CHAPTER 3
GROWING THE COMPENSATION PIE: THE BIG PICTURE FACTOR

“All organizations are perfectly aligned to get the results they get.”

—Jim Stuart

No matter how noble or powerful your organizational mission (why your firm exists), that mission (and your long-term vision) cannot be achieved unless you understand the ecosystem that supports it. To achieve your desired results, you must be clear not only about who you are, who you serve, and why but also how you do so. You must create organizational alignment.

Organizational alignment is linking strategy, systems and processes, people and culture, to best accomplish the mission, vision, and desired business results of an organization. Alignment occurs when the above elements are mutually supportive and focused on effective and efficient delivery of results.

The first step is an understanding of why organizations get the good results they get and why they get the not-so-good results they get—and it’s not based on their compensation criteria or methodology. This chapter discusses two organizational models important to accounting firms: the 7S Model and the Organizational Effectiveness Model.

THE 7S MODEL

While employed as a client partner and business developer at FranklinCovey Co., Coral received her first exposure to the company’s performance cycle, later to be called the Organizational Effectiveness Cycle (OEC). She came to understand it as an iteration of McKinsey’s “7S” Model, which illustrates the seven key components of an organization, which is charted in Exhibit 3–1, “The 7S Model.” The 7S-Model was developed by Tom Peters, Robert Waterman, and Julien R. Phillips, consultants at McKinsey & Co. They first published the 7S Model in their 1980 article, “Structure Is Not Organization.” The model maintains that an organization is not just its structure, but it consists of seven distinct elements, three of which are dubbed “hard” and four of which are dubbed “soft.”

The three hard S elements—strategy, structure and systems—are tangible and easy to identify. They can be found in a firm’s strategy statements, business plans, organizational charts, and other documentation. The four soft S elements—skills, staff, shared values, and style—are intangible. They are difficult to describe since capabilities, values, and elements of your firm’s culture are continuously developing and changing. The soft elements are highly determined by the people who work in the organization. Therefore, it is much more difficult to plan or to influence the characteristics of the soft elements. Although the soft factors are intangible, they have a significant impact on the hard strategy, structure, and systems of the organization.

Peters, Waterman, and Phillips describe the Seven S’s as follows:¹

As in nature, all organizations have their own ecosystems in which each element has its place yet is dependent on the other elements for long-term survival. Effective organizations maintain a fine balance between and among the seven Ss.

APPLYING THE 7S ELEMENTS TO ACCOUNTING FIRMS

Let’s take a look at how this might work in an accounting firm. Following is a description of the seven Ss in a public accounting firm.

If one of the seven elements changes, each of the other elements is affected. For example, a change in human resource systems such as internal career plans and management training, will have an impact on organizational culture (management style), and thus will affect structures, processes, and finally characteristic competences of the organization.

According to Dagmar Recklies, when firms try to make changes, they usually focus their efforts on the hard Ss—strategy, structure, and systems—believing these are easier to change. “If we change our strategy,” says one managing owner, “won’t we get different results?” Traditionally, this has been the approach public accounting firms have taken when starting a change process. Unfortunately, however, it is the wrong place to start.

Most companies and public accounting firms care less for the soft Ss— skills, staff, style, and shared values. Peters and Waterman in In Search of Excellence observed that most successful companies work hard at these soft Ss.² Few companies, including public accounting firms, have taken their advice to heart. We know that soft factors can make or break a change process, since new structures and strategies are difficult to build when the culture is dysfunctional or values are not shared. The dissatisfying results of most mergers, whether small or spectacular mega-mergers, are often based on a clash of completely different cultures, values, and styles, which makes it difficult to establish effective, common systems and structures.

THE ORGANIZATIONAL EFFECTIVENESS CYCLE (OEC)

Like the 7S Model, the OEC (Exhibit 3–2) helps us see our organizations in a holistic fashion, and if properly employed, it can be a powerful instrument to help leaders increase performance and achieve sustainable results. The OEC reorganizes the elements of the 7S Model and serves as two leadership tools:

1. A graphic model, which illustrates the relationships among all key components of an organization and defines the path for leading change in a firm, department, or functional area.

2. A methodology, which enables leaders to diagnose root causes and to design root solutions systematically and effectively—and answer the question, “How can we develop a more highly effective firm?”

The Organizational Effectiveness Cycle as a Graphic Model

To illustrate the relationships among all key components of an organization, we must first know the components. They are:

▮ Customer and other stakeholder needs (other stakeholders may be internal or external and may include employees and their family members, vendors and suppliers, community members, and shareholders, among others).

▮ Mission (why we exist), vision (where we are going), and values (how we will treat each other along the way). (Chapter 4 offers a detailed discussion on mission, vision, and core values.)

