CHAPTER 14
WHAT WILL YOU DO TOMORROW?
“When it comes to the future, there are three kinds of people: those who let it happen, those who make it happen, and those who wonder what happened.”
—Ron M. Richardson, Jr.
Congratulations for finishing the book. By now we trust you have a more in-depth understanding of differing types of compensation plans. And we hope the majority of your questions about these plans are answered. Our goal was to provide you with information that allows you to improve or recreate your compensation system. It is now time for you to choose whether you will do either. As the above quote states, you have only three options, do nothing, do something, or wonder.
If you are thinking about implementing a new plan, you may still be unsure about which owner and staff compensation plan is right for your firm. When it comes to compensation, there are almost as many formulas for splitting the pie as there are firms. Our 2006 Compensation Survey surely demonstrates this. Nevertheless, we want to leave you with some concrete steps to follow and some recommendations. For it is up to you to decide.
FOUR KEYS TO SUCCESS
There is a fairly simple four-step process to follow when improving or recreating your owner and employee compensation systems.
Diagnose before you prescribe. When you visit your doctor with symptoms, he or she must diagnose before prescribing medication or treatment. Be sure you know the underlying problems—not just the symptoms—of your current plan. To assist you in this step see Exhibit 14–1, “Diagnostic Questionnaire.”
Involve everyone in the diagnosis and design—get their input. Involvement is absolutely essential for a successful program. We often say, “no involvement, no commitment.” This does not mean, however, you must gain consensus. The ultimate decision rests with the firm’s management team.
Understand that individual behavior drives firm-wide culture. Each firm will design its own compensation program, and it should motivate individuals to live the firm’s values, develop their competencies, and hit their performance goals, thus creating desired culture. Your compensation plan will not change the firm’s culture, so make sure you start with developing the culture you want and then design the compensation plan to support that culture.
Be sure everyone understands the new plan—and owners buy into it. You cannot spend too much time educating staff members and owners about their programs. They must understand how it will work, how it will be funded and who will administer it.
CONSIDERATIONS
Whenever you try something new, you can almost be sure it will not be perfect the first time. The same is true for compensation programs. To come as close as possible to perfection, however, here are things you need to consider:
▮ What factors will be part of your new plan? Determine what factors you will measure and how you will measure them. The factors on which people will be measured should motivate them to behave in a manner that furthers the firm’s strategic initiatives.
▮ What weight will you assign for each factor? Depending on your strategic initiatives, the factors on which you measure should have different weights, and the weights can and should change from year to year based on changes in your strategic initiatives.
▮ What tool(s) will you use to measure each factor? You can use 360-degree surveys, productivity reports from the time and billing system, marketing reports, satisfaction surveys, and a wide variety of other tools to measure the factors.
▮ Does the compensation system recognize all types of contribution to the firm’s success? Firms need strong finders, minders, and grinders as well as leaders, mentors, coaches, and so on, to be successful. Firms are a composite of the knowledge, skills, and personal attributes of its owners and employees. Fortunately, people are not clones of one another, and your compensation system needs to recognize the various contributions that drive the firm’s overall success. While it is true that not everyone is created equal, it is also true that the firm would not be where it is today without everyone contributing, in some fashion, to its success.
▮ Is it perceived to be fair? A system that is not perceived to be fair or fairly applied is doomed to cause problems. We suggest, therefore, that you seek feedback at least annually to determine existing beliefs about the compensation systems’ fairness.
▮ Is it flexible to meet changing needs of the firm? Firms definitely change and you want to ensure the program is flexible enough to change along with the firm. We are not suggesting frequent changes in the compensation system, however. We suggest changes only to the degree they are absolutely necessary.
▮ Does it have significant differentials in compensation from owner to owner (or team member to team member)? Small variances in total compensation (that is, salary plus bonus) between people in the same role (especially senior roles) are not healthy. As we said, owners and employees are neither clones nor equal contributors. The longer your system is in place, the greater the gap in compensation between the highest performer and the lowest performer in each level at the firm.
BENEFITS
While we like to say all firms should embrace a pay for performance system, we know that is not going to happen. Nevertheless, there are benefits that only a pay for performance system can bring. Pay for performance:
Provides a clear link to the firm’s strategic plan, and core values.
Is transparent.
Links individual and team performance to pay.
Provides fair, honest, and accurate assessments of performance.
Rewards high performers and identifies low performers.
Ties into competencies which reflect the skills and abilities needed to meet firm goals.
FINAL THOUGHTS
Donald Trump once said, “In the end, you’re measured not by how much you undertake, but by what you finally accomplish.” Designing the right compensation plan is a great undertaking to help you and your firm accomplish desired results.
The choice is now yours. Choose wisely.
EXHIBIT 14–1 Diagnostic Questionnaire
What is your current compensation system (formula, equity, equal pay, executive committee or managing owner decides, pay-for-performance)?
What do your owners like about it?
What do your owners dislike about it?
Do they perceive it to be fair?
Do they understand how the compensation process works?
What factors are currently measured?
Do these factors drive the desired behavior?
Do the owners fill out a self-evaluation form at the end of the year?
Is the self-evaluation form shared with the other owners?
Is input sought from all the other owners regarding compensation decisions?
Do you provide owners with a base salary and then allocate profits based on specific criteria?
What percentage of an owner’s compensation is the base salary?
What percentage of total compensation comes from the bonus pool?
Does the plan drive the desired results?