People & Pay

By definition, Standout Firms best demonstrated the ability to grow and generate income, key factors that build sustainable value for firm shareholders. Depending on the firm stage, Standouts generated 40% to 90% more owner income, experienced revenue growth at rates five to eight times higher, and achieved profit margins that were typically double that of their peers. Management of overhead expenses, however, was among the most impressive advantages of Standout Firms, where firms held a 13 to 17 percentage point difference over their peers.

People and Pay Make Firms Stand Out

For Standout Firms, people and pay are largely what separates Standouts from their peers. The Standouts are a shining example of the benefits that can be achieved through disciplined people practices, particularly the way these firms continue to build their organizational structures, compensation plans, and staff development practices despite market conditions.

Standout Firms have systems and processes in place that allow them to get more out of a dollar’s expenditure on compensation and achieve other cost-saving advantages as well. Standout Firms are based on thoughtful organizational structures that put the right people in the right places. Well-defined and clearly communicated work flow processes, coupled with formal training programs, assure that staff of Standout Firms know how work needs to be conducted.

Training is an especially key distinction for Standout Firms. At every firm stage, Standouts are more likely to make formal training programs available to their staff, and they are more likely to offer them across every position group (See Chart 4: Those Who Can, Train).

The use of dedicated management and incentive compensation at Standout Firms reinforces the firm’s policy that work behavior be aligned with the overall objectives of the firm.

These measures combine to yield a more efficient deployment of staff which, most importantly, enables Standout Firms to delegate non-advice related activities away from professionals. Through delegation, the firm is less dependent on its professionals, freeing their time to focus on revenue-generating activity. As a result, Standout Firms can make more use of lower-cost labor while getting greater productivity out of their highest paid professional staff, ultimately devoting a smaller proportion of revenue to compensation as compared to peers.

Standout Firms of all stages also demonstrated a commitment to growth and acquiring talent. To assure they have the best people and sufficient capacity, Standouts are more apt to hire and more apt to give raises, despite an uncertain economy.

Particularly notable are the intentions of the industry’s largest Standout Firms–Standout Innovators–to invest in new talent. Of the Standout Innovators, 55% view college graduates as a key recruiting source, as opposed to just 27% of other Innovators. Their greater willingness to take on college graduates is not only a bold investment in the future but also a sign that these larger, better-performing firms offer developed career paths and formal training that can accommodate and groom younger professionals.

Room for Improvement

In the course of our research two important human capital practices became evident where even Standout Firms seemed to struggle: staff performance management and equity distribution.

All firms show the potential to better link performance incentives to the areas of the business that each role can directly influence. No matter how junior a position, each staff member can have a marked impact on the success of an enterprise particularly when working toward specific objectives that are within the individual’s span of control. For example, as well as using business-wide performance measures to determine rewards, support staff performance measures may include developing initiatives that will enhance the client experience and increase client satisfaction.

In a related area, while most firms tend to have a performance-management process in terms of measuring and evaluating the contributions of staff, the full benefit of this practice is yet to be realized. Even among Standouts there is significant opportunity to more actively manage individual performance. Depending on the firm’s stage of development, 8% to 56% of Standouts do not conduct performance evaluations, and of those groups that do, only 8% to 43% rate their performance-management process as highly effective.

Turning to the subject of equity as it relates to retention, a notable 46% of our survey’s largest firms reported they admitted a new partner over the prior 12 months. Firms that did so reported placing greatest emphasis on ensuring the new partner had the values and character that were most consistent with existing partners. In addition, prospective partners needed to demonstrate an ability to lead and contribute to the management of the firm.

Of the new partners, 85% were promoted from within the firm, a positive sign for retention of talent. That said, a resounding 84% of all firms surveyed do not have a broad ownership distribution plan in place (See Chart 5: Close to Their Chests). This failure suggests a dramatic opportunity to better leverage equity planning. Not only does a robust equity plan support the retention of key talent, but it will also help to address increasingly difficult succession challenges by spreading ownership over a larger number of people.

With the right management practices, any firm can move beyond simply surviving to truly thriving. As for where to focus, following are the most important lessons from our research.

A firm’s organizational structure and human capital plan must be in solid alignment with its business strategy. This includes structuring a compensation plan that aligns staff behavior with firm strategy and client service objectives.

Firms cannot grow without growing their people. This means actively managing the organizational structure, building a training capability, and adhering to a hiring strategy that anticipates growth as well as the need to move people into increasingly specialized positions with more concentrated expertise.

People are best motivated when they stand to gain personally from improved performance. Incentive pay linked to achieving specific objectives is a powerful tool for motivating team members to contribute additional effort in order to achieve firm goals. The opportunity for key individuals to earn equity shares is an effective motivator as well.

Proactive performance management can reduce subjectivity regarding the measurement of individual contributions and more clearly tie compensation to performance. Meaningful performance measures, consistently monitored and managed, will drive positive performance outcomes.

No matter how dire the revenue picture, a firm’s top priority must be to protect its investment in people. Before cutting salaries or laying off staff, exhaust all ideas for how people can be made more productive and used more efficiently.

How a firm prioritizes these lessons is up to each individual owner. Executives are encouraged to apply these People and Pay findings to their own specific situations in order to identify where they are most vulnerable. Much is to be gained by implementing a plan to shore up human capital weaknesses. People are a firm’s most valuable asset and core to its competitive advantage. Disciplined people practices, particularly those related to organizational structure, compensation planning, and staff development practices will assure a firm’s success and longevity through the good times as well as the bad.

Dan Inveen is the principal who leads market research for FA Insight. He can be reached at [email protected]. Eliza De Pardo is the principal who oversees FA Insight ‘s consulting services. She can be reached at [email protected]

Dan and Eliza are former senior members of the Business Consulting Group at Moss Adams.

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