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have recently become more frequent. In searching for leaner structures and competitiveness in a difficult business climate, a number of consulting firms have come to the conclusion that they cannot afford to sustain large numbers of highly paid (though not always highly productive) partners without undermining the firm’s financial health and staff morale.

A sole practitioner’s career path

Most individuals who start their own consulting business do so after between 8 and 15 years of practical business experience, or after having worked for several years for a consulting firm. Those who go directly into independent consulting without any previous experience usually set up in IT or other special fields where technical knowledge is key and businesses are prepared to use technical experts without practical experience.

For a sole practitioner, the question of promotion to a more senior position does not arise. What normally happens, however, is that, as he or she becomes more experienced and ambitious, a sole practitioner is able to undertake more complex and difficult jobs, and to charge higher fees. Nevertheless, many sole practitioners get into situations where important career choices have to be faced. They could progress technically and take on more challenging assignments, but this may require giving up personal independence and agreeing to work in a team. One consultant may decide to expand the firm and employ other consultants. Another consultant may join a large consulting firm if a senior position is offered, while a third may establish a network and cooperate with other small firms.. A fourth will reject all these alternatives and look for assignments requiring special expertise and a great deal of experience, but small enough to be undertaken by an individual. The consulting business offers enough opportunities to satisfy a wide range of different career aspirations.

36.4 Compensation policies and practices

The compensation policies and practices of management consulting firms are based on principles similar to those in other firms in the professional service sector. Compensation reflects factors such as:

●the technical complexity and special requirements of consulting work;

●individual talent;

●the situation in the market for consulting services;

●the financial performance of the firm;

●the contribution of the individual consultant to the development and financial performance of the firm.

Financial compensation is not regarded as the only way to motivate consultants. Long-term motivation is emphasized by demonstrating to the new

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recruits that in due course they will be promoted to the partner level, when they will earn considerably more. The nature and the job content of consulting, as well as the exceptional learning opportunities and business contacts provided by consulting assignments, are also strong motivational factors.

Entry-level and operating consultant compensation

At entry level, consulting firms compete among themselves and with other employers for the best talent. As a result, salaries offered to new recruits tend to be higher than those offered by firms in industry and commerce. In the total remuneration package, the base salary usually accounts for more than 90 per cent and may attain the full 100 per cent. Hence, the role of bonuses and profitsharing is relatively small, although some firms stress that consultants at all levels should be eligible for some bonus.

The bonus paid to junior and operating consultants may be discretionary and depend only on the profitability of the firm as a whole. Alternatively, the consultants may get a bonus that is related to the fees they (or their team) earn from their own clients, and to new business that they generate for the firm.

If individual fee-earning and new business generation are strongly reflected in the bonus paid, the message is clear that this is what the firm expects from you. As a result, young consultants will become less interested in helping other colleagues, engaging in teamwork or spending time on activities for which no bonus is likely to be paid.

Experience has shown that even a small discretionary bonus is valuable for consultants at any level. However, a bonus should not be paid automatically, without a review of the consultant’s work performance. Also, the bonus should not send the wrong signals on what the firm values most in the consultants’ behaviour and performance.

Partner compensation

Partner compensation is a complex and delicate issue of management in professional firms. The partners are in a dual position – they own the firm, and are therefore entitled to part of the profit, and they carry out specific managerial, marketing or consulting jobs, for which they are paid a salary. The prevailing formula used for partner remuneration tends to be a base salary plus profit share or bonus. For example, in 1998 senior partners in American consulting firms were awarded bonuses and profit-sharing amounting on average to some 29 per cent of their base salaries.4 In 1999, the average annual compensation in consulting firms covered by a Kennedy Information Research Group survey was as follows: recent MBAs US$79,000; consultants US$97,000; project managers US$158,000; and partners US$388,000. Thus, remuneration of partners was four times that of operating consultants.5

Partners and other professionals in equivalent positions manage the firm and play key roles in promoting the business. Their roles and performance ought to

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be reflected both in the compensation formulas used and in the actual level of compensation. If partner compensation criteria disregard, or are in conflict with, the firm’s goals and policies, even the best strategic plan will be nothing more than a piece of paper.

