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By David C. Kuhlman and Laura D. Kellogg

At one time or another, most firms wonder whether they pay competitively for their personnel. They wonder if they match what other firms pay and if they risk competitive raids. They commission surveys or hire consultants to opine on the issue. They poll headhunters for their insights. But, usually, their questions lack focus and clarity, and uncertainty masks the implications. We hope the following paragraphs will shed some light on this mysterious subject.

The Fallacy of Pay Competitiveness

The awful truth about pay competitiveness in professional environments is that the issue is at once irrelevant and vital to the success of a firm. Plus the reasons are bound up in the very nature of most professional firms.

Most professional firms are a sort of private entity, usually owned by some or all of the partners. This model creates a fundamentally different and unique set of economics that challenges the notion of pay competitiveness. In serving clients among industry, we often hear terms like "competitive pay levels" and "pay market positioning." Such organizations have an explicit philosophy for matching the going rate for talent and ensuring they do not pay too much. The implication for a professional firm is clear and the temptation great to just say, "Why don't we do that?"

The simple answer is: because you can't. We concede the great virtues of paying competitively and the great costs to not doing so. These corporations are not bound by a simple reality that binds most professional firms. Namely, such corporations can pay more to employees at the expense of shareholders, as measured in dividends or market returns. A professional firm, owned by its partners, cannot. If the money isn't there to pay competitively, a firm is hard pressed to do so despite economic reality.

In the end, the competitiveness of a firm's economics determines pay competitiveness. The higher the firm's profits per partner, the greater its flexibility to pay competitively. A firm with excellent profits per partner pays out well over the competitive market, and appropriately so. The message, however, is that pay competitiveness, by necessity, depends more on the firm's productivity than on an a priori decision.

Does this mean issues like competitiveness and turnover do not concern professional firms? Of course not. On the contrary, firms must think differently than their industrial clients about the future. The term we use is "exit price."

Exit Price Defined

Exit price is the amount of money and other intangibles required to entice someone to leave a firm and go elsewhere. However, unlike other kinds of enterprise, this is a more complex matter than "how much cash we offer."

Exit price involves not only specific, tangible factors like money, but also intangibles like inertia, and other job intrinsics (see the accompanying exhibit). Individuals seriously consider these factors when deciding whether or not to stay with a firm. The brutal truth is, any valued professional at a firm could make more money elsewhere. The key lies in what the total package conveys. As one of our clients says, "We've chosen to do this--be in a professional firm--instead of having a real job!"

Intrinsic factors have at times a puzzlingly powerful influence on binding people into a firm. We've often found in the presence of powerful intrinsics, pay has to be "close enough" for the other factors to take over and dominate an individual's thinking about staying or going. As a partner in the Big Six once told us, "I could make a lot more outside, but I'm already making a lot more than I ever expected, and I love being part of this firm. I belong here." You might be surprised how often we hear this sentiment echoed in even moderately successful firms.

Likewise, the absence of intrinsics can create problems that may well be insurmountable with money. This makes exit price a powerful issue to contend with, since it manifests itself differently among different groups of employees. Following are some thoughts on how you might think about exit price for three different groups.

Exit Price for Nonpartner Professionals

Professionals who are "coming up" have particular vulnerability to exit price issues. More often than not, the firm can control its fate. Specifically, managing exit price for non-partner professionals means balancing career prospects and work environment against the number and mix of talent you need to ensure effective partner succession. How you strike this balance is typically all you need to know about how much to pay these people.

Career prospects usually constitute the dominant concern for the up and coming professional. Specifically, "what are my chances of making partner?" and "will I like it once I'm there?" "What will it cost me to get there?"--does not appear. Although a select few seek non-partner alternatives within professional environments the great truth of partnerships remains largely the same: "If the club is worth joining, people will go through a heck of a lot to join it." This means that the exit price for associates, non-partner professionals, is dominated by such questions as--

* how clear is my path to partner?

