The question many leadership teams of professional service companies ask is, ´How do we share the rewards of our company with the owners and employees?" Or, "We´ve grown to a firm of five-hundred from a firm of ten and have the same way of sharing the fruits of our business-but it is somehow not working as well as it once did". These discussions start in other ways too but you get the drift of what this is about. How success (and the lack of it if need be) is shared is very important.
The ´Secret Sauce´
The ´secret´ of reward harmony, ´really´ rewarding performance, reflecting however the firm defines ´fairness´, and attracting the very best professionals and keeping them focused is to build a transparent compensation and results-sharing solution that everyone ´trusts´. This will likely be a solution that´s based on rewarding the performance, skills, competencies, and other variables that the firm values. High impact pay and reward solutions that add value to the business in real and measurable terms and the goal of most professional service organizations. It´s a business-driven system that works best when the business ´works best´. And when the organization has more limited rewards to share, they are shared based on contributions to the business. This sounds a lot like ´motherhood and apple pie´ to many but in the final analysis pay and rewards in a professional firm must make business sense-there must be a strong business case for however pay and rewards are determined. If this isn´t the case, whether the firm does well or not won´t be viewed as mattering to how rewards are shared.
The talent implications of pay and rewards are dramatic for a professional service firm. How pay and rewards are determined and distributed impacts the type of talent that joins and remains with the organization. "How it´s done here" is implied by the reward solution provided when the employee joins the firm. It also has implications for the employee´s decision to remain with the firm for a significant portion of their professional career. Employees seeking the opportunity to add value in the business by keeping business-relevant skill and competency current will be attracted to a professional service firm that rewards such preparation. Employees who want to contribute in terms of measurable outcomes and results will be attracted to firms that pay for these results. So rewards ´telegraph´ the firms reward values in measurable terms.
As in the case of all for-profit ventures, pay and rewards need to be an integral part of the business strategy and tactics. When business strategy and tactics are addressed and perhaps ´re-tuned´, the pay and reward solution must be adjusted to support this new direction. If they´re not, how pay and rewards are structured may be inconsistent with the organization´s business plan and make achievement of this plan more difficult. This is because people are the only asset a professional firm has and how they perform defines the success, or lack of it, the organization experiences. People form the reputation and customer relationships of the firm. When a client thinks of a professional services firm it is the quality and performance of the people that provide the lasting image whether positive, neutral, or negative. And while people work for more than pay, its legend that the pay and reward solution is critical to the success of a professional firm.
While there is no research we know of that identifies the reasons why professional firms struggle and fail. Considerable antidotal data does sustain a strong belief on our part that how the successes (and failures) of the business are shared over time is a major element that creates either considerable positive energy or internal discord in professional firms. And that this positive force or discord more often than not contributes to retention or defection from the firm or to the creation of a competing firm comprised of members from the original firm.
A convenience sample of exit interview results from professional firms provides the following on reasons senior people the firm says it would like to keep are voluntarily leaving this firm in order of importance:
1. The firm´s leadership and the associates I work with
2. The opportunity to create a firm of my own.
3. The way pay, rewards, and equity and firm performance are shared.
4. Interpersonal difficulties and internal conflict.
Hardly a scientific conclusion but it does suggest that pay and rewards are important to members of professional firms. While pay and rewards are clearly not the reason key people say they are leaving, this appears to be the next critical issue after leadership and who they work with and a chance to form their own firm. Forming your own firm may also be at least partially an issue of sharing in the success of the organization. So wherever pay and rewards ranks, it´s clear that if something can be done to repair a system that is a source of discontent and possible of causing the firm to emphasize issues that while rewarded don´t directly add value to the business.
