How a Firm’s Remuneration System Can Impact Attaining its Strategic Goals

In many professional services firms their partner remuneration is often based on their personal performance rather than the performance of the firm.

There are four main ways in which a firm’s compensation system can support the its strategic plan.

First, the remuneration and profit-sharing system can help to create a common understanding of the direction in which the firm wants to go. Secondly, it the can support the firm’s strategy by identifying and rewarding those who create value that supports the strategic plan. Thirdly, it  can encourage partners and fee-earners to take action to help differentiate the firm from its competitors.  Finally, a well designed compensation system can help the firm to achieve its objectives by rewarding the implementation of key strategic activities .

Professional firms need a system for dividing and distributing its profits. It is important that this system is aligned with the firms strategic plan and goals. The difficulty is that many partners are not motivated solely by money. Consequently, it can be difficult change a partners behaviour through the compensation system alone. This is because the reward may not be enough of a motivating factor.  The compensation system can, however, give partners a clue to what behaviour the firm is seeking from its fee-earners. This is because changes in the behaviours that are rewarded can send a message to the partners about where their focus should be. It also shows what specific performance and behaviours are required by the firm.

Once a compensation system has been implemented, there is only one test it has to pass. Does it encourage the behaviours needed to successfully implement the firm’s strategic plan?  To apply this test, the partners have to understand what the measures of success are. They also need to know what skills and the behaviours are required to enable the firm to achieve its objectives. In fact, compensation decisions are an integral part of what defines the firm, its objectives and its strategy.

However, professional firms frequently fail to motivate partners to focus on behaviours that will help the firm succeed. This is either because the firm is rewarding the wrong aspects of performance, or because partners don’t understand what is being rewarded.  There is often a mismatch between what professional firms say they value in their partners and what they reward. The key is to ensure that the behaviour that is required to achieve the firm’s strategic objectives is understood. Consequently, the firm’s compensation system must reward and encourages the desired behaviours. This will help ensure partners take the actions they need to take to move the firm forward.