Partner value and compensation continues to be a management topic that attracts considerable attention at firm summits and MAP conferences.
The balanced scorecard approach, connecting compensation to firm objectives, has made progress over the past few years. However, for the most part, individual firms are reluctant to change compensation formulas just for the sake of change. There must be a compelling reason to change, and typically when it comes to changing compensation there are winners and losers. Fear of the unknown is often greater than the motivation for an improved system.
There are several factors that typically determine the value of a partner. They are: responsibilities; results; management skills; client development; technical expertise; and team focus.
The age, size and culture of the firm play a distinct role in the firm's partner compensation plan. The old saying, "Be careful about what you measure," is certainly true, and partners are masters at focusing on the things that effect their own compensation.
A common misconception is that a compensation plan is for a career, rather than for a year or a few years. While I don't imply that firms should change their compensation formulas for the sake of change, it is irresponsible to believe that a firm's initiatives won't change, even if the strategic objectives remain constant for a number of years. The question, then, is what characteristics are included in a good partner compensation plan and how do firms tend to value partners in today's competitive environment?
In looking at successful firms, I believe there are seven distinguishing characteristics when it comes to partner compensation. They are:
1. The foundation - the current firm strategic plan.
2. Taking time to think and plan (working on the firm rather than in the firm).
3. Objectivity - an outside perspective.
4. A clear, communicated, written compensation plan.
5. Fairness - communication of that plan "up front."
6. Consideration of each partner's unique abilities (both performance and job satisfaction).
7. Accountability and coaching - frequent feedback and communication, preferably quarterly.
These characteristics can further be broken into leadership, management, discipline and accountability. Accountability and discipline are missing today in many firms. Historically, partners have been evaluated on charge hours, book of business, and realization. Older compensation systems tend to focus only on financial results. Newer systems focus not only on the financial results, but also on staff development (training/learning), client satisfaction and adherence to firm standards, policies and procedures.
You will also notice that "seniority" was not mentioned above. Firms should not promote entitlement, but rather an environment of accountability, and a focus on the firm's strategic objectives.
The value chain
With this said, the value chain starts at the low end, with partners who have technical skills, but not management and client development capabilities, to a high for those partners who are focused on the management of the firm (managing other partners) and client development. In the middle are the partners who serve clients, manage non-partner personnel, and have limited client development skills or responsibilities.
As firms age and grow, they tend to increase the value of management, rather than simply of production.
This is often a tough "hurdle" for many firms to clear, simply due to partners' acceptance of the required changes in both their roles in the firm and their compensation.
In fact, one of the biggest issues today with rapid growth and firm mergers is the challenge of getting partners to think like a larger business, rather than the way they did in their previous firm. To change their thinking, we recommend an exercise called the "10 Times Growth Model." Force your partners to "think." Ask them what the firm would need to do if it was 10 times larger than it is today. With some time, they should come up with such answers as that the firm needs:
* A professional management team;
* Quality personnel;
* Increased revenue per full-time equivalent;
* To manage like a business;
* To train;
* Increased capital;
* To document standards, policies and procedures;
* To develop a knowledge management system;
* To specialize; and,
* Integrated systems.
Next, ask what they would need to do if the firm were 10 times larger. Their answers should generally focus on:
* Becoming a better manager of people;
* Adhering to standards, policies and procedures;
* Getting training and updating their skills;
* Spending more time selling;
* Forming more alliances;
* Spending less time doing client work;
* Planning more time off;
* Maintaining the confidence of themselves and their subordinates; and,
* Upgrading the firm's client base.
Now, for the most important question: Ask them which one of these items should be removed if the firm is only growing at 10 percent to 15 percent annually.
The answer is none.
Partners should be thinking like the firm is already 10 times larger than it is today, and making decisions based upon the future rather than the past. The growth and profitability of the firm must be planned, and each partner should be held accountable. There will be disagreement, but that is no reason to ignore the important issues. That is firm leadership and management's responsibility.
Change, typically, is driven by three things: pain, reward and education. In most firms, it requires all three factors, and the one that partners respond to the most is the pain of change associated with compensation and the reward for doing the right things.
If you are serious about accountability and the desire to change partner compensation, start with a well-defined strategic plan. Then, as Jim Collins talks about in his best-selling book, Good to Great, the task of getting the wrong people off the bus may be an easier task than getting the right people in the right seats.
Leadership requires tough decisions, and partner compensation is one of those issues that require change, thinking and focus on written strategies.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access