A COMPENSATION SOLUTION FOR PROFESSIONAL SERVICES FIRMS
by D. Sean Velarde
Professional services firms are changing the variety of services they offer to clients, and their cultures are changing as a result. A new compensation model can be employed to help adjust to the new expectations on the part of shareholders, managers and staff.
An effective compensation system should provide incentives to achieve the firm's desired goals in the areas of revenue production, business origination, client service and firm culture.
Developing ways that offer long-term benefits to clients, staff and the firm is the new way to optimal performance.
An incentive-based compensation system rewards the contributions of the individual partners in a more objective fashion than a traditional partner sharing system. This system places more value on individual contributions and less value on what the firm does overall. Applied consistently, this system will promote the desired behaviors necessary to achieve the firm's goals. Those few professionals unwilling or unable to help advance the firm's goals within the system will do so through voluntary or involuntary attrition.
For example, a system that rewards new business development might solve the concern of those partners most responsible for bringing in the work. If, however, the system does not reward the partners who do the work, you will fail to motivate that group of partners. You can bring in all the work in the world, but you will not improve your profitability if no one takes responsibility for the clients. The reverse is also true. The partners who are capable client managers will have nothing to do unless the rainmakers bring in the clients. Likewise, your compensation system will largely influence whether the culture of your firm is a sweat-shop or one that promotes quality of life outside the workplace. The compensation system should be simple. If it leaves most partners scratching their heads over the calculation of their individual compensation, the plan is doomed to fail.
The Compensation Plan
The most successful system for professional services firms is derived from the incentive-based model adapted from the Boston law firm, Hale and Dorr, in the 1940's.
The Hale and Door model creates categories in which a partner could earn income: New Business - originator of the client and Client Services - actually doing the work. These percentages can be adjusted each year to address issues that the firm determines are the most important for the coming year.
An example of the compensation model might be:
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40 percent derived from development of New Business
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60 percent derived from Client Services
The model can be easily modified to produce the firm's desired results in each of the four categories described. As an illustration, a firm may seek to raise the New Business category's percentage if it desires to generate new work coming into the firm. In the year following, the focus may shift and percentages can be adjusted to reflect those changes.
Partners know exactly what they have to do if they wish to increase their income. Many partners prefer such a system because it allows them to become the masters of their own financial destiny. Essentially, this system allows efforts and contributions because it rewards success and hard work.
Competitively, there is less bitterness toward a partner who is perceived to be making less of a contribution to firm profitability because when they contribute less, they receive less.
D. Sean Velarde is Managing Director and a member of the Business Group at Burns, Figa & Will, P.C. You can reach Mr. Velarde at 303.796.2626 or .