* do I feel the advancement process is just?

* does the partnership look and feel strong?

* are the partners a cohesive group?

* do the partners share characteristics I admire more so than others around me?

* what is the prevalence of poor advancement decisions, a sign they aren't taking advancement as seriously as I do?

Work environment affects this perception about partnership profoundly. If the firm creates an environment that pits associates against one another or places billability as the cardinal value, then associates will construe the "club" accordingly. They may lose confidence. A firm must take care to invest where it will build its practice over the long term. Because it does not take much for associates, whose billability drives the economics of a firm, to break even and because the firm in which associates merely break even is out of business, it rarely "pays" to nickel and dime their compensation.

However, on the other side of this philosophy lies a willingness to cut otherwise productive associates who do not reflect the model associate or partner of the future. Remember, unless a firm is growing rapidly, quality developmental opportunities can prove a scarcer resource than associate pay. Because economics do dominate a firm's ability to pay competitively, spend money first on those associates who will build firm value over the long term.

Exit Price for Partners

Partners' exit price is both easier--because it is more constrained--and more complex, because it involves some intrinsic conflicts. Nowhere are economic constraints more clearly felt than at the partner level. If there is no money in the box to give out, you can't pay competitively. However, partners themselves control many of the factors that drive not only economics but also intrinsic rewards.

The key pay consideration is to deploy available funds to drive the highest profits per partner over time. This creates a self-fulfilling prophecy. Simply said, not so simply done. Rewards should be geared to criteria, in the following order:

1. Those who create significant near-term economic value, and build the firm at the same time.

2. Those who create huge near-term economic results, but do not really build for the future.

3. Those who cover their own costs, but represent the firm's future asset base.

4. Moderate, pure-economic producers.

5. All others.

These priorities make sense where all partners conform more or less to the same behavioral norms. When a few big producers don't play by the rules, the firm must face some tough choices. Choosing not to address the behavioral and style problems is a bit like, in the words of one client--"Congratulations, your fate is in the hands of Atilla the Hun, our biggest business developer." On the other hand, the pragmatic balance between values and survival cannot be denied.

Exit Price for Support Personnel

Whenever we talk about exit price and support personnel, we have to acknowledge we are playing by different rules. Although professionals think in terms of "career equity" built over time, most support people do not. The key here is to pay an aggressive wage, set high standards, and weed out non-performers.

Nowhere in your firm are differences in competency and commitment more resented than with support staff. Likewise, the right kind of elitism can drive and enhance performance in support staff far more effectively than any incentive program.

Support staff quality and "return" depend far less on how or how much you pay, but on how you select and appraise. As a result, building the quality of your assessment and evaluation process may have the single biggest effect on raising the exit price of support staff. Doing so will enable you to pay higher rates by taking advantage of the tremendous leverage great support staff can give.

How to Test Your Exit Price

What does this mean you should do? First, understand how your pay stacks up against your competitors, but recognize this is only the starting point. Below is a list of eight questions you must answer truthfully. Only after you answer them can you retain key talent, enhance your profitability, and successfully and consistently exceed the exit prices of key performers.

1. Is our firm profitable enough to pay people as we believe we should or must?

2. If not, what behavioral changes are required to do so?

3. Are we really rewarding those who do the right things the right way?

4. If not, are we in a self-fulfilling downward cycle?

5. Do our associates have clarity on where they stand in their careers?

6. Have we identified the important assets for the future and have we protected them well?

7. Do we have high standards for support staff and do we enforce them?

8. If faced with the opportunity to pay 25 to 50 percent more than competitors for secretarial support, would we be comfortable doing so? If not, how would we have to upgrade our talent? *

David C. Kuhlman is a principal with Sibson & Company, a management consulting firm based in Princeton, NJ Laura D. Kellogg is a consultant also with Sibson & Company's Chicago, IL office.

Reprinted with permission of Insight, July 1996, copyright 1996

Michael Goldstein, CPA
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