently so that you can see what the profit is before all your little deductions? Are you going to show this to them? Are they going to be able to comb through the expenses and say, “Oh, this shouldn’t be counted. Why did you spend money on this? Why, this dinged my profit share.” Are you going to run all your expense decisions through this person for their approval, before you spend the money on it? It’s very difficult.

If you want to try and motivate someone with the profit it can create some uncomfortable situations. It’s better to be a bit more accurate with why they’re getting a bonus. So don’t give them an overall profit share, because so many aspects of that are out of their control, no matter what kind of role they have in your business.

So many aspects of that won’t be entirely under their control and that’s the point of bonuses, and raises, and profit shares, and all the other types of rewards that you could give people, right? It’s that you want to incentivize a certain level of performance, or you want to get a certain benefit, or you want them to focus on certain things, or you want them to improve on certain things- there’s something in particular that you want to go better. And that’s why you’re thinking about an incentive. 

My suggestion with any kind of incentive is to make it super specific to things that they can actually have an impact on. Something that they could actually achieve through their own actions that wouldn’t get blocked by someone else (or you), because then that can cause some resentment within the team. 

Imagine you gave your whole team a bonus based on the profits of the business. And then half the team is in the customer service department and can’t have a huge impact on it because you don’t have a customer service problem right now, cause they’re good. And imagine if instead the company missed the revenue goals that they had for the quarter because of something your marketing team or sales team did or didn’t do. The whole customer service department now hates your entire marketing and sales team and your marketing and sales team now feel really guilty and feeling all the hate from the other parts of the team, just because there was an incentive in place that these people couldn’t directly influence themselves and didn’t have control over. So that’s an important thing to keep in mind as well. 

And finally, just while I’m talking about giving everybody a bonus, in that example, not every role deserves a bonus because they can’t significantly influence the results in the business. It’s okay to pay people a wage to do their job well or pay people an hourly rate or a contractor arrangement. It’s okay to pay them that and expect that they do a good job for you, that they are committed to the job, that they are excited to come to work, and that they contribute positively to the culture of your business. You don’t actually have to incentivize, that’s what people do for their pay. And if you’ve had the experience opposite to that, you’ve probably got a lot of C and even D players on your team and the solution to the problems that you’re having isn’t to offer them some money to get them to perform better. It’s probably firing some of them and hiring better people. 

And I know that the idea of bonuses is a bit more appealing because we feel like we’re generous and it’s a cool thing to be talking about. As opposed to the uncomfortable thing of making some hard decisions about your team and having to let them go or having to replace them, or feeling disappointed that people you’ve treated like family and feel very close to aren’t doing a good job for you. There’s a whole bunch of uncomfortable feelings on that option. So it’s understandable that bonuses seem so appealing. But not every role deserves a bonus. This is for your management layer and you shouldn’t necessarily have a management layer until you’re mid six figures in revenue or up. 

I talked to a few people recently who have $20k a month in revenue, in a marketing agency, and they’re talking about their management meetings and their managers. And I was surprised and asked how do you have enough people to need managers? It’s the problem with falling in love with the book like Traction and thinking, “Yeah, that sounds like a great solution to all my management problems.” Nope! It’s probably not. If you’re that small, you shouldn’t have a management team, you just need to learn a few more management skills.

And that might sound harsh, but it’s the thing that you need to know, and the reason why I know this is because I did that too. I had a team of 12 at one point during my career, and there were some people that I should have fired instead of trying to coach them to be better or helping them with some of the more difficult aspects of the work that they couldn’t seem to do themselves. And yes, I should have let those people go. And it was really hard because the business was fairly young, this particular team member was one of the first couple of people we hired. But their work was slow, always personal dramas impacting their ability to get the work done when we would rather it got done so that it fit well into the rest of it. And, and so, yeah, I’m not judging you for this, I’m just helping you point out the real problem that is perhaps what you should be working on, instead of trying to throw money at the problem by offering bonuses and raises to people.

One of the downsides about bonuses if you’re not careful about how you word them, is you can actually send yourself broke. One client I worked with many years ago had designed this “great” profit share revenue based system for them. And then there were a whole bunch of expenses that came through in future months when he had to pay the bonuses to the team. And it would’ve sent him broke to actually pay the bonuses to the team. This isn’t that he mismanaged the funds or anything, this is that he was giving them way too much of a bonus.

If the revenue went up 20%, he split 30% of the extra revenue among the team. And his gross margin wasn’t good enough to be able to support a 30% bonus. And he found that out particularly when he had a down month after a couple of really good months that really highlighted the problem.