The ´Partners´
The most common way partners are ´picked´ and compensation and financial success sharing are determined is by some partner or ownership process. Maybe a senior committee of the partners or owners or perhaps the senior partner who makes pay and reward plus even partnership decisions alone or with counsel from a select group of ´others´. Most professional organizations have a process for making these decisions that was put into place when they were a relatively small firm. Some of the primary reasons these processes come into question and perhaps challenge are the growth and success of the firm, the firm´s need to obtain talent that did not ´grow up´ in the firm. Also, retirement and change in leadership roles may introduce new decision-makers into the partnership and compensation determination formula. For whatever reason, from time to time "the way it´s done here" is brought to question.
The partners often hesitate to explore the compensation elements of the firm. The most common source of hesitation is the belief that changing the pay system that applies to key professionals will create considerable ´noise´ and distract from the business of the firm. These are fair concerns and professional firms that have not studied pay for a long time are indeed challenged when they finally do address pay. We partnered with the leadership team of a large medical group comprised of several hundred physicians. This group had not studied pay for many years and many things had changed.
For example the group paid physicians based on years of service and years in the medical profession. However, the market value of certain specialties had changed from what it had been. So years of service and the value of physician skills no longer correlated as they had for many years. They also wanted to define a ´pay for performance´ solution and this provided a substantial challenge. However, the group did reach a creative conclusion and became committed to a mutual process for implementing it over several years. It involved some ´freezing´ of physician pay and ´accelerating´ the pay of others unrelated to service and that needed to be transitioned into slowly.
Business Challenges Magnified by Pay
The ´problems´ faced in pay within a professional partnership vary widely. Most of the studies start with a ´fact finding´ phase to somehow explore the perceived or real issues that need to be faced. This goal is to ´correct´ any deficiencies in the pay and reward solution that seems a mismatch and a source of discontent to a large enough contingency in the firm to warrant the study. Here´s what seem to be the most identified issues identified as the reasons for reviewing pay:
1. Perceived inequity between pay and contributions to the firm.
2. Need to clarify and define the factors that should determine professional pay.
3. Goal to much more strongly pay for professional performance.
4. Improve overall firm income and client quality performance.
Whether these are universally targeted goals and shared by professional organizations in general isn´t important. The issue is that in the sample of professional organizations providing input, pay is an issue that´s close to the success of the firm. And the importance may be due to either some actual dislocation of pay from the key goals of the organization or a perceived situation where pay ´misses´ a connection with what the leadership of the firm believes is central to organizational success.
While pay and rewards are important in other companies, people are the only source of client work and revenue for the firm. For professionals pay and rewards, as well as other forms of status the firm can provide, are important. Because much of the individual financial contribution made is ´time related´, how what people make is determined counts. Addressing pay and rewards in a professional organization is commonly deferred by senior leadership because how the success of the organization is to be shared it often is one of the first things the organization deals with in the ´chartering´ process.
And often generations of valued employees and partners are brought into the firm and grow with the firm under the original reward structure. Pat and rewards in a professional firm gain sponsorship and strong support as ´the way it is done here´. Many leadership teams fear that changing the reward solution that got the organization where it is now may create problems for the organization. Pay and rewards is often an ´if it isn´t broken, don´t fix it´ sort of formula.
Core Process Solutions
If the organization isn´t able to provide a strong business case for the existing pay and reward solution, what approach to addressing pay and rewards makes the best sense? We have seen a number of alternative approaches tried by a number of professional service organizations. We have seen all of them work to varying degrees. We have concluded that the better the process the longer the solution will last. And the better the process the organization uses to study and develop a revised compensation solution, the more closely the leadership team believes any resulting changes match the basic business directions of the firm. And the process that works best is clearly not a ´one size fits all´ situation.
The alternative ways professional organizations address compensation change aren´t great surprises. Rather, they deal with compensation change in ways that are similar to how all companies deal with similar challenges. Some of the ways studies of this type have been addressed in professional firms include the following:
1. Leadership team with assistance from internal staff and perhaps external advice address the tactics of pay and make any changes. Changes are unilaterally communicated to those affected.
2. Leadership team gathers input, suggestions, and comment from partners and employees. With assistance from staff and perhaps outside advisors make the tactical changes to programs and plans. Changes and communicated through ´focus groups´ with comment and chance to provide input.
