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. Consequently. getting both correct is critical to the success of the firm’s strategic plans. Information about which activities are most rewarded affects the firm’s culture. Importantly, it also 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. This is 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. This dichotomy, along with its issues and possible solutions, are discussed in the following articles:
How reward systems affect the performance
This article looks at how reward systems affect the performance of a traditionally structured professional services firm.
In many professional firms, the billable hours are the primary measure of performance. This is because they are considered to be directly proportional to the revenue earned. Conversely, time not spent on billable work is seen as wasted. However, such methods fail to reward many important non-billable work that can’t be easily measured. Time spent on non-billable work could, for example be spent on improving the efficiency of the business. While the time spent on this can’t be charged out, it will result in better performance which will have a positive impact on the bottom line.
Focusing on billable hours creates a short-termist philosophy in the firm. This often results 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. Consequently, these firms tend to lack direction and structure. This can have a negative impact on the firm as a whole as people end up pulling in different directions, In addition, there is little or no cross-functional cooperation. The net result is that the firm does not achieve its full potential, Consequently both the firm, and therefore the partners, make far less money than they 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. They also resist taking on a larger managerial role in the business as a whole. The reasoning is that this would take time away from their ability will do billable work, This in turn can have a negative impact on their reputation within the firm and perhaps even in their remuneration.
Solving the issues.
These issues can be solved by aligning the firm’s compensation system to its strategic objectives. This means rewarding non-billable time that is spent working on the activities that are 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 sets the objective of getting the name of the firm known in a particular target market, then people should be a recognised for undertaking that activity. If this is not done 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 impacts 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? They should be encourages to spend it constructively, helping to develop the firm.
Examples of this type of activity includes the following:
- Researching future client needs,
- Developing new services that meet client needs
- Improving administrative systems
- Developing their professional skills
- Training junior staff, etc.
Adjusting the compensation system
It is important to note that as professional firms grow, individuals will tend contribute in different ways. As a result, the compensation system needs to be capable of being 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, 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, different groups of professionals might have different goals (see our article entitled “Practice and Sector Focused Strategies In Professional Service Firms“). Therefore, the compensation system may have to be adjusted to ensure that it is aligned with the different strategies employed by each group.
In summary, a firm’s performance measurement system should be aligned with its strategic plan. This clearly communicates the value the firm places on achieving its objectives and goals. In these circumstances 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. They will also be more willing to share their knowledge and expertise. In this sense, the compensation system can affect a firm’s strategic direction.