Do you find that everyone in your organization has a different viewpoint on executive pay, resulting in ongoing conflict and no permanent solutions?
CEO: “Why is my board always at odds with what senior leaders deserve?”
Board Member: “Feels like we keep paying more for leadership… is it that much more valuable than client service?”
Leader: “As an industry group leader, I’m rewarded on new service growth, while my peers are rewarded on profitability – why are we always pulling against each other?
Potential Leader: “Why would I want to be in a leadership position I don’t understand? I make plenty of money in my client-facing role today.”
If these comments sound familiar, you’re not alone. Boards and leadership teams spend a disproportionate amount of time discussing this issue without reaching a satisfactory solution. Failure is painful and can have a significant impact on business.
It is not uncommon, particularly among sizable firms, to spend 3 to 7 percent of their overall income pool on the top 2 percent of partners. However, as a partner or board member, you’re concerned not only with giving your top leadership the right incentives to stay and perform at a high level, but also with ensuring that the investment in executive pay helps produce leadership focus and behaviors that effectively drive your company towards its objectives.
It is important to identify what you expect from your leaders. Often, the goal of senior leaders’ roles is to make the firm more valuable, profitable, and sustainable. However, even if growth is the ultimate goal, it may be useful to measure your leaders on objectives besides managed revenue, etc. Think about how to value outcomes that signal progress or can support achievement of your growth goals:
The value leaders provide is distinct, realized over longer periods of time, and not well understood by most of the partners who haven’t held senior leader roles. All of this makes it more difficult for Boards and Management Teams to align on how to value and measure leadership contributions. Strategic thinking and planning is likely to produce results in years rather than weeks or months. Further, the contributions that lead to results are not as easy to query from the billing system like charge hours and generated revenue.
It can be especially productive to consider measures that link senior roles to overall firm performance, since the purpose of leadership is to improve the firm as a whole and everyone’s situation within it. Consider relative valuation techniques — for example, multiples of average partner pay and objective-based bonuses. Further, consider a mix of annual and rolling multi-year metrics that balance the timeframes of effort to outcome.
The traditional annual performance evaluation process, should appropriately reflect the nuance by having multiple people involved with at least a couple of individuals who have held some leadership roles in their career. Also, a pre-agreed framework for the range of pay and what will make it increase or decrease is critical to a dispassionate assessment and reward.
Professional service firms do not necessarily operate in standardized ways. There may not be market comparisons for certain roles. Consider that roles such as Managing Partner and Heads of Practice or Industry are almost always uniquely crafted for each firm. Further, firms almost never hire into the roles from outside. While it may make you feel better knowing your firm is in step with the industry, attempting to mimic peer firm pay levels and rewards most often will lead you back to endless debates without a frame for how to value such contributions in your own environment.
Remember all the problems caused by conflicting points of view on leadership pay? The best way to get the board, leaders, partners, and future leaders on the same page is through transparency and consistency.
In addition to reducing annual arguments over fairness, transparency into leadership expectations and evaluation will help potential future leaders understand whether the role is right for them. In addition, knowing clearly what these roles entail can help future executives prepare themselves effectively for these responsibilities.
At Axiom, we have extensive experience helping professional services firms solve their unique executive compensation plan issues and build a business that can meet — and beat — the challenges of the marketplace. Contact us today.