3. Leadership team charters a ´study group´ of partners and employees to develop recommendations concerning tactical changes. Leaders consider and accept and reject the features as they see fit. Consult with internal and external advisors. Communicate decisions through study group and consider any comments and suggestions. Plan implemented with help of study group members.
4. Leadership team ties the compensation solution to the business strategy and makes it part of strategic direction. Chargers a design team to develop a compensation system that´s reflective of the business strategy and a business case for changing how rewards are addressed. Included considerable employee and partner participation and input with final decision made by leadership and communicated and championed.
All of these solutions work well depending on the nature and culture of the organization. Some firms view compensation as a tactical issue and others view it as a strategic issue. For lasting value and maximum acceptance, professional firms that are able to deal with it suggest that increasing involvement of the members of the firm, plus all employees, results in a solution that last longer and is more strongly accepted and sponsored.
Is the firm interested in a ´quick fix´, a ´fine tune´, or a more strategic change in the direction rewards take in support of business priorities. If the change necessary is something like making a change in an existing reward tool such as variable pay based on organizational performance, then a tactical solution most probably will work. That´s because the organization and it´s leadership isn´t asking people to accept and sponsor a new direction, but rather just the modernization of some existing tool.
If on the other hand pay and rewards are no longer judged to reflect the directions and priorities the firm needs to take, a more lasting ´overhaul´ of the reward solutions may be needed. If major directional change is needed, then acceptance and understand of why current practices must change and what the implications of these changes will be critical. And getting understanding and acceptance requires more involvement. This means getting acceptance and understanding will take more time.
And, if changes to status quo are significant, then transition to the new ´way things are done here´ will be ´noisy´ and time consuming. But changing rewards in an organization such as a professional services firm is often ´heavy lifting´. This is because many came to the organization with the ´original reward deal´ and now it is change. So the business case for change must be powerful and people must see how once they get from where they are now on rewards to where they must be that the opportunity for a ´win-win´ is realistic and attractive.
The ´How To´ of Reward Change
Assume that the professional services firm has decided that the existing pay and reward system no longer matches the business goals and priorities of the organization. Assume further that the organization has also decided that it is willing to institute reward change and that once the change is underway they are willing to complete the process. That´s because unless the leadership team is willing to complete the change process, starting the change is a waste of time. Unless, of course, the leadership becomes convinced that change is not needed and assuming this decision is made because the organization comes to believe the existing solution better fits the organization´s goals then any other solution might. And we mean by this that leadership honestly believes the existing solution is a better fit. We don´t mean that leadership decides that the energy it will take to make the needed change is ´too much´ even though they believe the firm would be much better off if the change were put into operation.
Let´s look at a sample process that typifies a more strategic view of how to address possible pay and reward change in a professional service organization. We view the development of a strategically-focused reward solution for a professional service firm as necessarily needing to address the following issues:
1. Strategic Business Direction of the Organization
2. Strategy for Pay and Rewards to Support Business Direction
3. Evaluation of Present Pay and Reward Solution
4. Design, Implementation, and Communication
5. Continuous Monitoring and Improvement
These elements of the process can be renamed as fits the culture and semantics of the organization. However, the strength of this process lies in the fact that it builds a business case for changing rewards and subsequently uses this business case as the foundation for either reinforcing the existing pay and reward solution or justifying a modified one. The very best way to get acceptance of how pay and rewards are determined is by saying they are designed in this way in order to help the business be a success. Here´s what the business is doing and here is what people must do to help the organization succeed. So given this information, here´s what the firm is paying for in terms of behaviors and outcomes. That is the reward strategy so to speak.
