How Partner Compensation Affects Strategy in Professional Services Firms
The way the partners are rewarded in professional services firms can have a dramatic effect on the development and, more importantly, the implementation of their strategic plans.
Why? Because in the same way that ‘what gets measured gets done’, ‘what gets rewarded gets focused on’. The reality is that the two – measurement and reward – run hand in hand so getting both correct is critical to the success of the firm’s strategic plans. Information about which activities are most rewarded not only affects the firm’s culture and atmosphere but, most importantly, it influences how partners choose to spend their time.
While this is true to some extent in all businesses, it is particularly problematic in the professional services sector because the responsibility for the management and development of the business lies in the hands of the same people who are responsible for delivering the service and, therefore, making the money for the business. This dichotomy along with its issues and possible solutions, are discussed in the articles “The Unique Challenges of Developing Strategic Plans for Professional Partnerships” and “Creating A Better Business Structure for Professional Partnerships“.
This article looks at how reward systems affect the performance of a traditionally structured professional services firm.
In many firms, the billable hours are the only measure of performance, since they are considered to be directly proportional to the revenue earned, while time not spent on billed work is seen as wasted. However, such methods fail to reward many important non-billable contributions that can’t be easily measured such as activities aimed at improving the efficiency of the business, for example. This creates a short-termist philosophy in the firm, resulting in many people adopting an “I will look after myself and to hell with everyone else” attitude. This means that there is little or no focus on the future so these firms tend to lack direction and structure which can have a negative impact on the firm as a whole as people end up pulling in different directions and there is little or no cross-functional cooperation. The net result is that the firm does not achieve its full potential and consequently both the firm, and therefore the partners, make far less money than it/they is/are truly capable of.
Another consequence of this type of structure and reward system is that partners are reluctant to take responsibility for managing their team, let alone taking on a larger managerial role in the business as a whole, because this would take time away from their ability will do billable work and may, therefore, have a negative impact on their reputation within the firm and perhaps even in their remuneration.
These issues can be solved by aligning the firm’s compensation system to its strategic objectives so that it rewards non-chargeable time that is spent working on the activities that have been identified as being important to implementing the business plan. When designing the firm’s compensation system, it is important to strike the correct balance between recognising billing performance and the contribution to the firm’s future. For example, if the strategic plan set the objective of getting the name of the firm known in a particular market segment then there should be some form of reward in the compensation system for that activity, otherwise the message delivered to partners is that the activity is not valued so they will not pursue it.
In fact, non-billable time spent by partners and fee-earners often determines the likelihood of the success of the firm’s strategic plan. Every partner and fee-earner will have non-billable time. The key question is how do they spend it and in particular so they spent it constructively developing the firm by, for example, researching future client needs, developing new services that meet these needs, improving administrative systems, developing their professional skills, training junior staff, etc.
As the professional services sector becomes more competitive, a long-term view is crucial and time end efforts must be spent in developing new expertise areas and penetrating new market sectors and geographical areas.
It is important to note that as professional firms grow, individuals will tend contribute in different ways so the compensation system needs to be capable of be adjusted on a partner by partner basis. For example, more emphasis will tend to be placed on billable hours for newer partners while more experienced partners will tend to have more weight placed on business development and management activities. It should, however, be noted that this is not a hard and fast rule as it is possible that some new partners will have a natural ability to generate new business so their compensation should focus on that strength.
Furthermore, since in a firm different groups of professionals might have different goals (see our article entitled “Practice and Sector Focused Strategies In Professional Service Firms“) the compensation system may have to be adjusted to ensure that it is aligned with the different strategies employed by each group. the partners and fee-earners
In summary, if a firm’s performance measurement system is aligned with its strategic plan and clearly communicates the value the firm places on achieving its objectives and goals then the partners and senior fee-earners will be more likely to share in the firm’s vision, align their actions with the firm’s objectives, and be more willing to give up their competitive advantage through the sharing of knowledge. In this sense, the compensation system can affect a firm’s strategic direction.