FA Magazine November 2024 | Page 60

Cover Story continued from page 35
rather not say it , but if you choose not to take risk with your own money you will be restricted to what you earn only from compensation . And right now , that ’ s not where the money is .
Bonuses In A Bad Year
One of the more difficult merit questions in our industry is what to do with bonuses in a recession year . It ’ s during these times firms have the least money to spare for compensation ( in fact , they may be running out ). On the other hand , the employees might be working their hardest in those periods of tumult . Do we pay bonuses for effort or for result ? Do we pay for individual results or for team results ? Should we do both ?
Perhaps we could balance the result by splitting the bonus for individuals and teams . But those formulas could get complicated , confusing the participants . ( In my experience , if employees can reproduce the bonus plan on a napkin , it won ’ t function well . There ’ s also the “ one tab rule ,” which says that if the bonus calculation is on a spreadsheet with more than one tab , it also won ’ t work well .)
Fundamentally , it comes down to who bears the risk of the markets . Is it the owners who benefit the most from the good years or the entire team ? For an outcome to be fair , does it need to be symmetrical ? In other words , should we risk to lose as much as we stand to gain ?
Is No Bonus A Punishment ?
I was recently discussing this question with a client , and he asked : “ Why should my employees suffer if the firm is not profitable ?” This was an interesting question .
Is that really suffering ? Is dessert a treat , or is it part of dinner ?
Most firms insist that bonuses are not an entitlement , yet bonuses taken away are thought of as a “ punishment .” That , again , is cognitive dissonance .
Who Decides What ’ s Fair ?
Note that fairness stems from the culture of a firm ; it ’ s not a feature of strategy or a compensation method . Being fair means , in part , convincing people we ’ re fair . Just explaining it is not enough if it does not “ sink in ” and if people don ’ t understand it the same way 3-year-olds do when they play with cubes or the way chimps do when they divide food . Fairness is instinctive and intrinsic — the toughest part of our psyche to reach with management memos .
I have never written an article with so many question marks in my entire career . This is because when it comes to fairness , asking the questions out loud is half the battle . The other half is leadership speaking the answers out loud . Nothing else is fair .
PHILIP PALAVEEV is the CEO of The Ensemble Practice , the leading business consultants to the financial advisory industry , and founder of the G2 Leadership Institute , a leadership program that trains the next generation of leaders .

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