Strategic Business Direction of the Organization
What´s unique about this? Doesn´t every organization have some sort of ´strategic business direction´? Most say something about strategic direction but most don´t put the workforce in the context of the business strategy. In otherwords few business strategies make the important step to defining the role the workforce plays in making the strategic goals a reality. The first priority is to visit the strategy and see whether strategy is stable or changing to meet a business challenge. Challenges to be faced can be something in the business environment; some customer challenge; a new organizational staffing direction; or a situation where new skills and competencies that do not exist in the organization at presented are suggested by some new business direction.
Business strategies for professional firms do best when they define the ´what´ about the goals and the ´how´ about them as well. Here are some oversimplified examples of ´how to´:
1. The firm will enter the XYZ business by obtaining employees with XYZ compatible skills.
2. Our organization will grow by assigning employees the responsibility for at least $XXX in new revenue.
The important issue here is the connection between what the business goals are and what employees are expected to do to achieve them. The business case is clear and transparent and employees can see how they will be expected to perform. If the strategists are expected to translate the business strategy into what people are to do, it´s more likely that strategy will be more practical and realistic. Often strategists are not directly connected to those in the firm who are accountable for bringing life into an intended strategy. So, sometimes goals are set on wishful thinking instead of what can realistically be achieved even at significant stretch performance. If a connection must be made between strategic goals and what is required of those in a professional firm to achieve them, the ´how to´ of strategy is likely to be communicated and understood.
The first step is always the development of a real business strategy. The real business strategy develops the goals and the metrics for evaluating performance and outcomes in a concrete fashion. In a professional firm the strategy development process also creates dialog between those developing strategic direction. In too many instances, however, setting annual goals is called "strategy". And this is most often more of an accounting or financial process that sets down goals based on a prior year´s performance or what the firm needs in terms of income and customers to justify the existing staffing level.
This too often avoids the issue is whether the firm has the right people to achieve the goals. And just setting annual goals also misses addressing the issue of whether the firm has the right competencies and skills to achieve the objectives. It is like saying to the firm, ´Go in there and increase sales´, without providing a realistic and practical way of achieving these goals. And once the goals are communicated without a ´how to´ achievement strategy the firm can lose momentum trying to figure out how to make the objectives in the absence of a codifying workforce performance solution.
Strategy for Pay and Rewards to Support Business Direction
Now, armed with a business strategy and the implications for the workforce, the professional firm is ready to evaluate the existing pay and reward schemes to see if they support the business strategy. This is the, ´If it isn´t broken, don´t fix it´, part of the process. It´s also can be the, "If it is indeed broken, do something about it´. And it can also be a time to say, "If it isn´t broken, break it". And why would this last approach make sense? Because often pay and rewards become entitlements in a professional organization. Meaning the actual written and internalized programs may look like they help execute the business strategy-but the way they are managed tells a completely different story about pay and rewards. But this part of the pay and reward business alignment process in a professional firm is where it´s decided if the ´fit´ of current solutions is right or wrong.
There are many strategic issues that play a part in the evaluation of current pay and reward practices. However, some of the questions that explore the ´fit´ could include the following:
1. Who´s Paid Competitively? From a competitive standpoint, does the organization pay strongly competitive pay and rewards for those who have demonstrated the competencies and skills the organization needs to achieve the business strategy?
2. Are Skills Worth Acquiring/Applying? From a developmental perspective, does the organization make it financially attractive for those who are capable of acquiring and applying the competencies and skills needed and learning how to apply them to achieve desired outcomes?
3. Is Performance Worthwhile? From a performance perspective, is it sufficiently worth while in terms of perhaps annual incentive awards for employees to achieve the goals and objectives for which they are responsible? Is the ´win-win´ powerful enough that ´going for the gold´ is much more worth while than waiting around for it to come to you?
4. Are Rewards Cost Effective? From a cost perspective, is enough of compensation cost design so it varies with the key indicators of performance of the organization? For example is there a strong and positive correlation between the performance of the organization and pay and reward costs? For instance when performance dips do pay and rewards dip correspondingly? On the reverse side when performance climbs is the business paying more for this performance?