So whenever you’re designing an incentive system the two things you need to keep an eye on is:

First: Is this gonna send me broke? Is this going to dramatically cut into my profits? 

Second, you also need to test what’s the logical effect that this will actually have on people’s behavior. Because sometimes we want people to do X, or I want more of this kind of results from my team, or this kind of thing from my team, and so you design a rewards scheme or an incentive scheme and you must double check the logic: is that incentive going to encourage those particular team members to do the thing you want, or is it actually going to lead to them doing something completely different? 

So for example, if someone has a bonus that’s tied to increasing revenue and they have spending control over the marketing budget, then the incentive for them is to lose money on the new sales in order to get the revenue up so they get more of a bonus. “Ah well, obviously they wouldn’t do that.” Not necessarily! You have to be explicit: “this is your marketing budget / this is the limiting factor”, or “you have to achieve X and here are your limits”.

Also: “here are the things that you can’t do.”

And then after you’ve actually implemented the system,  review it, and if they’re starting to do something really stupid then change the terms. Because you don’t want them to do the wrong behavior and then you have to pay the money. So not only sending yourself broke if they do achieve the targets, but also if they act in the logical way that that incentive is actually encouraging them to go- is that going to be a problem for you? Someone could send you broke or try to bump up the revenue by overspending on marketing and training programs, and hiring teams, and Facebook ads, and all that. You need to be careful about those kind of things. 

There’s a broader point I want to finish up on here: don’t assume people think like you. Would you be motivated by the possibility of more money? Would you have more ownership if you got equity or a profit share? Well, potentially, because you’re running your own business and people who like to run their own business generally have a certain way of thinking. We’re incentivized by certain things, they have a bigger impact on us, like the possibility of freedom, steering our own ship, the possibility to earn a lot more money by putting in a lot of effort, the possibility of going for a sale, all those things.

We think differently to people who want to be employees or regular contractors, or freelancers on the team. And it can be a bit dangerous thinking that, “Oh, you know, if I had had this kind of an incentive in a previous job, I’d probably still be employed. I wouldn’t have felt the need to go out and do my own thing.” Or “Wow, this is a great arrangement that I’ve come up with, a great incentive scheme I’ve come up with, this would be really motivating for the team.” Well, not necessarily because your team isn’t like you. 

Another point on this “don’t assume people think like us” is that sometimes we worry. Sometimes a bonus or incentives scheme comes from a place of fear that if we don’t incentivize the people, they will go to another business. Or (it’s the real fear for a lot of people) is that they will start their own copycat of our business. “Wow, this person is so essential to my business. They know how it all works, they’ve got a great relationship with my clients. Oh my God, I better give them a bonus or an incentive to try and keep them here, so they don’t go start something on their own.”

When really, the majority of people don’t want to start something on their own, they want the reliability of a regular paycheck that’s going to come in, and knowing that they can then go and get another job somewhere else. They don’t want the stress or the risk of running their own business. And so you don’t need to incentivize them to stop them from going and setting up a competitor. 

If you have people that are a bit entrepreneurial and want to start their own business one day, that’s a whole separate topic about maybe don’t hire them (or be very, very careful about how you hire them and for what roles). Not because they’ll steal your stuff, but just because they’re not going to stick around. And generally when we’re hiring roles, we like to have people that will be happy to repeat the same tasks over and over again.

So, people don’t think like a business owner in most cases. Usually people aren’t entrepreneurial and that’s good, we can relax. We are not just going to teach them, train and give them experience, and they’re going to become a competitor. But also it’s good because we need people who aren’t entrepreneurial, that are happy to do the things over and over again, because most of us don’t like doing the same thing over and over again, so we need to pay people to do it for us.

So I think I’ll wrap it up there. There’s been a few points here. I hope my overall caution about bonuses and incentives has come through. Whenever a client says to me, “Hey, I’m thinking about setting up an incentive system”, my default position is “No. Why do you feel you need it?” Usually there’s another reason why we think we need a bonus or incentive scheme that needs to be dealt with, and the bonus or incentive scheme is the wrong solution to the problem of employee engagement, motivation effort, buy-in, success. 

I better stop there, because I can rant on this for a while. It’s something I’m fairly passionate about, but hopefully I’ve given you some points to consider, so that whenever you are tempted to give people bonuses you’ve got a few things to think about. 

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Ben McAdam

Hi, I'm Ben McAdam. I'm a Profits Coach and entrepreneur. I help business owners grow their profits and gain clarity around their numbers, without judgement or confusing jargon. If you want some help with that: let's have a chat.
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