Effective Compensation is a Strategic Asset

April 9, 2008 · by Steve Fiskum

Effective design firm compensation plans reinforce the unique vision and goals of each organization and serve to align and motivate people to focus their energy in a common and consistent manner.

Effective design firm compensation plans reinforce the unique vision and goals of each organization and serve to align and motivate people to focus their energy in a common and consistent manner.

Design firms are among the original knowledge-based businesses. Accordingly, individuals in our industry are well-educated and have selected their career, in part, for the intrinsic rewards derived from the satisfaction of applying their creative talents to challenging opportunities. Monetary compensation is only one component of the broader reward spectrum, much of it intangible, that motivates individuals to stay, contribute, and thrive in an organization.

Many firm leaders share stories of their “boomerangs.” These are people attracted away by a competing firm offering a higher salary who later return to their former employer asking for their old position at their previous pay rate. Sometimes such an experience helps a person realize that compensation for one’s work comes in many forms.

Fair and equitable financial compensation is, of course, essential to building and nurturing an organization of outstanding people. For many reasons, including the changing demographic profile of the American work force, design firms consistently list the attraction and retention of top talent as a primary challenge. Monetary compensation, however, is not the primary reason most design firm employees stay with their firm.

Recently, a consultant surveyed employees of a large firm on the reasons they chose to pursue their careers with their organization. Project quality and relationships were the top two reasons selected by 40 percent of the employees. Another 40 percent listed core values, design excellence, professional development, or building type expertise as their main reason. Only 3 percent of the firm’s employees said compensation was the top reason they stayed. While responses from people in other firms might differ, most design professionals are focused on building a satisfying career through which they are growing in ability, responsibility, and influence. It’s not all about the money.

Interpreting Data

Design firm compensation surveys provide helpful insights into how the marketplace, on average, values various roles in our industry. Firm leaders use surveys as one way to measure how their organization stacks up against competitors for various positions. Likewise, employees seek out surveys to validate their individual worth and perhaps to rely on as a negotiating tactic during performance reviews.

Most people who are familiar with the broad range and cultures of design practices recognize that while such surveys serve an important purpose, they have limitations we must understand if we are to apply the information effectively.

Data and statistics of surveys are rolled up, averaged, and homogenized. Results are indicative of an “average” firm as categorized by size, geographic location, practice area, and so forth. However, it would be rare, if not impossible, to encounter an average firm. Focusing on architectural practices, for example, few of the more than 20,000 firms in the United States are typical at all. Most have unique cultures, values, and personalities that require equally diverse approaches to compensation management. Both firm leaders and employees need to use analysis and insight when applying the data within the context of their own situations.

Culture Counts

Compensation to individuals must reinforce and support the culture of their organization. Culture is largely determined by a firm’s vision and values. Culture defines what is important in a firm and, thus, what is rewarded. There are many ways to describe aspects of culture.

For example, some people consider an organization’s location along a spectrum, with practice at one end and business at the other, to be an indicator of culture. Depending on a firm’s position on this spectrum, there are common perceptions about how it operates and makes decisions. Others might define culture through descriptions similar to those that analysts have applied to certain of the Fortune 500, and they categorize firms according to whether their focus is about innovation, process, or customer intimacy. Another distinction, but one heard less often these days, is whether an organization is a design or a service firm. Fortunately, today’s enlightened leaders understand that both of these qualities are at the essence of a successful and thriving organization.

Regardless of a firm’s particular culture, everyone must be in alignment on vision and values if maximum potential, financial or otherwise, is to be achieved.

Motivating Behaviors

Effective leaders clearly articulate the vision and values of their organizations and embrace a compensation philosophy that encourages and rewards desired behaviors. Vision in smaller firms, often developed top-down, may be clear and readily understood by everyone through the process of osmosis. In such situations, leadership likely works side-by-side with staff. In larger firms, it’s necessary to communicate vision and values clearly and consistently through multiple methods — and to communicate regularly. In such organizations, especially those beyond the first generation of leadership, vision and values are often developed collectively.

Regardless of size, best-in-class firms have performance review processes that encourage dialog about how the individual has contributed to the organization fulfilling its values, strategies, and goals. Some organizations refer to such a process as a balanced scorecard.

Effective compensation programs respond to the particular ambiguities of a business. While firm leaders are expected to be comfortable with ambiguity, they should not assume that others in the organization have a similar understanding of goals that, at times, may appear in conflict. Sometimes the rank and file may feel that leadership is inconsistent in the results that are praised or rewarded financially. For example, teamwork and collaboration are essential to a successful design firm, yet a great idea usually has one originator who is also a relentless champion. In addition, while all firm members are expected to build the organization’s reputation and enhance its market position, closing the deal on a juicy commission is often attributable to a single passionate and charismatic individual.

Leaders need to reward teamwork while also recognizing and motivating outstanding talent. The manner in which firm leaders address such ambiguities has an impact on the behaviors they strive to foster, promote, and reward through monetary compensation.

For firms that have grown beyond a single entrepreneurial owner, the classic triad of competencies required to operate a successful business — design, management, and sales — are led by principals who focus primarily in one of these areas. When a firm grows to a size at which multiple leaders focus on narrower roles, the marketplace begins to dictate that some of these roles are more highly rewarded than others. The range of a firm’s salary and bonus for specific positions, assuming similar experience levels, is informative of its values and management style.

In organizations where compensation is consistent across a peer group, there is greater pressure for everyone to perform and meet an expected standard. In contrast, wider compensation variance within a peer group indicates a greater likelihood a firm will retain lower performing individuals because doing so is rationalized through less pay.