And the answers to these questions are of importance to the next decisions about what pay and reward tools and programs are needed to better align pay and rewards with the business strategy. In many instances the way the pay and reward programs are currently designed can make it impossible for the organization to realize the objectives. Pay and rewards are powerful communicators of directions and values. They certainly can´t make people do what they don´t want to do. However, they are very effective in showing those who decide to do what is required how they can share in this success. And they can communicate to those who do not join in the initiative to achieve the business goals what they are missing if they don´t.
Evaluation of Present Pay and Reward Solution
Some pay and reward tools do a better job of accomplishing some pay and reward objectives than do others. For instance few reward designers believe that retirement plans help an organization focus employees on performance. Unless, of course the organization believes creating fear in the hearts of the employees that unless they perform they will lose their jobs and thus their retirement plans instills a performance ethic. And giving more or less liberal health benefits is not viewed by many to help the organization perform better. Indeed retirement plans and health benefits are important to employees and to their decisions about joining or staying with a company, but you can´t give someone ´more health benefits´ if they performance and cut their benefits a bit when they don´t.
But a performance management system that is linked strongly to base pay adjustments can pay for the acquisition and application of new critical business skills. And when the need for skills changes, the performance management solution can be agile enough to match these new directional needs. It makes no sense to have a performance management tool that fails to communicate to employees what´s important about performance and what is not important. It makes sense to place a priority on what´s important. And it is important to limit the number and type of things you emphasize. This is because having multiple performance measures and goals with each being a small portion of overall value permits the employee to pick and choose the ones to do and those not to do. So organizations need to emphasize what they want to get in terms of performance.
Now let´s focus on one of our favorite reward tools-variable pay. Variable pay (or incentives) provides cash payments that do not become an annuity of base pay. They need to be re-earned from performance period to performance period. And the larger the proportion of cash compensation (or other rewards) that come in the form of a potential variable pay award, the more important it is for the employee to achieve the goal that determines whether the award is earned or not-and if earned, what actual variable pay award is. And variable pay awards can vary in the period over which performance is measured-one, two, or three years being the most common measurement periods. Variable pay is an agile tool that permits organizations to spend pay and reward dollars for results they want. It avoids the problem that typical ''merit´ solutions often have of paying for one year´s performance for the rest of an employee´s career. Variable pay provides ´reusable´ reward dollars that can be re-spent from year to year for different accomplishments.
But the evaluation generates a conclusion about what new directions the organization may need to take to align pay and rewards with the business. It outlines what measures and goals are to be used and what the standards of performance for each goal will be. It defines where pay and reward tools will be used and how and for what employee populations. It permits leadership to simulate how the mix of tools and programs will work together and to get a ´free look´ at how the programs might work based on various performance and skill alternatives. Once finalized, this leads to the actual design, implementation, and communication phase.
Design, Implementation, and Communication
This is as advertised. It is where everything is put together and it is where all the prior steps come together. The importance of this process is that by this time the organization knows the business strategy and where people must fit in making it a reality. It is also when the organization can develop the actual programs and make any minor or significant changes in the overall pay and reward design. In most instances this includes the development of the following:
1. Base Pay. Base pay or the equivalent partnership or ownership solution that represents ownership share of the organization.
2. Performance Management. Performance management and career tracking that aligns any increases in base pay or ownership share with some measures of value-added to the organization.
3. Measures and Goals. Metrics for base pay or ownership share adjustments related to issues of gaining new and refreshed skill and competency and translating this into measurable business outcomes.
4. Variable Pay. Annual and perhaps long-term variable pay (incentives) linked to some measures of performance at the individual, organizational unit, or firm or organization-wide level including financial and non-financial metrics. Combining sharing organizational performance over the long and shorter-term.
5. Benefits and perquisites. Health insurance and other protection including profit sharing or other provision for employee sharing and savings. Retirement and disability benefits and other insurance protections. Possibly some form of ´cafeteria´ or ´choice-making´ among benefits.