▮ Strategy (how we accomplish the goals of the organization).

▮ Systems and processes (how work flows and is accomplished on a dayto-day basis). Examples may include accounts payable and accounts receivable processes, training/systems, performance management, compensation systems, and the way a tax return is processed.

▮ Organizational culture (the collective behaviors of an organization’s members).

▮ Results we are trying to accomplish for internal and/or external stakeholders.

Exhibit 3–2, “Organizational Effectiveness Cycle,” illustrates the components of the OEC. When used as a model for leading change, we start by “seeking first to understand” what our key stakeholders want and need from us. Continuing clockwise on the model, we move to mission. Our organization exists, then, based on what we hear from our key stakeholders, to meet as many of those wants and needs as we can, given our collective skill and desire. Rallying the troops to fulfill client wants and needs is where vision comes in.

In his book Leading Change, John P. Kotter shares eight reasons that major change efforts often fail.³ Three of them have to do with vision: underestimating the power of vision, undercommunicating the vision, and permitting obstacles to block the vision. First, without a sound vision, the “paperless” initiative, the new niche team structure, the revised 360-degree performance appraisal system, the pay-for-performance compensation, and bonus system may not be taken seriously or implemented properly.

Second, Kotter believes major change is usually impossible unless most employees are willing to help, often to the point of making short-term sacrifices. Without credible communication, and a lot of it, he says, employees’ hearts and minds are never captured. Finally, the implementation of the vision requires action (individual and collective behaviors) from everyone. Even though employees may be behind the vision, however, they often experience roadblocks in the form of firm strategy (for example, they do not know what it is), firm structure (for example, the way teams and departments are organized), or people systems (for example, compensation or performance appraisal systems that force people to choose between the noble goal and their self-interests, supervisors that demand behaviors that are counter to the vision, employees who get away with dysfunctional behaviors because supervisors lack the courage to deal with them, or hiring people for their strong technical skills only).

Many firm leaders believe the owner retreat (often called the strategic planning retreat) should “fix” things—that results should change because we have changed the strategic plan. While strategy development is important, the OEC framework suggests people (not strategy) are the key to results and change. So, if we want a change in results, we must get different behaviors from employees—which inherently means a change in the systems that recognize and develop their knowledge and skills or that motivate their behavior.

So, after defining strategy, leaders are responsible for designing effective and efficient processes and systems that allow people to work together synergistically. And it is what people do (or do not do) on a daily basis that gets results (that is, change).

The Organizational Effectiveness Cycle as a Methodology

When using the OEC as a model for leading change, you “work” the model in a clockwise fashion, beginning with stakeholder needs. However, when using the OEC as a methodology for diagnosing root causes and designing root solutions, you “work” the model in a counter-clockwise fashion.

To diagnose why you are not getting the measurable results you want (for example, revenue, profitability, realization, employee retention, and client satisfaction scores), you must look at what people are (and are not) doing to get those results. What behaviors do you need more of, and what behaviors do you need less of?

Then, you must ask yourself, “Why do people do (or not do) those things?” This generally leads you to one or more of three answers:

1. They do not know what to do (know-what).

2. They do not know how to do it (know-how).

3. They are not motivated to do it (know-why).

As a result, you are forced to look at why they don’t know what, how, or why. And it almost always boils down to an ineffective system (for example, hiring system, training system, performance management system, compensation system, or information system) or ineffective structure (for example, team formation, wrong people in the right place, or right people in the wrong place).

This forces you to ask much bigger questions. They include:

▮ “Why did we organize ourselves this way?”

▮ “Why did we hire people who don’t share the same values we share?”

▮ “Why don’t people have the skills they need to allow us to leverage more effectively?”

▮ “Why don’t managers and owners delegate more work?”

▮ “Why did we accept client(s) that are inconsistent with our acceptance standards?”

The answers to these questions tell you what’s wrong with the systems and structures you currently have in place and how they are holding you and your employees back.

FINAL THOUGHTS

Again, it’s not strategy that gets results—especially financial results. It’s people that get them. So, your ability to continue your noble mission by sustaining and improving margins compels you to focus on people (a soft S), to identify and outline the behaviors that are needed to produce your desired results, and to build systems that help people engage in those behaviors. Why? Because all organizations are perfectly aligned to get the results they get.

Few firms will achieve complete alignment. The goal is simply a degree of compatibility and consistency that lets people devote their energy toward accomplishing results, with a minimum of effort toward overcoming obstacles.

EXHIBIT 3–1 The 7S Model⁴

EXHIBIT 3–2 Organizational Effectiveness Cycle⁵