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2012 Professional Services Outlook: Bonus Compensation, Measures, and Retention

A few weeks ago I had a thought-provoking conversation with a managing partner at a middle-market consulting firm. He shared the following dilemma: “I’m supposed to be signing off on bonuses soon, and I don’t know if I should be generous to reward those that stuck with us through the downturn in hopes of deterring turnover or opt to be more conservative and reserve cash in case 2012 isn’t as rosy. Our firm leadership is split. Our backlog and sales reports are sending us mixed signals. What would you suggest?”

It’s a question I hear all too often. And it’s a question that has no easy answer … in fact, it only raises more questions.

  1. Why is there that much subjectivity in variable pay? If the managing partner doesn’t know what the bonus pool will be, there’s no way the rank and file staff do either. And that runs the risk of disappointing consultants, exacerbating the retention problem he’s already worried about. When a consultant is disappointed with bonus pay, it usually leads to a variation of one of two internal dialogues: 1) “I thought we were having a better year than this, wow was I misled,” or, 2) “We had a good year, but my contributions aren’t being recognized.” Either way it can lead to a surge in turnover. According to APQC’s Open Standards Benchmarking data on rewarding and retaining employees, 40.8 percent of people who leave organizations, leave for higher compensation elsewhere.
  2. Are you really relying on bonus compensation to retain your talent? If so, you’re probably already losing the war for talent. Yes, consultants want to be recognized and rewarded for their contributions. But if you think your top value proposition for employees is compensation, then you’re only going to keep your most vulnerable until bonus checks are cut. More than three-quarters of participant organizations in APQC’s Work Force Capabilities 2011 survey reported that they are having difficulty securing workers with the capabilities needed to achieve business objectives. By all means, make sure your compensation is competitive (benchmark yourselves against your competitors and clients, those that are most likely to lure away your talent), but don’t stop there. This “HR problem” will spread to the entire organization as disengaged employees and increased attrition combine with unfilled positions to hinder business expansion, productivity, and market share. It’s important to understand how much your consultants really like their client work. How successful would your consultants say you are at managing against burnout? To what extent do they trust their managers? How confident are they in your commitment to their future development? If satisfaction levels are high in those other areas, you won’t need to buy their happiness with higher salaries.
  3. Which benchmarks should you rely on to give better insight into 2012? If after collecting and analyzing sales and market trends you’re either not sure what to do or don’t trust the results, then you’ve got a bigger problem. Are you measuring the right things? Are the outputs timely enough to be valuable? Do you know what and how your peers benchmark themselves? If you aren’t sure of the “best practices” to address these issues, the team at APQC would be glad to lend a hand. Feel free to explore our Knowledge Base and keep an eye on APQC's blog as we soon release APQC’s latest dashboard of human capital metrics.
  4. What are you really asking me: Will market demand in 2012 be better or worse than 2011? Was the growth you experienced last year just pent-up demand or sustainable demand? While those are reasonable questions, I’d argue that the answers don’t matter as much as you think it does. Most forecasts say the global consulting marketplace will grow a little in 2012, but not significantly. But here’s what’s changed in the “new normal”: few firms grow in lock step with the “market” anymore. If you were to look at a scattered dot diagram of firms’ growth rates vs. the market over the last few decades, there would have been a fairly tight band – most firms’ growth rates were within, say, five percent to 10 percent of the overall market. What I’ve started to see more in the last few years is a bigger band of firms far outpacing the market, a band that’s significantly lagging the market, and a relatively thin cluster of firms growing in pace with the market. If we look within firms, not all practices are growing at the same pace – review any large public firm’s 10-K and you’ll see, for example, that their revenue from emerging markets are growing by double-digits while traditional service lines are more sluggish. So, the question requires a deeper dive into your firm’s service mix and that of your clients. It also requires a better understanding of pricing pressure and to what extent you’re still discounting vs. increasing book and realized rates. And, at the end of the day, the bigger challenge is managing profitability, not revenue growth. The more successful firms are managing their bottom lines and expecting their top lines to follow, rather than the other way around.

I welcome your questions and comments.