Components of Compensation

The majority of firms rely on bonuses as an essential component of their compensation program. This reliance on bonus payments helps firms manage swings in financial performance resulting from our industry’s oversensitivity of the broader economy’s highs and lows. The relative size of bonuses and how deep into the organization they are paid vary significantly. Those individuals with the greatest personal financial risk in an organization should receive an appropriate return on their investment. In addition, individuals who have a greater impact on the performance and success of the organization should be paid commensurately. Many of these people are motivated by incentive-based bonuses.

Bonuses paid at year-end can be derived in a multitude of ways and in several combinations. Examples include performance-based merit bonus, salary percentage bonus, equal share bonus, share of ownership bonus, and deferred bonus, to name a few.

In addition, bonuses may be paid during the year. Examples of these include project profitability bonuses paid to the team, individual spot bonuses to individuals, recruiting referral bonuses, and a quarterly bonus paid to all firm members based on recent profitability.

There’s value in connecting a bonus payment closely in time to the accomplishment being rewarded. In any event, bonuses as a component of compensation enable a firm to weather economic ups and downs more easily, to reward teamwork, and to recognize outstanding performers.

Non-Cash Compensation

In administering compensation and benefits, progressive leaders make appropriate decisions concerning rewards that are immediate and those that enhance the long-term well-being of employees. Today, retirement plans, some of which having discretionary components, are common in most firms. The degree to which these and other discretionary programs are funded relate to a firm’s culture, financial success, employee demographics, market expectations, and other criteria. Further, some plans, such as a safe harbor guaranteed retirement trust, are designed to share rewards deep into the firm while others, such as age-weighted supplemental profit sharing, are designed to reward the more experienced staff who are closer to retirement. Firms with such programs need to communicate their existence and value overtly, particularly since many employees, perhaps conveniently, focus primarily on their W-2 wage statement during salary negotiations.

A variety of other non-cash benefits paid to employees constitute a substantial amount of a firm’s overhead. These include programs such as pre-tax cafeteria benefit plans, health and dental plans, day care, training, development, professional memberships, and in some cases, perks such as club memberships, company automobiles, paid parking, and the like.

These or similar benefits are part of an individual’s total compensation package, and it’s important they are recognized and appreciated as such. Best-in-class firms annually prepare a total compensation summary customized for each employee. Most firm members are enlightened when they receive a comprehensive summary of their total compensation that includes all benefits.

Transparency

Financial transparency, a quality most people agree is essential to aligning knowledge workers toward common goals, can be detrimental if taken to the extreme. This is particularly true if compensation is directly linked to financial performance and little else.

Those who are privy to information, sometimes most everyone in a firm, have an obligation and responsibility to learn how to interpret and understand the numbers. For example, a firm might earn most of its profit from a single practice sector, perhaps one that is maturing and in which the firm is highly skilled. To position itself for the future, this firm may have a strategy to invest and develop expertise in a new sector, resulting in short-term losses for that work. Principals engaged in building a new practice area encounter different challenges than those who manage a mature practice. Accordingly, transparency of financial data negatively impacts the organization if individuals misinterpret it or, worse, if they attempt to manipulate the information to their advantage or otherwise engage in counterproductive behaviors.

In the extreme, too much transparency can lead to employee burnout and departure when the information no longer serves to motivate. A principal with poor financial results, for whatever reason, might inadvertently drive the team to work unreasonable and excessive hours and the non-assertive staff may feel overwhelmed. Firm leaders must decide when to filter information that may be misinterpreted or is no longer serving a motivational purpose.

Other Considerations

The manner in which firms with multiple practice areas or several offices manage accountability and distribute rewards is indicative of their culture. Today’s financial software enables information to be sliced and diced in numerous ways — by client, project, principal, practice area, and so forth. Some firms have profit centers and reward accordingly, while others are more inclined to share the wealth because they believe better firm-wide teamwork is the result.

Generational differences manifest themselves in several ways, including how individuals view compensation. Much has been written about the characteristics of the four generations in today’s workplace and their different motivational needs. There is variation in the nature of intrinsic rewards each generation considers important. The generations also relate to their organizations differently. Traditionalists have generally strived to build their career with one firm, while people from Generation X think more in terms of portable careers. Some of us may be surprised that it is common for Generation Y workers to call or e-mail their friends to share details upon receiving a raise. In contrast, baby boomers and traditionalists rarely, if ever, share their salary information or bonus with their peers.

Ownership transition programs also can affect salary and bonus. Firm owners committed to leaving a legacy through the internal sale of stock often pay higher compensation so that selected employees can actually afford to purchase the stock, even though much of it might be financed. In any case, for those risk-taking individuals buying into a design practice, disposable income takes a hit during the years of significant investment.

Labor laws have compensation nuances that may vary by state. Firms should be cognizant of legal requirements as they design their compensation plans. In particular, attention should be paid to the classification of employees into the categories of exempt and non-exempt. To be exempt (i.e., salaried), an employee must meet certain standards, including a level of self-supervision as defined by the U.S. Department of Labor. Further, bonuses for salaried employees may not be linked to the number of extra hours they work during the year. While larger firms are typically well aware of the nuances of labor laws, smaller firms sometimes have compensation methods such as for overtime pay or compensatory time that are problematic.

Firm leaders should periodically review their compensation policies and evaluate whether they are consistent with both the Fair Labor Standards Act and the marketplace while at the same time reinforcing of the unique vision, values, and goals of their organization. Well-designed compensation programs are a valuable strategic asset in shaping a design firm’s future and aligning its members for success.

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