In small consulting firms with a few partners, simple income or profit division formulas are quite common. If there are three partners in a firm, each of them may be allocated one-third of the profits. The formula causes no difficulties if, within the small team, there is a team spirit, a clear division of responsibilities and an understanding of who does what for the development of the firm. The three partners will probably be able to speak frequently and openly about these questions and change the focus by mutual agreement (e.g. spend more time on coaching a new associate or start looking for a new line of business). It may be unnecessary and even contrary to the firm’s well-established practices to formally reflect such agreements in changed partner compensation.

The matter gets more complex with the growth of the firm’s business and the number of partners and consultants employed. There will be a need for a compensation plan for partners that reflects and supports the firm’s strategic goals and priorities. As a rule, the plan will use a combination of a few criteria (say three to five), which may be quantitative and measurable (e.g. the partner’s personal billings) or qualitative and judgemental (e.g. the partner’s contribution to junior staff coaching and training, or to building up the firm’s image in professional and client circles). Each criterion will be assigned a weighting. Consistency between the criteria declared and actually applied is essential (see box 36.3).

The practical impact of each criterion needs to be carefully considered. Furthermore, periodic performance evaluation ought to be applied even to partners in senior management positions, using a formula that stresses collective assessment and is acceptable to senior professionals. For example, a partner can be asked to prepare a self-assessment of performance using the main criteria chosen by the firm. This is then reviewed by a compensation or management committee and discussed with the partner in a committee meeting or individually.

Shares and share options

During the 1990s, the use of shares and share options to compensate consultants gained importance. Consultants thus followed the trend that had become widespread in business, in the IT and e-business sectors in particular. Data from 1998 provided by the Association of Management Consulting Firms (AMCF) showed that such ownership was not available in only 31.5 per cent of the 62 firms surveyed. It was available to all employees in 24.1 per cent of firms, to junior partner level and above in 16.7 per cent, and to senior partners in 24 per cent of the firms surveyed.6

This compensation technique strengthens the link between the performance of the firm and individual compensation. It stimulates the consultant’s interest in

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Box 36.3 Criteria for partners’ compensation

(1)Seniority

Widely used. Still an exclusive criterion in some distinguished professional firms. Encourages partners to get used to a stable income level irrespective of current personal effort and achievement.

(2)Profitability of firm

Widely used. Encourages partners to focus on helping each other, promoting teamwork and improving the whole firm’s results.

(3)Profitability of activity supervised or managed

Widely used. Puts a high premium on actual results of the partner’s projects (assignments) or of a unit for which the partner is directly responsible.

(4)Personal billing

Widely used. Stimulates interest and initiative in doing individual billable work. Also remunerates for a high personal billing rate (fee rate) reflecting individual competence and image (which can be a separate criterion).

(5)Personal selling

Encourages finding new clients and projects, or obtaining new work from existing clients. Possible refinement: differentiating between new work of routine (repetitive) nature, and projects providing for acquiring new competencies, entering new sectors or similar.

(6)Client satisfaction

Encourages partners to look after clients, assure high quality and manage assignments to their clients’ full satisfaction.

(7)Training and development of consultants

Stresses transfer of experience and know-how, and the partner’s role in coaching and developing younger consultants.

(8)Contribution to the profession

Remunerates voluntary association and other work serving the profession.

(9)Contribution to the success of others

Rewards collaboration and help to other units through sharing of information, providing advice, giving leads, helping to negotiate new assignments. etc.

(10)Contribution to knowledge management and development in the firm

Rewards research, new method development, writing of practice guides, knowledge-sharing and other work enhancing the firm’s knowledge and competence.

(11)Building up the firm’s image

Encourages writing of articles and books, reporting at conferences, membership of government and mixed committees, etc.

(12)Self-development

Stimulates learning to enhance the partner’s competence and contribution to the firm.

(13)General management

Remunerates for management positions within the firm’s structure.

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