6. Recognition and celebration. Non-financial rewards and recognition to supplement forms of financial rewards.
Our emphasis in this article is on total compensation or total pay. In addition to total pay which is an important element of total rewards as shown in Exhibit 1, the other components of rewards such as compelling future, individual growth, and a positive workplace, are critical elements to a viable total reward strategy. It is beyond the scope of this article to address these components but this does not make them any less important than does a discussion of total pay.
Exhibit 1
Total Reward Components
It has been our experience that getting the involvement of a task force or work team of employees from the organization to help design, communicate, and implement the programs developed in response to the reward strategy helps gain acceptance and sponsorship. People support what they are involved in and understand. Pay and rewards is a ´hot´ change item that impacts people importantly. So getting a sample of those impacted involved helps smooth the implementation process.
People do not like pay and rewards to change. And getting employees impacted by the change to help design the programs to match the strategy is valuable and well worth the time and effort. While the involvement will certainly differ from organization to organization, it is invaluable in getting acceptance and in getting a cadre of communicators to help get the message out broadly about the value of the change and the business case. And, often the input and contribution substantially improves the quality of the actual programs being designed and implemented.
But the final accountability for making sure any new pay and reward solutions support the business rest with the senior leadership team. It means top management must make sure that the designs are well calibrated with the business goals and the total pay strategy. It means understanding the alternatives that were considered and why the solution proposed best fits the strategy for total pay for the organization. In many ways it is the time to evaluate alternative ways to get to the same conclusion. Like an investment strategy in pay and rewards. And the conclusion is designed and communicated broadly and intensely. Communications is always considered strongly but implemented less strongly. Communications is very important and as some sage said, "As soon as you think you have sufficiently communicated something, it is time to intensify the effort".
Continuous Monitoring and Improvement
Changing total pay to match business strategy is often ´heavy lifting´. And after the initial steps have been accomplished many organizations are fatigued and want to get on to other important issues and challenges. But just at the point of initial announcement is the time to set up communications that will be lasting and continuous. How programs work at the first day of operation may differ from how they operate in the long run. And leadership should monitor program management to see that the intent of the plan is being carried out. And two things to monitor for could be as important as answering the following questions:
1. If the intent is to pay for performance, does the solution actually do this?
2. If the program intends to focus on the top 20% of performers, does it do this?
3. If the goal is to pay strongly for key skill and competency, does this really happen?
The chance for improvement exists all the time. And managers and employees can make significant improvements as the programs are in operation. Many professional firms have periodic reviews of how the plans are being managed to look for chances to improve and fine tune all the time. Many organizations say that continuous program improvement provides them with a better working program in the third and fourth year of the program than the first and second. And the plans evolved and change as the organization´s needs change. And incremental improvement and positive change can result in a much better plan later in its life rather than earlier. And the key to monitoring and improvement is that if the solutions evolve to fit the needs of the organization over time, the organization can avoid the dramatic and significant change because periodic ´course corrections´ make dramatic change unnecessary.
Conclusions
Professional firms have only people. They don´t have the same ´tools of the trade´ that manufacturing organizations do, for example. People are the ´tools´ so to speak and that´s why pay and rewards in a professional firm are so important. Our suggestion is that a more strategic view that includes as much involvement that the organization can stand consistent with meeting deadlines and completion dates is the best formula for revamping the pay and reward solution of a professional service organization. While there is clearly no ´one size fits all´ either in how a reward change process is undertaken or on what the solution might be, it seems that a periodic review of practice as it relates to business strategy may be timely.
The global business environment is changing dramatically. And the changes are not permanent-meaning a solution that works for this year´s business may not for next. So agility and the willingness to be open in the reasons for a pay and rewards review and also for providing a formula that suggests how things might change and what the implications of these changes are for the workforce.
Source: Patricia K. Zingheim and Jay R. Schuster, Pay People Right! Breakthrough Reward Strategies to Create Great Companies, San Francisco: Jossey-Bass, 2000.