In many professional services firms their partner remuneration system is not linked to their overall business strategy as compensation is usually based on financial results while strategic objective are much broader in nature.
There are, however, 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 that is aligned with the firms strategic plan and objectives. The difficulty is that many partners are not motivated solely by money so it can be difficult change a partners behaviour through the compensation system 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 senior fee-earners because changes in the factors that are rewarded by the compensation system can send a message to the partners about where their focus should be and what specific performance and behaviours are is required.
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 and 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, 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 (in terms of performances, skills and competencies) and what they reward. The key is to ensure that the behaviour that is required to achieve the firm’s strategic objectives is understood and that the firm’s compensation system rewards and encourages the behaviours that mean the partners take the actions they need to take to move the firm forward.